Bitcoin and the Lightning Network

Bitcoin and the Lightning Network

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Right now, the main problem with Bitcoin is scalability; that is, the number of transactions per second that the network can process simultaneously. For several years now, the Bitcoin development community has been working on various proposals to improve the network’s ability to support a greater number of transactions, but for various reasons, it hasn’t been an easy task.

However, it seems that the wait has come closer to an end since one of these solutions is about to be implemented: the Lightning Network, the technology that could lead Bitcoin to its definitive adoption by the masses.

If you are a Bitcoin enthusiast, I invite you to read this post, Bitcoin and the Lightning Network, to the end, so that you may learn about the benefits that this new technology will bring to the most famous cryptocurrency insha’Allah (God willing).

What is the Lightning Network?

The Lightning Network (LN) is a communication protocol that enables peer-to-peer transactions outside the Bitcoin (BTC) network in a much more efficient way. This means that the LN offers the possibility of carrying out transactions without them being immediately registered in the Bitcoin blockchain, which brings the benefit of instant transactions and very low commissions.

For this, the LN has its own nodes and software, so its operation is independent of the Bitcoin blockchain. However, the LN does need to constantly communicate with the latter, for which it must make use of certain types of “special transactions.” In addition to this, the LN can also be integrated into other blockchains, such as Litecoin.

The authors of this proposal are Joseph Poon and Thaddeus Dryja, who wrote a whitepaper on the LN that you can find on the Web, have been developing this technology together with several private companies.

Why was the Lightning Network created?

As already mentioned, the main problem with Bitcoin and other cryptocurrencies is scalability. Actually, Bitcoin supports between 4-7 transactions per second and Ethereum between 12-20 transactions. If we compare this with the average of 1,700 transactions per second that the VISA Network can process, then you can see the big problem that the lack of scalability represents.

This lack of ability to process a large number of transactions makes cryptocurrencies like Bitcoin and Ethereum an inappropriate solution for day-to-day use – like making quick purchases in a store, for example. In fact, on many occasions, both Bitcoin and Ethereum have seen how their networks suffer saturation and traffic congestion from trying to handle a volume of transactions greater than their capacity.

When there is a sharp increase in network use, the cost of transaction fees rises, as excess transactions accumulate like a queue in the mempool, a space where all transactions wait to be confirmed by the Bitcoin miners. At this point, miners prioritize transactions with higher commission payments (transaction fees) to obtain higher profits, so those users who want their transactions processed quickly will have to pay more in transaction fees.

The Lightning Network was created to avoid these “bottlenecks,” by streamlining transactions and dramatically lowering commissions.

What should the Lightning Network do?

First of all, in order to function correctly, the LN requires the non-malleability of transactions, or what is the same, the information of any single transaction cannot be modified during the verification or generation process. Bitcoin added this feature with SegWit and reinforced it with Taproot, laying the foundations for new scalability solutions and serving as the basis for the development of the LN and its “payment channels”, the essence of how the LN works, and which we’ll discuss in more detail now.

Lightning Network payment channels

The payment channels in the LN are actually multi-signature transactions that are generated outside the Bitcoin network and in which at least one of the parties must make a transfer of funds.

To open a channel, it’ll be necessary to use the private key of each one of the parties and from that point on, any transaction carried out will be signed by both parties. This allows establishing a consensus or trust between the parties to carry out transactions.

Once a payment channel has been opened, it’s possible to carry out as many transactions as desired before closing the channel, being able to keep it open for a specified period of time – the time it takes for the next block to be generated on the Bitcoin blockchain.

When the channel is finally closed, all transactions carried out will be broadcast to the network, validated, and included in a block on the Bitcoin blockchain.

Payment channels interconnected under the Lightning Network

Although using a payment channel works well for transactions between two users, for an online business, it’s more practical to create a single payment channel for many customers. In this sense, the Lightning Network allows several payment channels to be interconnected that can be crossed with each other.

This interconnection between two or more channels requires that there be a common user between them. This feature would allow you to send funds to other users outside of your payment channels, through a user that is common to the different channels involved. All of this is possible thanks to different algorithms that facilitate the connection between users through the shortest possible route.

At this point, something that I must highlight is that, unlike what happens in the Bitcoin network, the more users generate payment channels in the Lightning Network, the faster and more effective the transactions will be, since scalability increases.

