The Blockchain | Lightning Network

What is  Lightning Network in blockchain?

After getting a closer look at the system of Proof of Work (PoW) you will probably see that this system is very likely to have a significant scalability issue - this is correct. Bitcoin is fighting against this problem and has found an interesting approach to solve it. The solution is called a “lightning network” and describes a method of processing transactions off-chain. (For comparison: While Visa can approve up to 4,000 transactions per second, Bitcoin can process seven without the lightning network.)

This type of process promises to reduce the high transaction fees to a minimum and increase the scalability to a maximum of up to billions per second. It sounds too good to be true, but let’s take a look at how they are planning to achieve it.

The lightning network can be broadly described as a peer-to-peer application that is added to the existing Bitcoin blockchain. This system is called “payment channels” and enables the possibility of transactions working without passing the blockchain. One payment channel is a connection between two users, who can send BTC to one another. These small transactions are only saved on the blockchain if both users sign at the end and close this channel. The users can determine the duration of it. This enables the chance that not every transaction needs to be saved on the blockchain, but only the outcome of several transactions. This means that it requires only two operations - one to open the channel and one to close it.

(You can visualize it the following way: Let’s say there is Paul who is buying a coffee every morning before work. If he wants to purchase the coffee without the lightning network, his transaction would need to be validated and saved on the blockchain. This could cost more than the coffee itself, and the transaction could take up to hours to be transmitted.

The lightning network can be imagined as a safe which contains a balance sheet. Paul and the coffee shop create a payment channel, and Paul is contributing 100€, while the coffee shop is contributing nothing because it expects payments. The first transaction needs to be done, and both of their contributions are saved on a balance sheet.

This balance sheet is saved on the blockchain and is visible to everyone and secure. Whenever Paul wants to buy a coffee at this shop, he can go there and make his payment. The payment will be made by changing the balance sheet. Let’s assume a coffee costs 3€. The balance sheet is changed from: “Paul 100€ and Shop 0€” to “Paul 97€ and Shop 3€”.

Each party gets a copy of the changed balance, and Paul receives a coffee.

This could go on forever because Paul is able to fund as much as he wants.

Both parties can close the channel at any time they want; they only need to provide the latest balance sheet, which will be saved on the blockchain.)

Furthermore, the network is creating indirect connections as well. Meaning, that a transaction from A to D can be processed if A has a payment channel with C and C has one with D. There is no necessity in creating an extra one between A and D.

(Back to our example: If Laura wants to buy a coffee at that shop and does not have a payment channel with that shop, but with Paul, then she can use Paul as an intermediary.)

One downside is this system requires the intermediary to have enough money in the appropriate payment channel. There is another issue from a financial point of view. The capital which is in the payment channel is fixed and therefore cannot be used for investments or others. One solution could be that a company is taking place as an intermediary, but that has not been the case.

The fact is, the lightning network can be the savior of Bitcoin’s image not being suitable as an everyday currency, but there is still a lot of work to do.