The Lightning Network is easily one of the hottest topics in the crypto sphere right now. Changing the face of Bitcoin in many ways, it’s something that could realistically make the leading cryptocurrency perfect for day-to-day use. We’ve heard the likes of Twitter’s Jack Dorsey discuss Bitcoin holding the potential to become the world’s single currency – the Lightning Network could help make that a reality.
There is no doubt that the arrival of the Lightning Network is a hugely exciting development. But, not everybody is going to be aware of what it’s all about. Here’s where BitStarz can help, as we’ve put together the following FAQ that should help you get up to speed on all things Lightning Network related.
What is the Lightning Network?
The Lightning Network is a system that functions on top of Bitcoin’s blockchain, with its purpose being to reduce both transaction fees and transaction times. The idea is that by running transactions through the Lightning Network and away from the main network, it will – at least over time – make Bitcoin more functional from a day-to-day perspective.
Why does the world need the Lightning Network?
Bitcoin has a problem that is becoming almost unignorable. Scalability issues have seen transaction fees skyrocket, to the point where it has heavily impacted the cryptocurrency’s usability. Back in December, it peaked at $34, which is why the calls for a solution to this problem have become so prominent. We’ve seen various outlets attempt to bring transaction fee costs under control – see SegWit adoption – but the Lightning Network has emerged as the most viable solution.
So, how does it all work?
You might think that the Lightning Network is tough to navigate given explanations you’ve heard elsewhere. Trust us, this new development is by no means as complicated as it might seem. The Lightning Network is a smart contract system that functions directly on top of the base-level Bitcoin Blockchain. It’s effectively a supplementary system that generates interactions between the two, allowing for cheap and fast transactions.
What’s required for the Lightning Network to function is a multi-signature wallet from a single party. Once set-up, the wallet address can be saved to the Bitcoin blockchain, along with a balance sheet that details how much of the Bitcoin deposit belongs to whom. Following the creation of this payment channel, it’s then possible for two parties to carry out an unlimited number of transactions without the need to alter the information on the blockchain. For each transaction that takes place between the two parties, the balance sheet is updated to reflect what value of the stored Bitcoin belongs to each party involved.
Both users are given copies of the balance sheet, with the final balance not uploaded to the blockchain until its mutually signed and the payment channel is closed. In premise, the Lightning Network sounds complicated. But, for the end-user it’s something that can be navigated in just a few steps, with it being a background process for the most part.
The easiest way to think about the Lightning Network is as a Bitcoin plugin that allows you to transact with others privately. Instead of broadcasting your business publicly (via the public blockchain), it puts transactions between you and another party under a cloak. This, in turn, reduces transaction costs and speeds in the process.
Do you need to open new payment channels for every new transaction?
Here’s where the Lightning Network becomes pretty interesting, as the Lightning Network – as its name suggests – is a network. This means that there are connections that spread between its users, effectively meaning that you can transact easily with others. We’ve looked at this method before – check out our prior post that uses the classic Alice and Bob style example – because in theory it means that you can be linked to everyone via just a few nodes. Think “Six Degrees of Separation” and you have some idea of the potential scale of the Lightning Network.
The Lightning Network is built upon a trustless architecture – hence the use of smart contracts – so this has a two-fold benefit. It makes sure that the funds will reach the intended destination through intermediaries. If this can’t be done or there is no plausible indirect path to the destination, it will issue a refund if. Plus, it allows for the seamless creation of new “relationships” within the network. Through just a few hops, the Lightning Network could very well make it possible to transact with anyone.
What are the benefits of using the Lightning Network?
Low fees, low fees, low fees – we can’t make this any clearer. All fees are proportionate to the transaction size, which means you’ll be charged just a fraction of what you would usually pay otherwise. The Lightning Network has the power to curb Bitcoin’s growing fees, which brings it in line with functional day-to-day currencies.
Another major benefit of the Lightning Network is its speed, with payments being settled instantly. Plus, the privacy element is also increased, with the number of transactions held on the public blockchain being minimized. When you add up all of it advantages, it’s easy to see why the Lightning Network is generating such huge public attention.
Are there any drawbacks to using the Lightning Network?
The Lightning Network has come on leaps and bounds in recent months, to the point where it’s changing the direction of Bitcoin. However, it would foolish of us to say that it’s perfect, as it still has issues that need to be ironed out. Looking at common problems that are currently being addressed through beta testing, peer failures is something that’s under the microscope. In the case of a peer failure – where one party is unresponsive within a transaction – users might have to wait hours to close a channel, which can derail a payment.
Users can’t pay someone that’s offline, as a payment in waiting feature isn’t currently viable for the Lightning Network. This brings up another major issue, in that the Lightning Network still isn’t quite stable enough for larger payments. This is due to the funds in peer’s multi-signature wallets not being sufficient enough to transfer big sums. Obviously, as the network grows this should become feasible, but at present time it still remains an issue.
What stage is the Lightning Network currently in?
The development of the Lightning Network has been rapid, with it already in the 0.4 beta phase. Lightning Labs latest mainnet release occurred back in March. The world has also seen the Lightning Network make its arrival on the mobile stage, with NFC adoption also being explored. It’s still some way off the peak of its true power, but with each passing day the Lightning Network is growing in size and stature.
There are still many unanswered questions surrounding the Lightning Network, but we’ve strived to cover the basics above. When all is said and done, what’s clear is that this development could be the missing link between Bitcoin and widespread use.