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Bitcoin is the most famous cryptocurrency of all and also, the most secure. However, its blockchain’s processing capacity allows only 2 to 7 transactions to be processed per second, a very low number considering the growing number of users who started using and transacting Bitcoin, especially from the year 2017 onwards, when scalability problems became more visible.
Since then, many users and fans of the platform have started looking for ways to solve this problem, finally arriving at the Lightning Network.
Understand more about this powerful scalability solution for cryptocurrencies.
What is the Bitcoin Lightning Network
The Lightning Network concept was created by Joseph Poon and Thaddeus Dryja in 2015. The goal of the Poon and Dryja project is to develop a payment protocol that can be used as an off-chain function operating at the peer-to-peer level for Bitcoin’s scalability issues.
But what does it mean? Basically, the Lightning Network’s idea is to create two-way (person-to-person) payment channels that are registered on a transfer network parallel to the Bitcoin blockchain, by which people involved in the transaction can make micro-payments in BTC.
How does the Lightning Network work?
When two people decide to create a payment channel for transferring funds from one wallet to another, they must create a multisig wallet and add funds to it. These wallets, only carry out the transaction if the private keys of all the participants are provided and the off-chain transaction is executed through smart contracts.
Once the payment channel is opened, for each transaction carried out, those involved update their copies of the statements (balance sheet), which continuously record the amount of cryptocurrencies that each user of the channel has. When payments are made and the channel is closed, the final statement is recorded on the Bitcoin blockchain and the Lightning Network smart contract distributes the Bitcoins to each user involved in the transaction, according to the latest version of the statement signed by them .
Something interesting about the Lightning Network and the fact that transactions can be routed through the network, that is, to pay a given user, it is not necessary for the payment channel to be opened between him and who will pay him. The transaction will be carried out as long as they have open channels with people in common, as the system will find the shortest route for the transaction to occur.
Advantages of the Lightning Network
We can cite as advantages of using the Bitcoin Lightning Network:
- Speed: once the network is active, transactions will be smoothly carried out almost instantly, regardless of network occupation.
- Fees: Transactions take place on Lightning Network channels, therefore, the fees paid to perform them in this way will be lower than the fees for normal transactions. This is a way of making payments in stores, restaurants, among others, using Bitcoin.
- Scalability: It is estimated that the Lightning Network can bring Bitcoin’s transaction processing to around 1 million transactions per second.
- Atomic exchanges: as long as the two block chains connected by the channel share the same hash function, users will be able to send money from one chain to another without needing an intermediary.
- Security and anonymity: Like most Lightning Network transactions, it runs parallel to Bitcoin’s main blockchain, making it virtually impossible to track payments made through Lightning channels.
Disadvantages of the Lightning Network
Among the reasons unfavorable to the Lightning Network we can mention:
It is not fully operational: at the moment, the main disadvantage of the Lightning Network is the fact that it is not yet fully operational, being a scenario of uncertainty about whether it will work as its whitepaper predicts.
- Channel complexity: the idea of the Lightning Network is to be a network of channels that, from the moment they are established, allow for uninterrupted transactions. However, if the payment is sent over a very complex route, fees may increase, as it will be necessary for the network to use many intermediate channels to carry out the transaction.
- Channel limits: in the current version of the network, channels are limited. This means that the amount of Bitcoins stored in the users’ multisig wallet at the time of establishing the channel is the limit of funds accepted by that channel.
Now that the Lightning Network is a clearer concept for you, learn more about the hash function, which allows transactions to be carried out via the cryptocurrency blockchain.
