While Bitcoin has remained the highest-grossing cryptocurrency in the world, it often receives criticism for scalability issues. Therefore, there are second-layer solutions like Lightning Network to address these issues.
What is Lightning Network?
As everyone knows that Bitcoin is a digital currency native to an eponymous blockchain. The Bitcoin blockchain uses the PoW consensus model. It means that the verification process for Bitcoin transactions depends on mining machines that are competing against each other to solve the encrypted puzzle first.
However, the PoW mechanism can make transaction speed slower and it can also require considerable energy input. Scalability is a term that is used to define the ability of a fintech entity to process transactions in unit time.
A lightning network is like a layer-2 solution or program that is built on Bitcoin to increase its scalability.
What are the Limitations of a Blockchain?
As it has mentioned in the above paragraph that blockchains can face some fundamental issues that are debated among developers. Two of the most important limitations of blockchain are Speed and Cost.
It is important to note that financial networks like VISA can process 47 thousand transactions per second. Meanwhile, digital and international financial networks such as Paypal and Swift networks can process 193 and 1000 transactions per second. Meanwhile, Bitcoin can securely process 7 transactions per second.
Considering that Bitcoin is a global financial network, it means that there is thousands of transaction happening at once from all parts of the globe. With the current transaction speed, Bitcoin network can face lags and the users may have to wait for days to complete a singular transaction cycle.
The second major limitation of blockchain is cost. Bitcoin depends on miners to verify transactions meaning that it can require a considerable amount of equipment and energy.
Furthermore, the cost of processing Bitcoin transactions also includes human labor and electricity. Bitcoin has often received criticism for its massive energy intake. Meanwhile, the transaction fees on Bitcoin remained conservative when the network was small.
As the number of Bitcoin users grew, the transaction costs also increased. It happens because miners prioritize the transactions that offer higher fees first. Consequently, during bull runs the Bitcoin transaction fees rose as high as $37 to $1000 in 2017.
How does Lightning Network Work?
The lightning network is an additional layer of the blockchain program that is built on top of the Bitcoin network. The LN is a network of nodes that are used to process transactions with the help of QR code technology. This is a shift from the usual Bitcoin transaction nodes that depend on public keys to process the transactions.
In this manner, the Lightning network can process transactions faster and for cheaper transaction costs. As per estimation, the Lightning network can increase transaction speed to thousands or even hundreds of thousands which could also make small transactions economical for Bitcoin users.
The Lightning network consists of smart contracts that are spread across two end users. However, the LN smart contracts can perform transactions using any bridge rather than needing specified pairing channels between two end users. The users can connect with the LN using wallet addresses that look very similar to Bitcoin addresses.
The users have the freedom to close the transaction at any given time and they can add the transaction record on the main Bitcoin blockchain. Since only closing and opening transaction records are added to the beacon blockchain, LN is also more private.
Origin of Lightning Network
The first plan for Lightning Network was shared by Bitcoin’s mysterious founder Satoshi Nakamoto. When Nakamoto published the Bitcoin Whitepaper, they alluded to the idea of a layer-2 solution like LN.
However, the blueprint of Lightning Network was first shared by two blockchain researchers in 2015 under the project named Lightning Network. The developers named Thaddeus Dryja and Joseph Poon published a whitepaper that was called the Bitcoin Lightning Network.
This paper also took reference from the structure of the payment channel for Bitcoin mentioned by Satoshi Nakamoto. In the original Bitcoin whitepaper, the Bitcoin founder mentioned the payment channel research conducted by another computer scientist named Mike Hearn in 2013.
Dryja and Poon worked on increasing the Bitcoin verification speed to 8 gigabytes per block based on the VISA TPS. However, the unit block of Bitcoin could not support 47K transactions per second.
Therefore, both developers focused their attention on adding an off-chain transaction options for Lightning Network. In 2016, they were able to establish a foundation named Lightning Labs that onboarded more contributors.
The main aim of Lightning Labs was to add LN to the Bitcoin network. Following the SegWig soft fork event in 2017, Lightning Labs was able to find an integration solution. The SegWig update was added to remove the malleability bug that allowed users to fake transactions and keep Bitcoins in their reserves.
