What is the Lightning Network?
The Lightning Network is a secondary layer built on the main Bitcoin network designed to provide scalability and improve efficiency on the main network. LN is a layer-2 solution that operates separately from the layer 1 (main blockchain architecture) base level Bitcoin blockchain.
Despite being separate from the Bitcoin network, the Lightning Network has its own unique nodes and software and interacts with the main chain.
It creates a payment protocol that enables off-chain transactions. The transactions are fast and can be confirmed without verification from the main blockchain network. Since all transactions are processed off-chain, the BTC Lightning Network transaction fees are significantly lower than the main network fees.
How Does the Lightning Network Work?
The Lightning Network is built on blockchain smart contracts that create peer-to-peer payment channels between two parties. The payment channel works as a direct payment line and allows participants to conduct unlimited lightning-speed transactions away from the main network. The payment channel is a pool of funds that is shared between the two parties.
Let’s say that you want to split a dinner bill with your friends using Bitcoin. Normally, each of you would need to create a separate transaction on the Bitcoin blockchain, which could take a while to confirm and incur high fees. With the Lightning Network, however, you can open a payment channel with each of your friends. Then, each time you want to make a payment, you can send it through the payment channel instead of creating a new transaction on the blockchain. This allows you to split the bill instantly and with very low fees. Once you’re done splitting the bill, you can close the payment channels and all of the transactions will be settled on the Bitcoin blockchain.
The payment channel works as a mini ledger and is used to make instant small payments without involving the main network. All transactions are conducted securely through Bitcoin Lightning wallets. Once both parties confirm to close the channel, the transactions are consolidated into a single transaction and sent to be recorded in the main blockchain ledger. The transactions will take only a fraction of a second and the fees are minimal. Simplifying the smaller transactions into one transaction reduces network congestion and improves transaction speed.
What are the Benefits?
The Lightning Network provides a faster and cheaper way to complete Bitcoin transactions.
- Speedy transactions: Off-chain transactions make transaction speeds incredibly fast. Theoretically, LN can handle around 1,000,000 transactions per second, while the main Bitcoin network can only complete 7 transactions in a second.
- Improved scalability: Users can make micro-transactions at regular intervals. LN also enhances scalability, because different parties can communicate and transact with each other through payment channels.
- Less energy consumption: LN uses less computational power to conduct smaller transactions.
- Enhanced security: Smart contracts ensure that transactions are safely conducted within the network and funds reach the recipients safely.
What are Its Drawbacks?
Bitcoin can be a difficult system for beginners due to its complexity, including addresses and fees that can be confusing to navigate. However, some wallets can simplify these complexities, allowing users to send and receive coins with relative ease. Unfortunately, the same cannot be said for the Lightning Network. Currently, there are limited options for smartphone apps that support Lightning nodes, and users must open channels before making any payments, which can be a time-consuming process.
It is still at the developmental stage and it is better to opt for the layer-1 Bitcoin network for larger payments. Besides, LN does not allow offline payments. Both parties have to be online to execute a successful transaction.