THE LIGHTNING NETWORK: AN EVER-EVOLVING CONCEPT MAKING A SIGNIFICANT DIFFERENCE TO BITCOIN’S BLOCKCHAIN.
WHAT EXACTLY DOES THE LIGHTNING NETWORK OFFERS THAT BITCOIN’S BLOCKCHAIN DOESN’T?
I will suggest you read the bitcoin white-paper here. However, it is safe to say the Bitcoin on-chain layer serves as an arbiter to the lightning network which is also known as the second layer network. If you have ever tried making a transaction during a particularly busy time, you have probably noticed that Bitcoin’s On-chain transactions can get slow and expensive. Transactions are confirmed only once in every 10 minutes on average and if you didn’t attach a fee, it could take you than days to get confirmed. Unfortunately, this means transacting on the layer one network (Bitcoin’s blockchain) isn’t scalable while VISA can process about 65,000 transaction per second, Bitcoin’s blockchain can process only 7 transactions per second, with additional upgrade this number can increase to double digits but it’s still not close to traditional payment process. Now, this problem becomes a real issue with day-to-day micro transactions. One of the main arguments of why Bitcoin can’t be used as a medium of exchange is due to how slow the on-chain network (Bitcoin’s blockchain) works and how expensive it is to make small payments on the network.
WOULD IT BE GREAT IF WE CAN HAVE INSTANT AND FEE-LESS TRANSACTIONS ?
This is where the Lightning network comes in with a significant difference. Lightning Network is a new protocol layer built on top of Bitcoin blockchain. It uses cutting-edge smart contracting to achieve faster-than-VISA transaction throughput, while retaining the peer-to-peer nature of the Bitcoin blockchain protocol. The Lightning network conduct transactions off-blockchain without limitations, that is, transactions are made off-chain with confidence of Bitcoin on-chain enforceability.
The network is specifically designed to facilitate micro-transactions, so if Bitcoin blockchain is Layer One Network, then the Lightning Network is considered as Layer Two Network. The concept was originally introduced in 2015, but has been leveraging on continuous development and community contribution since then. The main idea is that small transactions don’t need to be recorded directly on Bitcoin’ blockchain but rather off-chain (Lightning Network). It will amaze you to know it provides all the benefit bitcoin has without its drawbacks.
HOW DOES THE LIGHTNING NETWORK WORK EXACTLY?
It works mainly as a payment channel, If I want to transact with my friend, we will open an off-chain payment channel between us, form there on, the payment channel is open and the transaction can directly go between me and my friend without touching the main blockchain. Funds could be transferred as quickly as the user’s worth can communicate over the internet. Once we want to conclude our business, we can get a closing transaction on the main blockchain and basically settle all of our previous transactions. This is kind of like me and my friend writing down how much each one of us owes the other by exchanging the money until He and I choose to settle the bill. Let’s assume my friend and I want to make a small bet one the result of a Premier league match. If we pay this bet on a level one Bitcoin Blockchain, we may end up paying a lot more than we intended due to transaction fees. On the other hand, if we don’t pay enough fees, we might find ourselves waiting for hours for the money to change hands, but if we use the lightning network, it’s a whole different ball game.
OOH LET ME EXPLAIN,
When you open a payment channel, each of your deposit is certain amount that acts up like a sort of security deposit. The amount is to be equal to or larger than the value than will eventually be transacted. Let’s say my friend and I want to conduct a series of bets with a total value of 0.1 Bitcoin. So, we open a payment channel between us and each of deposit a payment of 0.5 Bitcoin as a security deposit. This deposit is the only deposit that actually reaches the layer one blockchain and payment will be settled only between me and my friend not minding that if at any point one of us want to back of the transaction we can easily just take out the deposit and leave without contacting the other person. Now, let’s assume I lose the bet and I need to pay my friend 0.1 Bitcoin. We will both sign the transaction in our off-chain ledger, a kind of like small packet book stating that I now have 0.4 bitcoin and he has 0.6 bitcoin. If at any point my friend wants to leave with the winnings, he can just display our signed ledger to the network and then deposit will be returned according to the new balances.
THE LIGHTNING NETWORK ALSO HAVE A FRAUD PROTECTION MECHANISM BUILT IN.
If for some reason I want to try to back out now and take my 0.5 Bitcoin back, my whole deposit will be sent over to my friend, such huge penalty is in place in other to discourage partners from trying to be fraudulent. Remember even if my friend and I transacted over a hundred times the Bitcoin Blockchain will only ever show Two transactions, one for opening the payment channel and depositing the money and the other for closing it and settling the bill. All other transactions are between what is basically fills in as instant on the Lightning network. So, this is how the basic function of the Lightning network works.
WELL, THIS IS ALL VERY NICE.
That means I have to deposit funds for each new person I want to transact with, and that’s not too realistic. In order to overcome this, the lightning network allows me to jump through connected payment channels. That means if I have a payment channel with my friend and he has a payment channel with his uncle, I can ask my friend to pay his uncle on my behalf using their open payment channel. The network effect makes the lightning network much more powerful since in other to transact with anyone you just need to find the path to that someone who already knows each other. It doesn’t even matter if that channel goes through over about hundreds intermediary. Thus, this is making the lightning network globally scalable.
Now the Lightning Networks provides new possibilities for using bitcoin as a payment method, one of these possibilities is that you can start streaming workload, meaning you can pay workers only for the number of minutes even seconds that have worked. In spite of Bitcoin Blockchain problematic drawbacks, Lightning network is really a great concept making significant difference to the Bitcoin blockchain through:
Scalability, Instant Reflection, Low Cost, Cross Blockchain Transactions.
SO, HOW CAN I MAKE USE OF THIS INNOVATION ?
If you really want to utilize this network you can either create your lightning network node or indulge wallets and exchange platforms like Bitnob who had the Lightning Network feature integrated on its platform. Here is a link elucidating how you can navigate your path through the process.
Note: With lightning network instant and fee-less payment, bitcoin will replace credit cards, even cash and all other existing transaction methods.
Hopefully by now you must have read and experienced the impact and influence of lightning network on bitcoin’s blockchain. You might have questions, feel free to ask at the comment section.
