Lightning Network (LN): How it Works
Lightning Network, as the name suggests, is a network of payment channels that settle Bitcoin transactions instantaneously.
Bitcoin Cash (BCH) was ‘forked‘ from Bitcoin to accommodate a larger block size on the Blockchain.
However, estimates suggest that even a block size 8 MB implemented on BCH is not adequate to support all the transactions of the world. Hence, development of the Lightning Network to support real-world volumes is paramount.
A ‘layer 2’ of payment channels over the Bitcoin blockchain to confirm payments securely between trusted parties. However, before beginning with Lightning Network, one must understand Segwit.
Background of Lightning Network Channels
- Multi-Signature Wallets: It is a digital signature scheme that requires a group of users to validate a single transaction. It is used to protect the Bitcoin wallets against theft and unforeseen circumstances like disease and death.
A combination of more than one keys is used to validate a transaction. This feature is essential to Lightning Network as the formation and dissolution of the payment channels will require validation from both the parties.
- Segregated Witness: Segregated Witness was applied to provide for the implementation of Lightning Network. It separates the Signature details of the transaction from the other transaction details.
In Lightning, using multi-signature design, the signature is verified outside the main Blockchain.
Off-Chain Approach to Scale Bitcoin
Lightning network is primarily an off-chain approach to scale Bitcoin. It proposes a new layer over the Bitcoin protocol between ‘trusted parties.’ Lightning Labs is the forerunner in working towards implementing the technology.
Furthermore, the protocol enables to set up trusted channels which can settle multiple transactions between the network participants. Therefore, the Lightning Network channel is recorded only twice on the blockchain; once at the opening, and later at the time of closing the circuit.
How does Lightning Network (LN) work?
A channel is formed between two parties using the multi-signature technique. The two participants assign a specific amount of Bitcoin to be traded using the channel only. Any number of transactions can be sent across the channel. Moreover, the final balance of the Bitcoin wallets of the respective users will reflect on the main ledger after the participants close the channel.
Let’s say a particular channel holds a+b Bitcoins, where ‘a’ sats was assigned by the first and ‘b’ sats by the second participant on the channel. The two participants can transact via the lightning channel instantaneously incurring minimal fees. Hence, they can perform millions of transactions limited only by the total amount assigned in the circuit.
At the end, when the network participants decide to close the channel, the final balances on the channel reflect in the respective wallets of the users.
Forming a Web of Channels
Firms are creating numerous channels which are further interlinked using the associative property. Therefore, a Lightning Channel between ‘A’ and ‘B,’ and a channel between ‘B’ and ‘C’ would essentially create a channel between ‘A’ and ‘C’ as well. A web of instant payment channels over Bitcoin will develop over the years, similar to the internet.
— Lightning Network statistics ⚡ (@LNstats) March 6, 2019
Nevertheless, Bitcoin’s public address will still provide payments of high values which require immediate inundation and higher security. An average transaction fee of 0.0005 BTC ($1-3 average) is chargeable for validating the transaction.
Advantages of Using Lightning Network
The list of merchants and networks advocating their support to the LN is increasing day-by-day. Recently, a Brazilian computer programmer created a payment system for a vending machine built on LN. Video of it dispensing Coco-cola from a wending machine went viral on Twitter.
Jack Dorsey, the CEO of Twitter, too advocates the use of Lightning Network. He endorses Lightning Network by supporting tipping sites for sending micro-payments across social media platforms.
The advantages of using the Lightning network are:
- Instantaneous low fees transactions
- Secure Escrow Accounts
- It can be used to create smart contracts as well
Map of the internet in 1973. "Even 12 years after the first message was transmitted on the ARPANET, there were still only 213 computers on the network." Give #lightningnetwork some time. @lightning #bitcoin Source: https://t.co/oZ5lReNHyU pic.twitter.com/AzswGdeqpy
— John Pfeffer (@jlppfeffer) March 2, 2019