Eventually, in 2018 Lightning Labs issued a beta version of Lightning Network that was implemented on the Bitcoin mainnet. There were some figures like former Twitter CEO, Jack Dorsey who worked with Lightning Network for a while.
He also hired some developers who were able to perform transactions on the Lightning Network. These new developers received their salaries in Bitcoin. Dorsey had plans to integrate Lightning Network into Twitter.
How to Use Lightning Network?
A lightning network is very much like a peer-to-peer network that can be used to process transactions. Furthermore, since the transactions on Lightning Network can process instant transactions, they can support even the smallest transactions such as one Satoshi which is hundredth million units of Bitcoin.
The people or enterprises that wish to use the Lightning network need to their Bitcoins to a wallet that requires more than one signature called a multi-sig. In this manner, the users can create a digital agreement for creating a transaction request and completing it.
At the same time, the LN will also create an agreement on its balance sheet. For example, a merchant has opened an LN network that allows its consumers to send and receive Bitcoin payments. For every new transaction, the balance sheet is created on the LN.
When the user does not wish to perform anymore transaction with the Coffee shop, they can close the LN channel and the opening/closing transaction would be added to the core blockchain as a permanent record. The LN will perform the shorted possible route on the node networks to perform the transaction as soon as possible.
How can You Connect with Lightning Network?
There are several ways that the users can undertake to perform Lightning Network transactions. Some of them are mentioned as under:
Android Bitcoin Lightning Wallets
Users, who do not wish to go for the full node experience, can use the Bitcoin Lightning Wallet on Android. This is a wallet application and anyone using an android operating system on their phone can download it.
This app is also non-custodial which means that users have full control over their Bitcoin reserves and are responsible to handle their security keys.
Blue Wallet application is available for both Android and iOS users. However, it is a type of custodial service that means that the users can depend on the service to look after their Bitcoin reserves. At the same time, this service can run a node for the users.
The users can send or receive their Bitcoins on the Lightning network with the Blue wallet application. But they do not have the option to make withdrawals.
There are many users with enough material resources and technical knowledge who can run a full Bitcoin node. It means that they have become a Bitcoin server and they are working for Bitcoin and LN by ensuring the authenticity of the transactions on the blockchain.
At the same time, users can connect the full node with their operating systems and perform transactions using a personalized node. As a whole, the user can now act like a bank and it means that they are fully responsible for controlling and owning their Bitcoin funds.
Éclair Lightning Node
Just like setting up a full Bitcoin node, the users can also opt for a full Lightning node. To get this done, the users must download Éclair or get Raspberry PI to run the node. It means that the user can now route transactions for others and also perform their transactions directly.
Interestingly, there is also an Éclair Mobile version for android users. However, the application for Éclair is like a lite version that offers limited features. The users cannot receive payments on Éclair.
When the users have set up a full nod the next step is to upgrade efficiency. For this, the users can switch to Lightning Joule, which is a browser extension. This extension can be connected to the Lightning Network and it is compatible with Opera, Brave, Firefox, Chrome, and others. However, it can pose a major hacking threat
What is the Need for Lightning Network?
A good question to ask about Lightning Network is that when there are several other faster transaction networks available in the world, what is its need? To understand the utility of LN, here are some points:
Paxful is a Bitcoin exchange that enables peer-to-peer payments. This exchange has hosted millions of dollars’ worth of transactions in Bitcoins. It is currently serving 1.5 million users in Africa. The platform has plans to integrate support for Lightning Network and when it happens the users can benefit from faster and cheaper Bitcoin transactions.
El Salvador is a country that has registered Bitcoin as a legal tender. The government of El Salvador has issued a state-sanctioned wallet called Chivo which is compatible with LN.
Since users need to perform micro-transactions; therefore Lightening Network has become one of the most downloaded applications in the Central American nation.
Twitter has also added Lightning network nodes to Twitter. To this end, the users on LN can send tips in the form of Bitcoin to other users on LN. For this purpose, the users must download an app called Strike which is accessible to its 360 million users.
