Scalability is one of blockchain’s stumbling blocks. While Visa can handle about 2000 transactions every second on average, Bitcoin can only maneuver 7 transactions every second, along with 1MB block capacity.
This is where the lighting network comes in— to give blockchain’s scalability problem a fix.
Problem Lightning Network Intends to Solve
Bitcoin transfers are already cheaper to use than credit cards and more high-speed than wire transfers. However, it can only handle a small amount of load, or otherwise, it will get slower.
Lightning network is a solution to this.
As most crypto enthusiasts know, Bitcoin has a scaling issue. Bitcoin is created to store every single transaction within a data structure called a block. Every block contains information of the previous block, and most of it is just transaction data.
The blocks are established at 1MB maximum size, and this is where the trouble comes from.
For the reason that blocks are 1MB in size and are created every ten minutes, we can safely assume that the network can process about 3.3 and 7 transactions every second. Given that Bitcoin is a currency that is supposed to be used by billions of people around the globe, the processing time of its network is quite a dismay.
Understanding the Bitcoin Lightning Network
Bitcoin aims to make decentralized finance part of people’s daily transactions, so it needs to reach hundreds of thousands of transactions every second, like other electronic payment networks and credit cards.
Since the nature of blockchain is a decentralized technology, the main blockchain requires mutual agreement or “consensus” from other nodes (computers) within its network. Bitcoin is burdened by this concept.
If the number of transactions in the Bitcoin network multiply, storing and approving transactions will then be time-consuming and expensive. There will be an increase in the number of transaction requirements, including having a massive processing power of a computer just to execute transactions that involve Bitcoin.
The energy demand to compute and run transactions is massive and maintaining it for an everyday transaction is sky-high. To solve this problem, the second layer of Bitcoin’s blockchain is proposed.
Another Blockchain Layer
Lightning network is an independent solution maverick solution that is ushering the scaling problem by making transactions speedy, keeping fees microscale, and taking transactions from the blockchain.
Technically, the lightning network makes Bitcoin transactions almost free, quick, and extremely scalable.
For instance, you have a childhood friend. Both of you often send each other pay each other through Bitcoin because you’re both a fanatic. Using the lightning network, you and your childhood friend can open a shared Bitcoin account, referred to as a multi-signature wallet, and you both put a few Bitcoins in there.
If the two of you make a bet and you lose, you need to pay your childhood friend using your shared account. This process could go on as long as you want to use Bitcoin. The lightning network executes transactions all by itself and there are no fees because the transactions aren’t really placed on the blockchain.
The two of you can shift funds endlessly without having to inform the blockchain about your transactions. Because of this, transaction speed can dramatically speed up because the nodes don’t need to spare quite a lot of their time approving the transaction between you and your childhood friend.
You just need to update your account balances off-chain, and the only time you will use the main blockchain is when you fund your shared account, and by taking the funds back to our personal address.
The initial scheme supporting Lighting Network is that small-scale everyday transactions don’t need to be stored in the primary blockchain. Lightning network is the “second layer” that runs on top of the blockchain, allowing off-chain transactions.
The off-chain approach deems less important undertakings out of the main chain of blocks.
The lightning networks permit users to send bitcoins for free through their own digital wallets. There is an “installment channel” that is created between two individuals, making them execute off-chain trades. It is an “additional layer” to the blockchain that authorizes micropayments between two users.
The transactions made in the lightning network aren’t restricted to block size at all. Confirmation from other people within the network is not needed, and the blockchain of Bitcoin does not need to put any transactions that happen in the main chain.
The Bitcoin Lightning Network was initially described in a white paper penned by Thaddeus Dryja and Joseph Poon, then made headway into a community effort along with third-party individuals, and even private companies that contribute to its implementation and specification.
Smart Contracts and Lightning Network
The lightning network employs multi-signature scripts and smart contracts to carry out its vision.
Lightning network’s initial transaction is called “funding transaction” and this happens when two people fund a Bitcoin channel. Technically, two master keys— public and private— are exchanged. This exchange simplifies spending and access to funds.
Let’s say Jenny opens a bitcoin channel with her favorite cake shop and deposits $100 bitcoins in it. If she will buy a slice of cake worth $15, she will be able to pay the cakeshop on the spot, without having people within the blockchain verify it, because she has a channel directly connected with the shop.
Joshua, who has a channel opened with a coffee shop he visits regularly, buys a cake from the cakeshop. The connection between Iya, the cakeshop, and Joshua secures that Jenny can use funds from her balance with the cakeshop to purchase from Joshua’s coffee shop. Joshua can, as well, use his coffee shop balance to make a transaction with businesses within Jenny’s network.
If Joshua closes his channel with the grocery store, there will be no customers in common between the cakeshop and coffee shop. Hence, Iya will be required to open a channel with the coffee shop itself to make purchases.
Through this, a web of the transaction is routed among various lightning nodes in a decentralized method.
The signatures in the lightning node are not exchanged to prevent funding transactions’ purchases from getting sanctioned by the main blockchain. So, the two parties simply exchange a single key that is utilized in validating spending transactions, also known as commitment transactions, among themselves.
The two parties can make illimitable transactions among themselves and other nodes within their lightning network, and only exchange master keys on chances that the channel between them gets closed.
The lighting technology is still under development, but it holds quite a lot of potential and really makes Bitcoin, and other cryptocurrency transactions really as fast lightning. However, it is not the answer to every single problem of Bitcoin.
As lightning technology arise, improve, and evolve, new problems may take place within the cryptocurrency ecosystem. But for now, it is the much-needed initiative to get to grips with blockchain’s scalability problem.
