Lightning Network is an additional layer that is designed to solve the scalability problem of the Bitcoin blockchain.
The main Lightning network was launched in March 2018, and over the past three weeks it has tripled its Bitcoin network bandwidth to 300 BTC.
Today we will learn what the Lightning network is, how it works, and how it should become an integral part of Bitcoin in the future.
Scalability is the ability to cope with increased demand or, if you take the case of the Bitcoin network, the ability to contribute more transactions to the blockchain in order to maximize the number of users.
Currently, there are about 22 million Bitcoin wallets in the world.
And this is still a very small percentage of the world population, especially when you consider that many users have several addresses.
Bitcoin was created as digital cash and had to become a global currency so that the whole world could use it.
Therefore, the network must solve the problem of scalability in the early stages of its growth and before it is adopted on a wider scale.
When using off-chain solutions, most of the Bitcoin transactions are recorded not in the main distributed registry, but on the side chain, which runs in parallel.
This can be done using wallet technology with support for multi-sign (Multi-Sig).
Multi-Sig wallets were originally invented in order to create an additional level of protection for one or more people who want to keep money together without the need for trust.
This can be compared to a joint bank account, where signatures of both parties are needed to withdraw money.
In the case of a multi-signature wallet, the use of the money stored in it requires digital signatures of the secret keys of each person involved in the creation of this wallet.
You can create a Multi-Sig wallet where only 2 keys are required, or you can create a wallet with fifteen keys.
The Lightning Network is a second-tier solution that was invented in 2015 by Joseph Poon and Thaddeus Dryya, and has been developing ever since.
It can significantly improve scalability, allowing the network to conduct millions of transactions per second.
How it works
The main element of the network are two-way payment channels. Payment channels are multi-signature wallets that have been modified so that they look like accounts.
Both parties open a payment channel when forming a transaction in the main network. This initiates the first deposit.
Let’s say Bob and Jim play backgammon with bitcoins instead of coins. In each round of the game, they make bets using 0.01 Bitcoin.
If after each game they had to use only the main blockchain, then they would have to wait at least 10 minutes each time until the payment was completed, and only after that they could move on to the next round.
In addition, commissions would be relatively high since the number of transactions is quite large.
To overcome these obstacles, they open a payment channel and deposit each 0.05 bitcoin, making only one transaction in the main network, therefore the payment balance is displayed on the balance of their accounts.
Jim won the first game, and Bob must give him 0.01 Bitcoin. Since this is a side network, they simply update their payment channel, recording in it the fact that Bob transferred 0.01 bitcoin to Jim. Next, Bob wins three times in a row. In between games, they conduct a transaction in their channel.
At any time, they can close the channel, and then simply broadcast the last committed transaction to the main network.
This transaction will include all previous transactions that were made in the payment channel.
In fact, the modification of portfolios with several tags (which made them a payment channel without the need for trust) is the replacement of digital signatures associated with each transaction with signatures that are relevant at the time of execution.
Further, since the gap in trust has already been bridged, it remains only to transfer the transaction to the main network.
At this point, we figured out how payment channels work, but is that all? Is this the Lightning network?
And the answer (which may seem obvious to you) is not quite!
The main feature of the Lightning network is not in payment channels, but in the ability to transfer money through them.Suppose you want to buy a cup of coffee at Starbucks, but you don’t have an open channel with them.
Fortunately, you have an open channel with your friend, a friend has an open channel with his mother, and his mother has an open channel with Starbucks.
Thanks to Lightning, you can buy a cup of coffee by sending bitcoins through your friend’s channel and his mother’s channel to Starbucks itself.
Routing has several characteristics and limitations
- Payment must be made through payment channels that contain at least an amount equal to the amount of the transfer. In the above example, if a cup of coffee cost 0.00015 bitcoin, and your friend (or his mother) had only 0.0001 bitcoin in the channel, the transfer could not be sent through them.
- When routing through existing payment channels, a transfer fee may be charged (insignificant) in some or all of the channels.
- Confidentiality – participants in the channels through which the payment passes do not know anything except the one who is in the chain immediately in front of them and after them. Thus, in our example, the mother of a friend cannot say who initiated the payment: friend or you yourself. She doesn’t know if the payment is intended for Starbucks or for “switching” from Starbucks to another payment channel, which keeps our consumption habits secret and ensures confidentiality.
