Bitcoin Blockchain Lightning Network

Blockchain technology is innovative and groundbreaking. Decentralization, transparency, and resistance to tampering all make these ledgers incredible tools for the financial technology sector. However, blockchains aren’t perfect. In fact, they’re slow and expensive – it can sometimes take hours to transfer quantities of Bitcoin from one person to another. Not only that, the ballooning transaction fees are slowly eroding the usability of the world’s preeminent cryptocurrency.

However, it doesn’t have to be this way. A new solution, the Bitcoin Blockchain Lightning Network, is poised to level the playing field when it comes to using slow and expensive blockchains. But first, some background.

Does Bitcoin Blockchain Lightning Network Solve the Problem of Scalability?

The issue with blockchains is that as they get larger and more complex, it takes more time and effort to get things done. Blockchain scalability has always been a problem. If you think of a blockchain as a ledger, it’s easy to see why – each page of the ledger has a number of transactions on it. Once the page fills up, it needs to be added to the ledger before turning over a new leaf and starting the process again.

For the Bitcoin blockchain, each page (a block) has to be processed before it’s added to the ledger (the chain). This process involves reaching consensus with all the nodes running the blockchain, and this process can take around 10 minutes. Unfortunately it gets a lot more complicated from there.

Paying for Quick Transactions

With every movement of digital currency across the blockchain, there’s a record of the transaction. It contains all the information the ledger needs – how much is being sent, who’s sending it, and who’s receiving it – as well as what the fee is for the transfer. Transaction fees aren’t standardized; in fact, if you choose to pay a higher transaction fee, your transaction gets prioritized and moved to the top of the queue.

Of course, the opposite is true as well. If the transaction fee you choose to pay is low on the totem pole – if there are dozens or hundreds of transactions that have a higher fee than yours – you’re going to have to wait until the blockchain fills up on high-paying blocks before your transaction gets processed. Ironically, the more people use a blockchain, and the more popular it becomes, these transaction speed and fee problems just get worse and worse.

The Solution to the Problem

So where does Lightning Network come in? The technology revolves around a simple but effective philosophy: not every single transaction needs to be immortalized in the blockchain.

Yes, it’s true that part of the blockchain’s allure is because it’s a complete record of every single transaction. But if that feature becomes a hindrance, you can make a case for suspending it under certain circumstances – such as when two individuals carry on several transactions over time. In this case, it’s not necessarily as important to record each single exchange.

So how would Lightning Network resolve and streamline this process? By recording the opening of a “payment channel” between two parties on the blockchain – a not-so-secret passage that circumvents the need to record every electron as it transfers.

Payment channels can stay open, like a Star Trek wormhole, for as long as they’re used for. Then, when all transactions are finished, the channel closes and the blockchain records just one overall transaction instead of dozens of little ones.

Think of it this way: you and your best friend open a payment channel between the two of you. You’re helping him buy a car, so you send him a couple of Bitcoin. Then, he buys the car and sends you the Bitcoin you loaned him, but over the course of a few days. Using the payment channel, the Bitcoin you sent him and the Bitcoin he sent you back is all recorded in one transaction once you close the payment channel. One transaction, one fee, one entry on the blockchain. It’s fast and easy.

More Payment Channel Examples

The best way to describe a payment channel, for those who still aren’t sure of it, is looking at it as a safety deposit box with two keys. Only you and whoever else has a key gains access to it.

Opening a payment channel – or one of these deposit boxes – revolves creating an “opening transaction” where you and whoever else is using the box make an equal deposit. The double lock ensures that one person can’t make off with the cash without the input of the other.

Promise of Ownership

These transactions work on a “promise of ownership” model. The money in the box is used for transactions. Once you both fund the payment channel if you want to pay your friend, you promise to pay them out of your stash and vice versa.

Here’s a good example. There’s 20 BTC in your payment channel – 10 BTC from you, 10 BTC from your friend. You want to send 2 BTC to your friend, so you promise 2 BTC from your stash to your friend. Then, when you both open the box, your friend has access to 12 BTC and you have access to 8 BTC.

Pandora’s Box It’s Not

The thing is, you don’t have to open the box right away. Opening it up closes the payment channel. Instead, you can simply continue to make transactions – promising different amounts of BTC to each other – until your business is concluded. You’re just pooling your funds with someone else, and then deciding how the pool is divvied up when it’s time to cash out.

Once the box opens, those promises of ownership go into effect. Whatever the final balance is between you and your friend is the transaction recorded by the blockchain.

So Where Does Bitcoin Blockchain Lightning Network Come In?

So a payment channel is a peer-to-peer feature. Powerful, but seemingly limited. But when you combine more than one payment channel together to work in concert, the resulting network – the Lightning Network – is what emerges.

The shift from value in ownership of Bitcoin in a payment channel network to the promise of ownership of Bitcoin is a major sea change. Imagine this – instead of just a payment channel between you and your friend, there’s also a channel between your friend and his mom.

You’re not connected directly to his mom, but you are connected to her through him. You want to send her some Bitcoin, so you send a promise of ownership, through your friend, to his mom, in a chain that completely bypasses the blockchain but still gets recorded when all the payment channels close.

Is Bitcoin Blockchain Lightning Network Fast and Scalable?

There’s really no limit to the number of payment channels that can exist in a network. In fact, the more payment channels there are, the more opportunities for a transaction to get routed quickly from one person to another.

This has the potential to free up massive amounts of a blockchain’s bandwidth, speeding up every transaction – and cutting back on fees as well. That’s exactly how Bitcoin Blockchain Lightning Network functions – and how it’s going to revolutionize blockchain technology.

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