Lightning Network: The second layer protocol on a blockchain like Bitcoin that solves scalability issue enabling users to make fast and small cryptocurrency transactions.
Remember the times when we used to have pen friends? It took us days and months to write a letter, go to the post office to send it, and then wait for the answer. Now we have internet, instant messengers and email. Well, blockchain technology went through a pretty similar way of speed improvement within the last decade.
When Bitcoin was introduced by Satoshi Nakamoto as a decentralized peer-to-peer digital currency, it certainly was a huge technological breakthrough, but it had its flaws. The first blockchain networks were extremely slow. Bitcoin has only been capable of processing around 7 Transactions Per Second. For you to compare, Visa’s system handles around 24,000 TPS, and the BTCMEX matching engine delivers up to 100,000 TPS today.
Throughout several years the crypto community’s been searching for different solutions to improve the transactions’ speed, until 2015, when Joseph Poon and Thaddeus Dryja published a draft of the Lightning white paper. Their idea was to take the transactions off the blockchain… and it worked!
Lightning Network is a second layer technology, that supports the Bitcoin blockchain, but is not a part of it directly. The Lightning Network adds another layer to Bitcoin’s blockchain and enables users to create micropayment channels between any two parties on that extra layer.
Taking the transactions away from the main blockchain, the Lightning Network not only soles the scaling problem but also takes away the transaction fees. Will we finally be able to buy a cup of coffee for Bitcoin without paying any transaction fees? It seems that Lightning technology is the key!
Two peers need to set up a channel on the Lightning Network and create a Multi-Signature wallet with their private keys. Then they both deposit a certain amount of Bitcoin. From now on, they can perform unlimited transactions between one another. Technically peers are not sending the money, they redistributing the balance, and the payment data is updated in the network. The actual distribution of funds happens when the channel gets closed. The algorithm uses the most recently signed balance sheet to determine who gets what. The parties can shift funds without even informing the main blockchain.
Moreover, Lightning allows transactions between two different blockchains – a way to swap crypto tokens without using cryptocurrency exchanges! Imagine, Bitcoin to Etherium and back in seconds!
As for now, there’s no software for casual users to enjoy the Lightning benefits. Multiple tests were conducted by Blockstream, Lightning Labs and ACINQ, and proved the efficiency of the technology. Nevertheless, the developers of Lightning are still encouraging users to use the Bitcoin Testnet to try it out, and not send any real money yet.
The crypto community is anticipating the official launch of the Lightning Network, and for good reasons: instant micropayments, increased anonymity, almost non-existent fees!