How will the Lightning Network improve Bitcoin?

Scalability

Since the generation of blocks in the Bitcoin blockchain happens every ten minutes and each block can only accommodate a certain number of transactions, the block space then becomes a scarce resource by which those users who want their transactions validated before others users, will have to pay more fees. This is good for miners, but not for ordinary network users.

The Lightning Network reduces commissions (transaction fees) to just two: one to create the payment channel and one to close it. All transactions generated within this channel, whether they are one, two, or hundreds, do not pay commissions.

When the channel is closed, the ending balances are posted to the blockchain. This allows to make more efficient use of the space of the blocks and in addition, it’s possible to open as many channels as necessary.

Micropayments

The idea behind the LN is to be able to perform microtransactions with great ease; that is, day-to-day operations, whether it be grocery shopping or putting gas in your car. For this, the Lightning Network allows payments from 1 satoshi (0.00000001 BTC) to a maximum of 0.16777215 BTC for a single payment channel.

This is different from what happens in the Bitcoin blockchain, which establishes a minimum per transaction of 546 satoshis (0.00000546 BTC), something necessary to prevent “dusting” attacks on the network.

Privacy

Something very remarkable about the LN is its ability to offer users high levels of privacy. Although it’s possible to see who opens and closes a payment channel, users have the option to decide whether the channel is private or not. In the case of choosing a private channel, only the participating users will be able to know the transactions carried out within that channel.

Instant payments

As mentioned before, in the Bitcoin network, miners choose the transactions that they’re going to validate according to fees, or what is the same, the higher the commission, the faster they validate a transaction.

In the Lightning Network, validations are instantaneous and without commissions; once a transaction is made in a payment channel, it’s closed, registered in the blockchain, and disseminated on the network, so the payment of validation fees is omitted.

Atomic Swap

Although work is already underway to change this, at present, it’s not possible to make an exchange between Bitcoin and other cryptocurrencies without a trusted third party within the Bitcoin network. Through the LN, these exchanges could be made instantly and without intermediaries. Although at the moment it’s not possible yet, this possibility is already being experimented with.

Pros and cons of the Lightning Network

PROS

  1. Solves Bitcoin’s scalability problem – Theoretically, the LN has the capacity to support up to almost 1 million transactions per second
  2. Transactions are made almost instantaneously
  3. High levels of security and privacy – Off-network transactions are almost untraceable
  4. Offers the ability to make micropayments and automated payments
  5. It can be integrated into other networks – In fact, it’s already operational inside Litecoin
  6. Reduces the number of transactions on the Bitcoin network – This makes it more efficient
  7. Atomic Swap – Possible exchange of cryptocurrencies between different blockchains
  8. Decrease the amount of transaction fees – You only pay for opening and closing a payment channel

CONS

  1. It’ still in development phase – The developers themselves recommend at the moment, not to transfer large amounts of BTC
  2. The liquidity of each channel is limited to the amount of Bitcoin that the parties have
  3. It requires trust between parties – There is a risk that one of the parties commits fraud, something that doesn’t happen on the Bitcoin network

How will this affect the future adoption and growth of Bitcoin?

I could summarize this answer with the following three factors:

  1. Instant transactions
  2. Lower fees
  3. Interoperability

The Lightning Network will bring a whole world of possibilities for Bitcoin insha’Allah, and even for other cryptocurrencies; it’ll not only increase the speed of transactions on the network and decrease the fees to be paid, but it’ll also help expand the use of Bitcoin among those who would normally find it too expensive to transact on the Bitcoin network.

This will be possible thanks to the possibility of cross-chain cryptocurrency exchanges, something that will especially and more immediately, allow greater interoperability between Bitcoin and Litecoin – increasing the popularity of both crypto assets.

Conclusion

The Lightning Network is a technology still under development and experimentation whose main objective is to increase the scalability of the Bitcoin network. However, its potential is really great, as it’ll allow small payments to be made instantly, efficiently, and cheaply, while the Bitcoin network will continue to be used for larger transactions.

The other great solution of the Lightning Network will be its ability to transfer cryptocurrencies between blockchains with different consensuses, something that will reduce the need to use centralized crypto exchanges, which greatly reduces the privacy of our transactions.

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