What is the Lightning Network, and why should you know about it?

April 11, 2019
Darya Karatkevich

While bitcoin has been touted as the future of currency and payments, scalability and transaction speed have kept it from more mainstream adoption. It is only capable of a few transactions per second, since so much work must be accomplished to verify each transaction.

Several networks have tried to address this over the years by creating a layer above bitcoin to manage transactions, but by far the most promising is the Lightning Network. Started out in 2015 by Joseph Poon and Thaddeus Dryja, the system allows for multiple transactions to occur between trusted parties outside the blockchain.

The simplest way to think about it is to imagine two people who know each other well (friends, spouses, etc.) who set up a trusted shared ‘wallet’ where they can trade bitcoin back and forth freely. The only time that the wallet reports back to the bitcoin blockchain is when the wallet is opened and closed, recording the balance at each point for each user.

Of course, there’s more to it technically, and you can read the latest version of their white paper to learn more about the details. Let’s dive in a little deeper and see why the Lightning Network is important.

Addressing bitcoin’s scalability problem

From the beginning, one of the bigger barriers to widespread usage of bitcoin for financial transactions has been it’s limited capability for expansion. Most estimates show that bitcoin can only handle about 7 transactions per second. By contrast, Visa’s credit card transaction network can churn through 47k per second.

Further, with the original block size of just 1 megabyte, there’s no way bitcoin could handle the transaction volume of something the size of the Visa network. By creating a near infinite number of payment channels, the Lightning Network can solve the scalability problem of bitcoin.

Lightning goes live

On January 19, 2018 the Lightning Network went live with just 54 nodes. In just a year, that has jumped to over 2,700 nodes and over 20k payment channels. Clearly, the system has some potential as it is seeing real usage.

Several firms have working implementations, including Blockstream, Lightning Labs, ACINQ, and Stellar. Started by former Mt. Gox and Ripple co-founder Jed McCaleb, Stellar is one of the most talked about cryptocurrency startups in recent years. They adopted their own lightning network based on the work from the original white paper.

Bitcoin Cash

The lightning network isn’t the only solution out there to bitcoin’s scalability problem. The hard fork that created Bitcoin Cash was in part a response to the looming implementation of the Lightning Network. A group of users was concerned about trust and transparency given these off-chain transaction channels, and instead created a fork from bitcoin with a larger allowable block size.

Those who organized the fork and were proponents of Bitcoin Cash were more interested in preserving the autonomy and transparency of a single layer network. And while there is transparency within payment channels in the Lightning Network, it’s true the main net does not have full visibility at all times.

Lightning Network’s pros and cons

pros and cons

One of the biggest upsides to the lightning network is transaction speed. You will not have to wait minutes or even hours for your transactions to settle, as it will happen nearly instantaneously. You don’t have to wait for multiple nodes on the bitcoin network to validate a transaction, as it all happens within the channel.

This also means there is little or no transaction fee, as that now depends on the Lightning Network channel you’re using. This also gives the benefit of allowing micropayments in bitcoin, something that was too costly before the Lightning Network.

There are some downsides, including potential vulnerability to DDoS attacks. In fact, one such attack took down about 20% of the Lightning Network’s nodes in March 2018. The interconnected payment channels also create a very complex system, another drawback of the Lightning Network.

Many are concerned about the potential for large payment hubs to develop under the model, adding in a third party and a centralized node. There’s a potential that this is already happening, as several larger nodes are appearing on the network.

Cryptocurrency experts have lots of opinions about different solutions, and that can cause fracturing within the community. As seen in the Bitcoin Cash fork, this can cause multiple concurrent solutions to arise.

The future of the Lightning Network

With continued adoption and growth, the robust Lightning Network can be a game changer for cryptocurrency adoption. While initially designed for bitcoin’s network, many other currencies are implementing the Lightning Network as well.

By creating a second layer that is still user-controlled and trusted, micropayments, instant payments and infinite scalability are all achievable with cryptocurrency. The key will be in keeping it decentralized.

Post written by Darya Karatkevich
Darya is a blockchain market observer with 5+ years of experience as an author and editor for major tech blogging platforms. Her fortes are blockchain technologies and solutions, cryptocurrencies and crypto-related regulations.

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