That is what makes the Lightning network so revolutionary. This was a simple example with a very limited number of open channels. Imagine Lightning Network Now Operating Worldwide.
This will allow you to send money through Africa to South America or through Europe to the USA in a very fast and efficient way, so that millions of users can use the network at the same time both to buy a cup of coffee and to play backgammon with a neighbor.
Advantages and disadvantages of the Lightning network
The Lightning network has five main advantages over the main network.
- Higher anonymity – it will be more difficult to control our consumer habits or to match the user with the wallet address, because not all transactions are recorded on the main network.
- Reduced fees – There are two different types of fees. The first is a commission fee. Lightning Network commissions will be negligible compared to current fees. The second type is Reducing the load on the main network and reducing its size in the long term.
- Speed increase – transactions in the Lightning network are instant and do not require confirmation from the entire main network, like transactions in the Bitcoin network at present.
- Nano-payments – the ability to carry out transactions with small amounts, for example, 100 Satoshi or 0.000001 Bitcoin. Such a transaction in the main network is likely to be accompanied by a commission exceeding the size of the transaction itself. In other words, with the Lightning network, Bitcoin really turns into digital cash and allows you to receive payments in very small amounts.
- Scalability – although Lightning is not a “final solution”, and there are other problems that the network faces, due to improved access to it and user convenience, it will be possible to significantly increase the scalability of the network, at least for the next few years, and also cope with Expected significant increase in the number of users.
However, the Lightning network also has flaws, or at least “compromises”
- Anyone who is interested in receiving payment through the Lightning network should be connected to this network and send a “request for payment“. That is, everything is different here, as in the main network, where you simply share the wallet address or a QR code. Instead, you will have to create a payment request.
- Storing money on the Lightning network is the same as storing money in a hot wallet, so the level of security drops slightly.
- To overcome certain vulnerabilities that allow fraudulent activity, you must “listen” to the network, that is, be connected to it and receive information about transactions committed in your open channels.
- The possibility of centralization is opening up – the desire to redirect payments over the network can lead to the appearance of payment hubs. These will be Lightning nodes with a large number of open channels that store large amounts of bitcoins and allow people to transfer payments in exchange for a commission.
In this regard, it is important to understand that there are many different levels between full decentralization and full centralization.
Not everything is divided into black or white (centralized or decentralized), you can be at a certain point in the spectrum, which is very close to full decentralization, but not 100%.
In its current form, the Lightning grid is almost completely decentralized. When the network is widely used, and if payment hubs appear, the degree of decentralization will obviously decrease, but not significantly.
Lightning Network – Creating a New Ecosystem
Payment hubs were presented as a disadvantage from the point of view of centralization, but in reality they are an advantage, since they stimulate users to create Lightning nodes.
Think of the “scammers” – people who believe in the future of Bitcoin and keep coins for a long time.
Instead of storing bitcoins in hardware wallets, they can earn interest on them by creating an intersection on the Lightning network.
All they need to do is open payment channels and put their bitcoins in them. Later, for all transfers over the network using one of their channels, they will be awarded several Satoshi.
It is important to emphasize that these “percentages” from the Lightning network nodes are actually payment for intranet transfers, which is paid by transaction performers.
However, over time, these minimum fees for transferring funds will bring profit to the holders of the nodes.
In addition, as you recall from the description of the third drawback, we talked about the need to “listen” to the network to prevent fraudulent activities.
This need should lead to the development of another integral part of the ecosystem called Watchtowers.
The role of “watch towers” will be to search for fraud attempts of all kinds. In fact, it will even be possible to transfer this service to third-party companies.
These “watch towers” are actually Lightning nodes with another dedicated algorithm (similar to mining).
These nodes will receive payment only if someone uses their service (i.e., if they really prevent fraud).
The current stage of market development
Lightning labs launched its core network in March 2018. Today, there are about 1900 nodes, of which 97% have active channels.
The number of channels also increases markedly over time, and now there are more than 11 thousand.
In terms of network bandwidth, there has been a significant 300% increase in the last three weeks, from about 100 BTC to over 300 BTC.
Although it’s only the beginning, the processes of increasing the availability and implementation of the network, led by well-known developers around the world, are in full swing, and we hope that soon it will be used around the world and will become convenient and efficient.