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Bitcoin is the most famous cryptocurrency of all and also the safest. However, its blockchain processing capacity only allows 2 to 7 transactions to be processed per second, a very low number considering the growing number of users who have started to use and transact Bitcoin, especially since 2017, when scalability issues became more visible.
From then on, many users and fans of the platform began to look for ways to solve this problem, finally arriving at the Lightning Network. Understand more about this powerful scaling solution for cryptocurrencies.
What is the Bitcoin Lightning Network?
The Lightning Network concept was created by Joseph Poon and Thaddeus Dryja in 2015. The objective of Poon and Dryja’s project is the development of a payment protocol that can be used as an off-chain function operating at a peer-to-peer level to Bitcoin’s scalability issues.
But what does it mean? Basically, the idea of the Lightning Network is to create two-way (person-to-person) payment channels that are registered on a transfer network parallel to the Bitcoin blockchain, through which the people involved in the transaction can make micropayments in BTC.
How does the Lightning Network work?
When two people decide to create a payment channel to transfer funds from one wallet to another, they need to create a multisig wallet and add funds to it.
These wallets only carry out the transaction if the private keys of all participants are provided and the off-chain transaction is performed through smart contracts.
Once the payment channel is opened, with 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 Bitcoins to each user involved in the transaction, according to the last version of the statement signed by them. .
Something interesting about the Lightning Network is the fact that transactions can be routed through the network, that is, to pay a certain user, it is not necessary for the payment channel to be opened between him and the person who will pay him.
The transaction will go through as long as they have open channels with people in common, as the system will find the shortest route for the transaction to take place.
Advantages of the Lightning Network
We can cite as advantages of using Bitcoin’s Lightning Network:
- Speed: Once the network is up, transactions will be carried out smoothly and almost instantly, regardless of network occupancy.
- Fees: Transactions take place on Lightning Network channels, so the fees paid for doing so will be less than normal transaction fees. This is a way to make payments in stores, restaurants, among others, using Bitcoin.
- Scalability: It is estimated that the Lightning Network can increase Bitcoin transaction processing to around 1 million transactions per second.
- Atomic Exchanges: As long as the two blockchains linked by the channel share the same hash function, users will be able to send money from one chain to the other without needing a middleman.
- Security and Anonymity: As most Lightning Network transactions take place in parallel to the main Bitcoin blockchain, it becomes practically impossible to trace payments made through Lightning channels.
Disadvantages of Lightning Network
Among the reasons unfavorable to the Lightning Network we can mention:
- Not Fully Operational: At the moment, the main drawback of the Lightning Network is the fact that it is not yet fully operational, with uncertainty as to whether it will function as its whitepaper envisions.
- Channel Complexity: The idea of the Lightning Network is to be a network of channels that, from the moment they are established, allow uninterrupted transactions. However, if the payment is sent through a very complex route, the fees may increase, as the network will need to use many intermediary 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 users’ multisig wallet at the time of channel establishment 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 through the cryptocurrency blockchain.
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