Bitcoin Lightning Network Explained: How BTC LN Crypto Payments Work?
Back when Bitcoin (BTC) was first conceptualized by Satoshi Nakamoto, his proposal was criticized as not scalable enough. Even today, an entire decade later, this criticism remains, since cryptos still continue to struggle with scalability as one of their biggest enemies.
But, what is scalability, exactly? To explain it, we should note that Bitcoin was able to process around 7 TPS (Transactions Per Second) since its creation. Back when it first came to be, this was perfectly fine, since there were hardly any transactions being made in its early days. However, after a few years, its popularity grew, and the number of transactions grew in size. These days, transactions take a long time to be processed, and the fees continue to grow as a result.
This is a problem that needs to be resolved if Bitcoin wishes to ever fully replace traditional payment systems. It needs to be faster in order to compete with the well-oiled machine that has been employed for decades. Visa, for example, can make over 24,000 transactions per second, while Bitcoin remains at only 7.
A lot of developers have proposed different methods of solving this problem over the years, but none of them stood out as a valid solution. This remained an issue until one solution called Lightning Network was proposed, which is the first one that has any real potential.
What's the Lightning Network?
To put it simply, the Lightning Network can be seen as an additional layer in Bitcoin's blockchain. It basically lets users create a new payment channel between two parties interested in making a transaction, provided that both exist on the extra layer. The channels can remain for as long as there is a need for them to be there, and as long as they exist, the transactions between the parties connected by them will be instant. Additionally, this will also tackle the issue of high fees, which will become either minimal or completely non-existent.
How Does the Lightning Network Actually Work?
Let's suppose that there are two people who wish to send money to one another on a regular basis. We will call them A and B. To make the process of sending money more efficient, they are interested in doing it quickly and cheaply, so they will create their own channel on the Lightning Network.
Setting up such a channel will require them to create a multi-signature wallet, which can be accessed by both individuals, with each of them having their own private key. After that, they will have to deposit some amount of BTC. Let's say that they will deposit 3 coins each.
This is pretty much all it takes, and both parties can now send an unlimited number of payments to one another. If A wanted to send 1 Bitcoin to B, A will have to transfer the ownership of that coin to B. Both of them would use their private keys to update the balance sheet, and that would be that.
After the channel closes, that is when the actual distribution happens. The new, updated balance sheet will become the new norm, and determine which one of the two gets which amount of coins. If they decide to close the channel that connects them, A will be left with 2 coins, and B will have 4, as a result of the latest transaction.
None of this will be recorded on Bitcoin's blockchain until the channel is closed, and only then will the coin distribution be recorded on it. Basically, the Lightning Network will allow users to make numerous transactions, while only one will be recorded after their business dealings are done. However, even this will only be so in the beginning, and once the Lightning Network goes big, anyone will be able to send coins to anyone else, with the system exploring these channels and finding the shortest path to the receiver.
It should also be noted that the Network will be working on top of the Bitcoin's blockchain, but it won't enjoy the benefits of its security. This is why it should only be used for small transactions, while the large ones will likely remain on the original layer, which only allows for 7 TPS, as explained earlier.
Another great thing about the Lightning Network is that it will allow users to change currencies without having to go to the exchanges. This is also being tested right now, together with the rest of the Lightning Network, and so far, the tests have all been positive.
Who is Developing it?
The concept of the Lightning Network first came to be back in 2015 and was proposed by Thaddeus Dryja and Joseph Poon. Currently, the Network is being developed by three teams — Lightning Labs, Blockstream, and ACINQ. Of course, other teams, as well as the entire Bitcoin community, are contributing as much as they can. Another thing worth mentioning is that each of these firms is trying to develop the network by using a different programming language.
Pros and Cons of the Lightning Network
The Lightning Network has a lot of positive aspects to it, which is why it is worthy of creating in the first place. It has the potential to massively improve the transaction speed, and make it nearly instant. Additionally, it will reduce fees almost to a level of non-existence. It will finally take care of the problem of scalability, and it will allow for cross-chain swaps without the need of going to an exchange.
The current Lightning Network cons include the fact that it is still in development, and not yet even operational. Additionally, there have been concerns regarding the forming of nodes that the transactions would go through, with many arguing that this will mean that the network will be centralized.
Obviously, the possibility of using the Lightning Network is very exciting for many, and its benefits outstretch the negatives by far. Additionally, there is always a possibility that someone will think of a solution for the cons, and that the network will become massively accepted once its development is complete.
Its creation and use would improve Bitcoin's downsides almost completely, and it could once again become the best cryptocurrency around, just as it was originally intended to be. A lot of the cryptos' future depends on whether the Lightning Network will work as expected or not, and if it does, it will mean a whole new era for cryptocurrencies.