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What Is Bitcoin’s Lightning Network? Everything You Need to Know

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Bitcoin’s Lightning Network has the potential to transform Bitcoin. As more and more people use Bitcoin, its limitations are starting to show. Things such as transaction speed and total transactions per second. Here’s how the Lightning Network could change everything.

What Is the Lightning Network?

The Lightning Network is an attempt to solve Bitcoin’s speed and scaling problems. By reducing fees and increasing transaction speed, everyone benefits from a better network. The details are outlined in The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments, a whitepaper written in 2016 by Joseph Poon and Thaddeus Dryja. The three keys concepts are:

  1. Instant payments: fast enough to buy goods in shops instantly.
  2. Micropayments: allow the transfer of tiny fractions of Bitcoin, far smaller than currently possible.
  3. Scalability: an increase of both transactions and speed requires greater scaling than currently used.

The Lightning Network is aiming to be everything Bitcoin promised. With an instant settlement, almost unlimited transaction size, and tiny fees, it’s easy to see why the Lightning Network has so much potential.

The best part is the Lightning Network works alongside Bitcoin. It isn’t aiming to replace Bitcoin with a daft Hash Cash war, but compliment it. The Lightning Network uses Bitcoin’s existing infrastructure, including security and resilience. The designers even suggest that the Lightning Network can work alongside Bitcoin’s network and that the current Bitcoin network can operate for larger transactions, basically anything that needs an instant settlement, such as buying goods from a shop.

How Does the Lightning Network Work?

Before we can get into the details of the Lightning Network, you’ll need to understand how Bitcoin works. Our simple guide to blockchain may help here.

Think of the Lightning Network like hundreds of “mini Bitcoin” networks running on top of Bitcoin. Essentially, two or more parties agree to send money between each other, and only when are they both finished is this transaction written to the main Bitcoin network. Party members can send as many transactions as they like, which will only reconcile with the main network at a later date.

Funds live in a multisignature Bitcoin address known as a “channel”. This differs from a “regular” Bitcoin address, as its access is not restricted to one person. If person A and person B start a channel, neither party can alter the funds without the consent of the other person.

Channels start with a Bitcoin balance. When making a payment, both parties agree on the value and sign the transaction. This effectively redistributes the balance between each party. Any previous signings in the channel become invalid, as only the latest change matters. Channel addresses do not need the permission of both parties to close the channel. You could quite easily start a channel, send funds, and then immediately close it again.

Channels get closed by broadcasting the final transaction to Bitcoin’s network. No matter how many times funds transfer between two parties, Bitcoin’s ledger will only show one transaction once closed. By linking several channels together, it’s possible to transfer funds between two parties, by “jumping” across channels. By using the shortest available path (a bit like how the Internet works), it’s possible to bypass the Bitcoin ledger and settle funds directly.

This is so exciting for blockchain if you can call it that. These transactions are “off-chain”, as they technically bypass Bitcoin’s blockchain, but that’s not a problem. Transactions are still enforced by the blockchain, so there’s still that security aspect, but far greater speed is possible.

The Lightning Network handles all this through the use of scripted smart contracts – like how Ethereum works. Now if you’re confused at this point, that’s ok. You’re right, Bitcoin doesn’t use smart contracts, so how can the Lightning Network use something that doesn’t exist?

Bitcoin uses a scripting system just like other blockchains with smart contracts. The difference here is that Bitcoin’s scripting system processes transactions, and it’s not “open” to anyone to use. The Lightning Network technically highjacks this scripting system, and so it’s up to the processing nodes to allow this. As most operators see the Lightning Network as a good idea, there’s enough computing capacity to run it. Now, if some kind of crypto animal game (crypto kitties anyone?) wanted to run on Bitcoin, that might cause some problems, and it’s likely operators would refuse to process it.

Lightning Network Enables Atomic Swaps

Atomic swaps are possible with the Lightning Network. With most cryptocurrencies, if you want to change token X into token Y, you’ll often need to go through a third party. This could be an exchange or a friend, but there’s still a third party in the middle, who needs trusting.

The Lightning Network potentially allows the trade of any token using the same hashing protocol. You could, in theory, trade Litecoin for Bitcoin all on the Lightning Network. This is possible by multisignature wallets, and the core idea behind the network – you don’t need to trust a third party or the sender/recipient.

Start Using the Lightning Network Today!

As you’ve seen, the Lightning Network has massive potential. This Bitcoin enhancement can easily co-exist alongside Bitcoin, and by its very nature, it won’t be replacing Bitcoin, it needs it!

Similarly, Bitcoin needs the Lightning Network. To ever have a chance of becoming a global payment system, Bitcoin needs to be fast. Bitcoin isn’t fast, but the Lightning Network is. By reducing fees, and opening up the scripting language, Bitcoin continues to fend off alt coins looking to steal its crown. In the future, there’s the possibility of seeing many decentralized apps running on top of the Lightning Network, made possible by the tiny transaction fees, and your support!

While still in the very early adoption and trial phase, the Lightning Network looks set to take-off in a big way. You can do your bit by using it wherever possible, and if you’re a retailer, why not investigate how you can begin accepting Bitcoin today?

Joe Coburn
With a background in software development, Joe quickly realized the potential in blockchain technology when it first hit the scene. He started a personal blog (RIP) about cryptocurrency developments way back in 2010, and since then he’s been fascinated by the concept of decentralized currency.

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