How does the Bitcoin lightning network work?

Rising popularity has created several problems for blockchain technology. The Bitcoin blockchain can process very low transactions per second. The Bitcoin Lightning network helps solve these scalability issues.

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Jay Crypto

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Last updated Oct 17, 2022 at 08:45 PM

Posted Oct 6, 2022 at 04:00 AM

bitcoin lightning network

The recent rise in popularity has exposed blockchain technology. The number of transactions on the blockchains is very low and costly. To remove such problems in the network, the Lightning network came into existence. We will explore what the Bitcoin lightning network is. Let’s start!!What is the Bitcoin Lightning Network?The Lightning Network is a layer-2 infrastructure constructed above the Bitcoin blockchain:  it exists independently of the Bitcoin system yet connects with it. It is composed of a collection of small gates that enable users or businesses to transfer funds without using the blockchain to validate the transfer. It is identical to the present payment method used by firms such as Visa and Mastercard. A money transfer is not finalized until confirmation of cash from the customer and a query from the vendor. The actual settling of payments takes time—days or weeks in some circumstances.  

bitcoin lightning network 2

Source: Blockchain Simplified

The Bitcoin Lightning Network is powered by a group of nodes that transfer money; transactions are normally completed with QR codes rather than complicated cryptographic keys. In principle, it might enable thousands, if not millions, of payments to occur immediately, making minor transactions more cost-effective.

What Was the Need for Lightning Network?

Blockchain technology came into the technological landscape over a decade ago. However, over the last couple of years, two main issues have surfaced in this technology:  transaction speed, and cost. In theory, the Bitcoin blockchain can process 10 transactions per speed (TPS). But, practically, the speed is between 3 and 7 TPS. 

bitcoin lightning network 3

Source:Crypto.com

Blocks in a network are simply collections of payments. A blockchain's architecture limits the number of transactions that can be contained in a block. Payment records  not included in the current frame are added to a backlog. Based on the number of transactions waiting in the mempool, that backlog can take somewhere from a few minutes to a full day or more to process.

The Blockchain is based on a settlement technique known as proof-of-work. That's where miners spend their computational power while attempting to complete a challenging puzzle. Miners collect processing fees to offset the expense of the hardware and energy required in that computation.

The network functions effectively and fees are reasonable when the network is smaller and the number of transactions that need to be confirmed is low. But due to the limited room in each newly minted block, transaction costs rise as the network size increases. As a result, when a blockchain has more users, the transactions with the highest fees are prioritized for processing.

Due to these reasons Dryja and Poon created Lightning Labs in 2016, a firm committed to the development of the Bitcoin Lightning Network. Despite changing team members, Lightning Labs attempted to make the network suitable for the core Bitcoin blockchain. 

Bitcoin's SegWit-based soft fork in 2017 freed up room for additional transactions to accommodate each block and fixed a lengthy Bitcoin flaw, known as transaction malleability, that had allowed users to create bogus transactions, deceive the network, and keep Bitcoin in their wallets.

How Does the Lightning Network Work?

As it bypasses the primary Bitcoin system, the Lightning Network is quicker and less expensive. It is surrounded by an unorganized structure. Funnels are ad hoc peer-to-peer links that allow the transmission of payments. Channels can handle any number of transactions. Subnetworks that transmit transactions keep the network running. 

Everyday users or business nodes execute a program on their computers, devices, or Raspberry Pis. As a result, the Lightning Network remains decentralized. Once any quantity of Bitcoin has been stored in a transaction channel, the money can be used on the Lightning Network until the route is deactivated.

bitcoin lightning network 4

Source: Codemotion

When users wish to receive payment, they generate a receipt, which is a long alphabetic sequence of digits that is frequently represented by QR codes. Payers just scan the invoice with their Lightning Wallet and verify the payment.

Whenever a transaction is done, a confirmation message is delivered over the network to the individual who submitted the initial request. This is known as a P2P network, and it implies that payment processing does not rely on a single entity. This usually occurs in a matter of seconds, hence the name "Lightning."

Transactions do not have long wait periods or excessive fees because they are not conducted on the Bitcoin network. As a result, extremely small transactions, known as micropayments, can be made for as low as one satoshi. After utilizing the network, users can terminate that tunnel and quit, then use their Bitcoin on the conventional Bitcoin blockchain again.

How Can You Use the Lightning Network?

Assume you wish to do business with your favorite coffee house. To begin, you'd have to transfer some BTC to a digital wallet that involves additional signatures or keys to be released. These are typically known as multi-sig wallets. The Lightning Network enables users to join into a contract that guarantees payment, producing a balance sheet.

When you order a coffee, a fresh financial report is generated, and you sign it with your key to indicate what's left in your account and the coffee store's account. If you no longer intend to purchase coffee from that coffee business, you can terminate the link, and the associated financial report is permanently recorded on the blockchain. Payment conflicts can also be resolved by going to the two parties' most recent signed balance statement. 

Let's explore other ways you can connect to the network:

  • In case you can't create a direct link to your favorite purchasing point, the system will determine the quickest route between you and the shop by utilizing other network members.
  • If it all seems complex to you, then you can download a mobile application from the app store of your android. Bitcoin Lightning app will create a link automatically. 
  • Blue Wallet is a custodian business that hosts a node for you if you wish to utilize the Lightning Network. It will manage your assets for you.

Let’s dive into the Benefits of the Lightning network:

What are the Benefits of Lightning Network?

Lightning Network has quicker and less expensive payments, allowing the transfer of funds in a manner never before feasible. Users would be obliged to pay significant charges for a simple transaction and afterward wait an hour or more for it to confirm without Lightning Network. A few payments have to wait longer because miners prefer to verify bigger payments. After all, the rewards are higher.

The Lightning Network is a layer that sits on top of the Bitcoin network. Because of this relationship, Lightning Network continues to benefit from Bitcoin's security measures. People can therefore use the primary chain for larger transactions and the Lightning Network's off-chain for tiny ones without being concerned about security. 

Crypto advocates have also been experimenting with atomic swaps, which is the act of transferring one coin to the other without the assistance of a private entity or exchanges. Atomic Swaps are more convenient than exchanges since they provide near-instant swapping with minimal to no costs or wallet transfers.

The Downside of Lightning Network 

To use the Lightning Network, one must have a wallet that is suitable for it. While it is simple to find a Lightning Network wallet, it must be funded from a standard Bitcoin wallet. The initial transaction from a regular digital wallet to a Lightning Network wallet incurs a fee, so users lose some Bitcoin to interact with the protocol. Users must lock their Bitcoin after depositing funds into the Lightning Network wallet to build a payment channel.

Transferring Bitcoin across accounts can be inconvenient and costly, which discourages new users. However, certain wallets can handle both on-chain and off-chain payments without incurring fees, and the ease is expected to improve with time.

Concluding Thoughts

The adoption of digital currencies and transactions on them has put significant strain on blockchains in only just a few years. While there have been minor changes—and in some cases forks—to help networks manage with increased demand, the Lightning Network, if successful, could pave the way for wider acceptance of cryptocurrencies and their applications.

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