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What Is Lightning Network?
“The second layer of Bitcoin” or “The fastest way to transfer BTC,” whatever you name it, lightning networks use micropayment channels that scale the capabilities of Blockchain and, at the same time, handle transactions more efficiently and at minimum costs. They are a technological solution designed to solve the glitches identified in Bitcoin by enabling off-chain transactions.
Lightning Network was formally proposed by Joseph Poon and Thaddeus Dryja in the form of a paper in 2016. They wanted to counter the situation of slow transaction speed and excessive energy consumption.
Bitcoin was not designed to handle a vast number of transactions initially as it does today. So in regards, lightning network(LN) attempts to correct some issues, such as:
Time-consuming transactions have become expensive because many users are transacting after the initial push of Bitcoins, and mining has become challenging over time. Hence, the increased transaction numbers required an improved method of confirming transfers efficiently.
The energy required to compute the information is enormous, and mining costs are also increasing, making the maintenance of the Bitcoin blockchain a lot more difficult and expensive beyond expectation. Therefore, a more reliable solution was required to control these surcharges.
The backbone of the Lightning Network is multi-signatures and smart contracts. These characteristics ensure that the funds sent through these channels reach the right recipient and do not get lost in the network of sub-blockchains.
When Satoshi Nakamoto first described Bitcoin in a whitepaper in 2008, the creator used the phrase “peer-to-peer electronic cash.” The ideology behind proposing this currency was that one day, it would become a popular way to pay for goods and services online on a global scale. But the shift in Bitcoin’s valuation over the years has changed the narrative.
Some consider it “digital gold” or a way to resist wealth from market inflation. It is designed so that two strangers from anywhere in the world can securely send or receive funds without any intermediary, such as a credit card or payment processor bank or company. Such transactions do need a mechanism to function, and the solution to this was mining– a time-consuming process.
To control all these malfunctions and make the Bitcoin function smoothly, ‘Lightning Network‘ was invented. It helps in processing the transactions “off-chain,” which is cost-saving and quicker than the Bitcoins core blockchain. LN transactions are less energy-intensive than on the main blockchain.
The main Bitcoin blockchain (layer 1) can handle less than 10 transactions/sec. In contrast, the LN (layer 2) can handle millions of transactions/sec. With all such needs apart, global business models that can function on a faster mode of decentralized transactions are also in demand.
LN is dependent on the underlying technology of the blockchain; with the use of Bitcoin transactions incorporated with its native smart contract scripting language, it creates a secure network of parties that can transact at high speed and volume. With a simple flow to understand, let’s go through the workings of a lightning network.
Two of the representatives, whether individuals or an organization, collaboratively generate a blockchain ledger entry, necessitating mutual approval for any fund disbursement. Both contributors initiate transactions that reimburse the ledger entry to their respective allocations but refrain from publicly broadcasting them on the blockchain. They can adjust their individual allocations for the ledger entry by executing numerous transactions, drawing from the current ledger entry output. The blockchain-enabled smart contract scripting enforces the validity of only the latest version. Either party can conclude this entry at any point without reliance on the custodianship by broadcasting the recent version to the blockchain ecosystem.
With a network of the two-party ledger entries created, it becomes feasible to navigate through the network in a manner akin to routing internet packets. The nodes along this path do not require trust, as the payment is upheld through a script that enforces automatically, ensuring that the entire payment either succeeds or fails with the use of decrementing time locks.
Following the methodology, it is possible to conduct off-chain transactions without limitations with the security and confidence of the on-chain. By correlating the transactions and script with each other, the smart contracts can be easily applied on the blockchain with deterministic results.
The transaction of a future- lightning network holds multiple benefits; here are some that make it one of a kind:
Payments are made at the speed of light without any worry regarding the confirmation time of a block. Blockchain smart contracts secure transactions without the need to create an on-chain transaction entry for each individual payment. The settlement time of a payment is a few seconds.
LN makes it possible to conduct millions of transactions per second. This capacity blows away the magnitude of general transactions, making the digital transfers the most scalable of all. Attaching the payments per click is possible now without involving any custodians.
As the transactions settle off-chain, LN transfers have meager fees. This allows emerging use cases like instant micropayments, no limits on send and receive, and much more.
Cross-chain atomic swaps can happen instantly in the off-chain ecosystem, even when dealing with diverse blockchain consensus rules. As long as the involved chains can accommodate the same cryptographic hash function, it becomes feasible to execute transactions across various modes without relying on third-party custodians for trust.
Some LN implementations allow users to conduct transactions in the smallest unit on Bitcoin’s base layer, which is even lower than a satoshi.
The specifics of individual Lightning Network payments are not openly documented on the blockchain. Payments within the Lightning network can traverse multiple consecutive channels, allowing each node operator to observe transactions within their channels. However, they are unable to discern the origin or destination of funds if the channels are not directly connected.
The significant development by Lightning Labs, the Lightning Network, is a second-layer solution for Bitcoin. Its micropayment channels scale the capabilities of blockchain and have made the transaction efficient. This technical solution has brought the revolution in digital finance with its advanced benefits. No doubt there are multiple challenges faced by lightning networks, yet this ecosystem is built out to be robust, scalable, and user-intuitive for future experiences.
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