Twitter users can send others Bitcoins for free and without any transaction charges using Strike. Another social media platform to incorporate Lightning network transactions is Substack to enable Bitcoin payments.
Another major utility of Lightening Network is that the companies that incorporate Bitcoin users as the payment methods can use it. The users can perform both micro and large-scale Bitcoin transactions using the LN.
The network has gained enough traction and it is well-known among merchants and consumers for performing faster, cheaper, and minuscule transactions in Satoshis.
Lightning Faucets are a test net that allows users to emulate sending and receiving Bitcoins from their lightning wallets. The users can increase their Bitcoin reserves using Faucet. Using this Lightning Wallet, users can get a chance to earn more Bitcoins. At the same time, they can withdraw, 14 satoshis in one go which is valued at $0.004 per unit.
The Lightning Network Hack
The Lightning Network is often touted as a secure way to send and receive Bitcoin transactions. However, this network has faced issues with maintaining security for a while. In 2018, the LN was hit by hackers using the distributed denial of the service method. This attack took out around 200 nodes on Ln which were responsible for 20% of transactions.
Despite the preventive attempts, the exploit managed to affect around 7000 nodes. Therefore, the users on the network were unable to process their transactions for a while.
Advantages of Lightning Network
Here are some of the benefits that LN can bring to the Bitcoin blockchain.
The cost of processing transactions on Lightning networks is cheaper because it depends on the node network. Furthermore, the transactions on the Lightning network are processed using QR Code verification rather than depending on the combination of private/public keys.
The Transaction speed for sending or receiving Bitcoins on the Lightning network is faster than the Bitcoin blockchain. The transaction requests do not require mining Bitcoins and therefore they are considerably cheaper than the main Bitcoin network where miners compete to solve the encryption puzzle.
During trading volume floods, Bitcoin transaction fees can increase as high as $35 to $1000 per go. Even if the users wish to send only one Bitcoin, they would have to pay massive transaction fees.
Furthermore, the lack of scalability means that users would have to wait for long durations to process transactions. Therefore, users can switch to LN which means making cheaper and faster transactions.
Because the Lightning network is based on the Bitcoin core blockchain, it means that it can benefit from some of the security features of Bitcoin. Thus far, the Bitcoin blockchain has not been hacked reportedly. The users can also switch to the main Bitcoin blockchain to ensure secure transactions for larger volumes.
Only closing and opening transactions performed on the Lightning network are recorded on the core blockchain. It means that Bitcoin users can enjoy better privacy on LN because Bitcoin is a public network and anyone can trace transaction records on it.
Atomic swaps are a type of cryptocurrency exchange that can take place without any third party or exchange. These swaps allow users to process transactions with negligible fees and do not require wallet transfers. Submarine swap enables users to perform atomic swaps for cryptocurrencies between on-chain and off-chain Bitcoin wallets.
The lightning network has also incorporated off-chain transactions because one block of Bitcoin cannot contain the massive amount of transaction volume that it can process. Therefore, the users who are using the LN can also exchange their Bitcoins outside of the core chain which makes it an off-chain payment bridge.
Limitations of Lightening Network
Here are some of the important limitations of the Lightening Network:
The users must find a compatible digital wallet to make sure that they can perform Bitcoin transactions on the Lightning network.
The users must pay an initiation fee for the users for getting started with their LN wallet. They must also commit some Bitcoins to get approval for performing transactions.
The users need to have some technical knowledge to close the LN accounts which require both parties to issue routing fees.
Users need to beware of the stuck payments on the Lightning network that can be refunded by the Bitcoin network but can remain stuck for days at the end.
The LN suffers from the threat of offline transaction scams which can occur by closing transaction channels by one party so that the other one can steal their reserves if they are offline. Even when the scammed party comes online again they are unable to reverse the stolen funds as long as scammers remain offline.
There is a considerable amount of regulatory uncertainty around the Lightning network. The regulators can question LN integration on account of its anonymous transactions.
Lightning network is often talked about layer-2 solution attached to Bitcoin. The network possesses some threats and some advantages to the Bitcoin blockchain. Other blockchains such as Ethereum also make room for layer-2 solutions such as Polygon, Cartesi, Arbitrum, and Optimism, among others.