When it comes to cryptocurrencies, users have a plethora of options to choose from other than just Bitcoin. After all what is the Bitcoin lightning network, one of the biggest “flaws” with Bitcoin is that it has relatively high transaction fees and can take a long time for confirmations. This scalability issue has plagued blockchains ever since it exploded into mainstream awareness in the past 5-6 years.
In the case of Bitcoin, transactions are recorded onto a ledger called a blockchain, and the ledger or record of historical transactions is what prevents malicious actors from coming in to steal funds. Because the ledger effectively tracks the exact virtual location of every Bitcoin in existence, and this information is communicated and interlinked with every other Bitcoin and transaction ever made, a hacker looking to move Bitcoin by hijacking the system would need to find a way to edit the transaction history of hundreds and thousands of other transactions in order to move even one Bitcoin away from the wallet it resides in, an operation that would be essentially impossible to complete.
However, this interlinking of data, while secure and acts as a fantastic global transaction network on the internet, does not fare well in terms of throughput or amount of transactions it can handle per second (“TPS”). Additionally, confirmation on transactions also takes a long time, much longer than is suitable for day-to-day use in payments and the spontaneity of today’s transaction formats.
What’s interesting is that solutions that address the problem are being developed, some already actively running on top of the blockchain. These implementations, sometimes called layer two solutions, interact with the blockchain to introduce mechanisms that address specific issues that Bitcoin’s primary protocol is unable to solve.
The lightning network is one such solution – although it is not restricted to Bitcoin and can operate on other blockchains, it is well known as a primary off-chain transaction network for Bitcoin.
How does the Lightning Network work?
The lightning Network works by creating multiple secondary, tiny ledgers known as “channels” off the primary blockchain network, and recording transactions separately from the main blockchain.
One analogy that can be used to describe the lightning Network is by describing the accounting systems of a massive company. In a massive super-company such as the likes of Amazon, Google or Apple, there are simply too many transactions, deals, sales, costs and operations happening to be tracked by a single accountant; if every single person reported to a single accountant, they would be overwhelmed. This is what is happening with Bitcoin as it grows larger; the accountant, or even a team of accountants, would be unable to address the entire company’s transactions if everyone was reporting directly to them.
Instead, most accounts are kept within departments and segregated at multiple layers:
- At the top, there is a core finance team overseeing finances.
- Each country of business operation would have one accounting team that is in charge of the accounts of that country.
- The accounting team would have further smaller teams handling individual product lines or operations.
Lightning Network channels represent the smallest teams in “3”. Above that, lightning network also has nodes, which are similar to “2”. And they report back to the primary blockchain (Bitcoin in our example) similarly to “1”.
Because the end-users and transactions are now settled by reporting via small channels, the transaction times are almost instantaneous as there is no need for the participants in the entire blockchain to validate the transaction; the layers of trust are simplified in favor of transaction times and lower fees.
Enabling a strong degree of security without compromise
The lightning network is still able to secure transactions made on it by implementing Multisignature and Hash Timelock Contract (HTLC) mechanisms. Each channel involved in a lightning network transaction enforces certain rules and has certain functions:
Multisignature
A shared wallet between multiple parties that requires the cooperative signing of the parties involved in order for transactions to be made.
A hashlock
the sender creates a “password” or more commonly known as a secret, that is sent together with his transaction to the recipient. In order for the recipient to receive and use the Bitcoins, they must know this secret.
A timelock
the funds associated in the transaction cannot be spent before a certain time.
A commitment transaction
a function similar to a pre-signed cheque that allows each party a remedy in event of a hostage situation in the multi-signature setup.
By combining all of these functions together, the channel can behave in a secure manner enforced only by the intention of the two parties, without the need for a trusted third party.
Additionally, by connecting these channels across a large network and system, and requiring that participants in the network “lock” their Bitcoin in these mini-ledgers in order to use the lightning network, it is possible to route a transaction across to parties that aren’t directly connected to each other in a channel. This means that participants in the lightning network can send payments and initiate transactions with each other outside of the two participant system, and the only limitation would be the liquidity available in the network itself (a large amount of Bitcoin would be difficult to transact as there may not be enough liquidity to route the payment across the network)
Enabling Micropayments
One powerful feature that the Bitcoin lightning network brings to the table are micropayments. Because of the extremely low (or even zero) transaction fees involved in sending Bitcoin within a lightning network channel, tiny payments of as low as one hundredth of a cent are now possible. The enabling of micropayments has many use cases in the business world, from replacing existing advertising-driven businesses to allowing fairer content distribution and consumption across the internet.
Privacy
The lightning network’s channels are private by nature; parties can open a channel with each other and transact without the specific transactions brought to the primary blockchain. With Bitcoin’s native setup, all transactions are recorded onto the blockchain and have to be validated, meaning that there is little privacy beyond the anonymity of the Bitcoin wallets involved, whereas lightning channels would allow the specific transactions happening between different parties in a channel to be hidden (as it is able to enforce the transactions without broadcasting them to the entire network). Only the final state after closure of the channel is broadcasted to the main Bitcoin blockchain.
Lightning Network implementations
Three parties are currently independently developing lightning network nodes based on a standardized implementation protocol, which allows the three to communicate to each other.
ACINQ — Eclair
Lightning Labs — lnd
Blockstream — clightning
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