We are all aware of the concept of Bitcoin and the problem of scalability with this cryptocurrency. The second technology layer for Bitcoin known as the lightning network is the one in which transactions are carried out by scaling the capability of blockchain using micropayment channels. From the main blockchain, the lightning network has taken the transaction away therefore it is expected to decrease the associated fees of transactions by decongesting Bitcoin.
On the lightning network, the transactions take place instantly that further helps in enhancing the utility of Bitcoin as a daily use medium. The off-chain transactions could also be conducted using the lightning network that involves the exchanges taking place between cryptocurrencies.
The scaling problem:
If Bitcoin intends to reach the potential of becoming a medium of day-to-day transactions, then on a daily basis, millions of transactions have to be processed by it. However, its decentralized technology has the nature that demands all nodes harmony contained in the network that brings problems.
For instance, if the numbers of transactions on the network of Bitcoin multiply then it will become time-consuming and expensive to approve them and validate their data. The increasing number of transactions will require a dramatic addition in the computational power to add the blocks. This is true in any case whether they are located at work or home for executing the transactions that involve Bitcoin.
The concept of the lightning network relies on a basic idea of reducing the time to verify the transaction. If a transaction is done on the blockchain then it takes time to verify and fees are charged. What if we eliminate the main blockchain and it is used only when necessary?
Imagine two parties being involved in frequent transactions. Lightning network requires these two parties to establish a payment channel between them. The creation of this channel will be verified by the blockchain with an initial deposit of a prespecified amount of Bitcoins by both parties. Whenever a transaction occurs between these two parties, the funds are transferred, and the new statement is signed by both parties. The latest copy of the financial statement is kept by both parties with them. Transactions can continue to take place until there are funds kept with the exchange. If these two parties decide to end the relationship and scrap the payment channel, any one of them can do so as both have the recent copy of the statement.
The funds are distributed as per the statement. This end transaction is again recorded in the blockchain and verified by the network. Thus, there are only two transactions which are recorded in the main blockchain, the creation and the scrapping of the payment channel. This reduces the burden on the blockchain and makes the system scalable. What we are doing here is just creating an additional layer and bypassing on top of the original blockchain, thus increasing the speed of the whole operation.
There can be multiple channels like these between the number of users which creates a network. If one user wants to transfer some amount to another user with which he doesn’t have a payment channel. Then there is no need to establish a new payment channel if these two users are connected by some third user. The network tries and finds out the shortest possible way to connect these two parties and perform the transaction. The funds which are kept with the exchange can be considered as a wallet secured by two keys. These keys are known to the parties involved. The keys are used to sign the statement.
ADVANTAGES OF LIGHTNING NETWORK
The lightning network could be considered to be much in its very initial stages. It’s still in its development phase and some of the major advantages that it can offer by working after complete development are:
Speed of transaction – One need not spend much time waiting for numerous confirmations for each of the intended transaction when the network goes live. Regardless of the fact whether the network is busy or not, there will be instant processing of the transactions.
Transaction Fees – Lightning network offers reduced transaction fees as one of its major advantages since this is something that can offer a major boost to Bitcoin’s adoption so that it could be used in cafes, shops, retail markets, etc. as a payment form.
Scalability – The figure of transactions taking place per second of bitcoin and the other such cryptocurrencies could reach to heights that are unprecedented such as that of a million transactions taking place per second.
Atomic swaps that are cross-chain – For the duration for which similar cryptographic hash function is shared by the two blockchains (majorly done by most of them), it is possible for the users to send money without the need of relying on an intermediary that is the third party, like an exchange, from one chain to another. The potential that this technology can show is absolutely remarkable.
Anonymity – Complete anonymity could not be found in much of the cryptocurrencies that are existing at present. Tracing of the transactions is still possible from one of the wallets to another. However, when it is the case of a lightning network, the occurrence of the majority of the transactions takes pace outside blockchain. Tracing is made almost impossible for all micropayments that place with the help of lightning channels.
Is the picture as rosy as it looks?
The efficiency of the lightning network is in the reach of its network. If the facility is adopted by a large number of users, then it will be practically used for the tiniest of the transactions. However, more complex the network more will be the fees for making the transactions. The fees for using the lightning network are charged for finding out the shortest route for completing the transaction.
The main problem of this concept is the centralization of power. Blockchain boasts of eliminating the central authority of institutions and giving power to everyone involved. In the lightning network, if one party in the network is responsible for a high number of transactions then it may lead to centralization. The failure of this party can lead to failure of the whole system.
However, there is a difference in their processing in comparison to the standard transactions taking place on the blockchain of Bitcoin. The main blockchain is updated with these only when a channel is closed or opened by two parties. In the mid of those acts, endless funds shifting can take place between two parties and there is no need to inform the main blockchain regarding these activities. The speed of a transaction is enhanced dramatically with this approach since it is not needed to approve all the transactions by all nodes present in the blockchain.
You can read the original Lightning Network whitepaper below:lightning-network-paper