The Lightning Network

Scalability. It’s a word you hear mentioned a lot when Bitcoin is discussed. The word reflects Bitcoin’s ability to meet the demands of those who use it. Specifically, it relates to the speed at which transactions can be processed. The more people that use the cryptocurrency, the greater the demand becomes for faster processing.

A perceived lack of scalability has troubled Bitcoin since it was first introduced by the anonymous Satoshi Nakamoto in 2008. While many solutions have been proposed to deal with the problem, the Lightning Network is one of the few that has achieved success. You could say that the Lightning Network is still in a Beta form, but the initial results have been promising. Let’s take a look at this application and what it offers to Bitcoin.

What is the Lightning Network?

Perhaps it is best to explain the Lightning Network with an example that most people can relate to. When the Internet first began to gain traction in the early 1990s, online access was achieved by virtual of a telephone modem. Perhaps you remember those days. When you were online no one could call you. They would get a busy signal. If your phone service went out, so did your Internet.

The speed at which you could access information online back then was very slow compared to today’s standards. But think about it? Did you really think it was slow back then? Not really. The fact is that the speed of a dial-up Internet connection was sufficient to meet the needs of Internet users. Most people were playing games, chatting, and sending email. Websites were far more basic than today’s graphically enhanced beasts. It was only as the Internet began to grow that dial-up speeds became an inconvenience.

The same can be said of Bitcoin. The early adopters of the cryptocurrency probably had no issues with Bitcoin’s processing speed. It has been capable of processing about seven (7) transactions per second since its introduction, and that number has not changed. What has changed is the number of people that are actively using Bitcoin and other tokens. The demand for cryptocurrency processing has grown, and the limitations of Bitcoin are becoming apparent.

VISA averages 24,000 transactions per second. Many advocates of digital currency dream of a day when a cashless society is possible. If that is ever going to happen, and if traditional banks are ever going to become unnecessary, Bitcoin is going to have to compete with other fiat payment processors.

You probably already understand that the Bitcoin blockchain is a permanent record of Bitcoin transactions. When transactions are processed they are ultimately added to the chain. The Lightning Network is a protocol that actually sits atop the Bitcoin blockchain. It creates a new layer that can be used by parties to create payment channels. These payment channels are idea for parties that regularly transact Bitcoin.

By placing transactions in the Lightning Network it is possible to then batch or combine them for addition to the Bitcoin blockchain. The basically creates one large transaction instead of several small ones in principle, but the manner in which the Lightning Network works is a little more complex than that.

How the Lightning Network Works

Let’s talk about a freelancer named Joe. Joe is a writer that creates web content for clients that own websites. Joe has one client that prefers to pay in Bitcoin, and Joe is fine with that. Several times each month the client will order an article and pay for that article with Bitcoin.

Joe and his Bitcoin client decide that they will create a payment channel on the Lightning Network. The first step that they will need to take is to create a multi-signature wallet that both of them can access with their private keys. Once this wallet is setup, both Joe and the client will make a Bitcoin deposit into the wallet. Sometimes Joe likes to purchase some of his client’s goods.

Once this wallet and payment channel have been created, Joe and his client can conduct unlimited Bitcoin transactions between the two of them. The transactions are merely redistributions of the Bitcoin in the wallet. A balance sheet is created and maintained by the two parties, and each time the balance sheet is adjusted both of them must provide their private keys to sign the transaction.

At an agreed upon interval the two parties will close the payment channel. At this point the Lightning Network uses an algorithm that accesses the most recent update of the balance sheet. It then creates a transaction reflecting which party receives what and broadcasts that transaction to the Bitcoin blockchain.

The Potential of the Lightning Network

Remember, we said that the Lightning Network is still in something akin to a Beta form. As the application develops and is more widely accepted, the Lightning Network could have a tremendous impact upon Bitcoin processing speeds.

There will come a time when it is not necessary for two parties to create a dedicated channel. They will simply be able to use channels created by others to send funds. The system will look for the shortest route between two parties and use that channel.

Security may be an issue at some point because the Lightning Network is specifically designed to handle small transactions. It rests atop the Bitcoin blockchain but does not share the security of the blockchain at this time. Therefore, it is likely that those who process very large transactions will still use the standard method of sending and receiving Bitcoin. the market takes a tempown methods and stand by those choices. Hopefully, they will be the right ones.

The Developers of the Lightning Network

So, who is behind this new technology that can improve Bitcoin processing times? In 2015 the Lightning Network was proposed in a white paper published by Joseph Poon and Thaddeus Dryja. The Lightning Network white paper has been updated to reflect the current developments with the technology.

There are three individual teams that are tasked with carrying out the various Lightning Network projects. These teams and their responsibilities are:

  • Blockstream – Lightning Network programming in C
  • Lightning Labs – developing a Lightning Network Daemon written in Golang
  • ACINQ – Scala implementation

Expectations for the Lightning Network

As the technology for the Lightning Network continues to evolve there are many expectations. First and foremost among these is that the protocol can be developed for other cryptocurrencies.

The Lightning Network was specifically created for the Bitcoin blockchain, but it is based on programming that could be applied across many different cryptocurrency platforms. In the future it could be used with Ether, Litecoin, Stellar, and Ripple. Those tokens face the same challenges on some level when it comes to scalability.

Specifications for the Lightning Network have been published in a rudimentary form. It is reasonable to expect that in the future the teams working on the protocol will further define the so-called “rules” of the network and how its operations are governed.

Bugs in the application will continue to be resolved in the long term. For now, a great deal of testing is required to insure the platform works as intended. It will also be practical at some point for the developers to create standalone security measures for the network.

Lightning Network Pros and Cons

Let’s take a look at some of the advantages of the Lightning Network:

  • Improvements in transaction processing speed are the hallmark of the Lightning Network. It’s primary purpose and mission is to bring Bitcoin on a more comparable level with transactions processed by VISA, MasterCard, PayPal, and other traditional payment processors.
  • The network has the potential to lower transaction fees, possibly removing them altogether. This would open the door for more physical retailers to begin accepting Bitcoin and other tokens in their business.
  • There is potential for improved anonymity when the Lightning Network is used. Because it handles micro-transactions off the primary Bitcoin blockchain, off-chain payments could be more difficult to trace.
  • Scalability, of course, is perhaps the biggest benefit the network has to offer.

Some of the drawbacks of the Lightning Network are:

  • It is still in Beta. More testing is required, and development takes money. The network will need a steady supply of funding so that improvements can be made.
  • Setting up payment channels is a bit complex. The process needs to be simplified before the network can gain mainstream acceptance.
  • Payment channel limitations are also an issue with the network at this time.

It will be very interesting to see how this technology evolves in the next year or so. It may be the key that finally unlocks Bitcoin’s appeal to the general public as well as financial institutions. 

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