The scaling of Bitcoin and other cryptocurrencies has always been a hotly debated issue in the community. The Lightning Network has been introduced as a possible solution to this pressing problem. It has the ability to allow Bitcoin transactions to be processed much faster while minimizing the cost. Some believe that this type of protocol is vital to the future of Bitcoin and its viability as a global method of exchange.
About The Lightning Network
The Lightning Network was first proposed by two developers named Thaddeus Dryja and Joseph Poon. They made the proposal in a whitepaper that was published in 2015. This shows how long developers have been thinking about the scaling problem of Bitcoin. In truth, the anonymous Satoshi Nakamoto acknowledged the issue in the original Bitcoin whitepaper.
The solution proposed by Dryja and Poon was the creation of a network which sits atop the Bitcoin blockchain. Transactions that are carried out on this network are eventually settled on the Bitcoin blockchain, but by using a separate network to handle specific kinds of transactions the process can be made much faster.
The Lightning Network is made up of user-generated channels. Users can send payments back and forth to one another on these channels. What the network is designed to do is process transactions that happen with some frequency. Let’s say that you were engaged in a regular transfer of Bitcoin with another individual for some type of service like a payment for web design. You make several transactions while the site is being built. The Lightning Network makes it possible for you to make those transactions on a channel and then settle them on the Bitcoin blockchain at a later time that is agreed upon by both parties.
These types of transactions only involve two individuals, so they don’t need to be immediately broadcast to the Bitcoin blockchain. This has the advantage of making the transfer of Bitcoin almost instant, and it also lowers the fees because there are less blocks to be mined. The transaction fees can even be zero.
Off-Chain Transaction Channels
What the Lightning Network does is open up the possibility to process transactions off-chain. The way that these channels are created involves the set-up of a multisig wallet. These wallets require more than one key, or signature, to complete a transaction. Bitcoin is placed in the wallet, and the wallet address is saved to the Bitcoin blockchain.
What can happen now is that the individuals involved can complete transactions with the multisig wallet and never have to send those transactions to the Bitcoin blockchain. There is a balance sheet that is maintained for the joint wallet. This balance sheet reflects how much of the Bitcoin each person owns.
Once all transactions have been complete, the channel is closed. This is when the transactions are sent to the blockchain. Actually, the parties agree on the final total and one transaction becomes a part of the blockchain. If there is a dispute, the most recent balance sheet can be used to determine the final balance of the wallet and who the Bitcoin belongs too.
You can think of these off-chain distribution channels like a form of escrow. You are putting up a certain amount of Bitcoin to pay for your services from someone. As the services are completed, you can dish out the appropriate Bitcoin. Once all the services are done, you finalize the transaction by registering it on the blockchain.
Other applications like SegWit have proven that they can work in tandem with the Lightning Network to further address the issue of scaling. SegWit prevents transaction malleability, and that means more security for the Lightning Network. Security, in fact, is the most significant limitation for the Lightning Network. It does not have the full power of the blockchain behind it, so there could exist a potential of a breach. For this reason it is expected that smaller transactions will take place on the network while larger ones will continue to be carried out on the Bitcoin blockchain.
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