What is the Lightning Network & How Does it Work?

The Lightning Network is a second layer protocol that enables near-instant, high-volume Bitcoin transactions. This decentralized system leverages off-chain personal payment channels to eliminate congestion and provide users with the ability to conduct trustless payments between two parties. Many see this protocol as Bitcoin's best chance to curb scalability concerns moving forward.

What Problems Does Lightning Network Attempt to Fix?

The Lightning Network was developed to quell the scalability issues that continue to plague Bitcoin's blockchain. These issues began to come to the forefront in 2015. However, it wasn't until 2017, during the crypto break out year, that Bitcoin congestion concerns reached dizzying levels.

Network Congestion

In a decentralized network, congestion can lead to severe problems. In Bitcoin's case, it meant that it could take days for a transaction to complete. This delay was a huge issue for users because Bitcoin is notoriously volatile. The combination of network volatility and delayed transactions was too much for users to accept.

Bitcoin Transaction Fees in 2017-2018

Merchants, in particular, found that there was no way to accept Bitcoin without taking on enormous risk. Imagine you sell a product to your client and by the time you received payment, you lost 20% of the value. This scenario played out countless times during this congestion period. In essence, Bitcoin had failed at its first attempt to operate as a day-to-day cash system for the average person.

Fees

Along with delays came increased network fees. In the Bitcoin network, you pay a fee to entice miners to include your transaction in their block approval. During times of market congestion, users need to raise these fees to push their transactions through in a reasonable time. Sadly, this led to transactions that had fees over the amount sent. It also led to unapproved transactions with lower fees sitting around for days before receiving validation.

Benefits of Lightning Network

The Lightning Network eliminates all of these concerns via a custodian-free, instant, high-volume micropayments network that lives atop of Bitcoin blockchain. This off-chain protocol enables “lightning-fast” payments that only cost a fraction of their on-chain counterparts. Here are some of the biggest advantages the market gains from the Lightning Network.

Scalability

The main advantage of the Lightning Network is its scalability. Since the network exists on top of Bitcoin's blockchain, it isn’t bound by the technical restrictions that hinder Bitcoin's performance. Consequently, the Lightning Network is hugely expandable. Currently, the platform can enable millions of transactions per second using a peer to peer network atop the Bitcoin blockchain.

Micropayments

Another huge benefit of the Lightning Network is it enables micropayments. These small payments are ideal for a variety of reasons. They are perfect for daily transactions consumers depend on. For example, imagine going to buy a $.50 pack of gum with Bitcoin. If you attempted this purchase on the mainnet, your fees would be more than your transaction.

Lightning Labs CEO Elizabeth Stark

Along the same lines of thought, microtransactions enable a new realm of interaction between blockchain and regular business systems. One area microtransactions is shining in is gaming. Users can now earn real Bitcoin for participating in Lightning Network gaming platforms. This technology continues to see interests with everyone from car manufacturers, to POS systems seeking to integrate microtransaction capabilities into their networks in the future.

Functionality

The Lightning Network also provides Bitcoin users with more functionality. Due to its second-layer structure, the Lightning Network can provide added functionality to the Bitcoin ecosystem. Users can enjoy features such as smart contract programming, and direct on-chain coin exchanges via submarine swaps. Best of all, developers continue to expand Bitcoin's capabilities via this protocol.

How Does Lightning Network Work

The concept behind the Lightning Network is simple. The network functions as a second layer on Bitcoin’s blockchain to handle transactions independently without having to record each action on the blockchain every single time. The network only records the transactions upon the closing of a payment channel.

Payment Channels

A payment channel is a direct, bi-directional payment connection between two nodes on the network. Once a payment channel is opened between network nodes, unlimited payments can be sent and received without the worry of congestion or fee hiking. It’s only once the channel closes that these payments register on the blockchain.

Lightning Node

At the core of the Lightning Network's functionality reside Lightning Nodes. Nodes are critical because they set up Lightning payment channels. These channels can then be used by other users to process payments across the Lightning Network. For their troubles, node operators receive rewards via transaction fees. Best of all, node operators can select their own transaction fee requirements when they set up the channel.

History of Lightning Network

The concept of the Lightning Network first came to light in February 2015. At this time, Joseph Poon and Thaddeus Dryja, the developers of the strategy unveiled how the concept could provide relief to Bitcoin without changing the core protocols of the network. The concept was met with great interest and by January 2016, the researchers had published a whitepaper for the Lightning Network. The network has been under development ever since.

Lightning Network Whitepaper

In March 2018, Lightning Labs, one of the main development teams behind the Lightning Network, officially launched a beta version. This launch was followed shortly thereafter by ACINQ and Elements Projects. ACINQ went on to launch the first Lighting Network light client mobile wallet. Elements Projects took a completely different approach, instead of focusing on creating corporate sidechains to function within the LN-ecosystem.

Lightning Torch

In January 2019, the Lightning Network community started an initiative to demonstrate the micropayment capabilities of the system. The Lightning Torch was a digital payment that was passed global from user to user with each user adding an additional 00,000 satoshis prior to sending it. The torch began with long-time Bitcoinist, Hodlnaut, and then proceeded to pass from crypto star to crypto star.

The symbolic gesture saw huge popularity as more huge names participated. Twitter CEO Jack Dorsey, Lightning Labs CEO Elizabeth Stark, and Binance CEO Changpeng Zhao were just a few of the notable torch holders. At the end of the campaign, the final payment of the lightning torch was sent on April 13, 2019, as a donation of 4,290,000 satoshis to a non-profit that promotes named Bitcoin Venezuela. This group helps to promote Bitcoin usage in Latin America.

Casa Lightning Node

It was around this time that hardware options began to emerge in the market such as the Casa Node. The Casa Node is a standalone Lightning Network hardware node that simplifies the entire setup process. The goal behind the project was to eliminate technical barriers and allow anyone to earn rewards from operating an LN-node. Today, the project is on its second version of the Casa Node. Notably, this version is on backorder due to the demand for the product.

Lightning Gaming

It was around this time that Lightning Network-based games began to take off. Platforms such as Lightnight allow users to earn real Bitcoin for their actions. In the first-person shooter, Lightnite, users put up Bitcoin to play and the winner takes their crypto off of their slain foes. This title is one of just many available on Lighting Network gaming platforms such as Satoshis Games.

Lightnight FPS

How to Use the Lightning Network

Today, using the Lighting Network is much easier than in the past. There are a multitude of Lightning Network compatible wallets that allow you to easily manage and convert Bitcoin to Lightning Bitcoin and back again. Wallets such as Zap, Electrum, LND Thin Wallet, Shango, Spark, and éclair all provide these services.

Best of all, these wallets eliminate the technical barriers associated with opening a payment channel directly and funding it. Users can seamlessly make Lightning Network payments using these mobile wallet options without ever needed to invest a large amount of time into fully understanding the protocol.

Start Lightning Node

For those of you who would like to participate in the Lightning Network in a more direct fashion, it's recommended to become a node operator. This process is simple but varies slightly depending on whose version of the Lightning Network you utilize. For all versions, you will need to first download the client and create a Bitcoin address for the node's wallet. Then, you need to fund your wallet. These funds will be how you fund your channel. Importantly, these funds will represent the maximum transaction amount allowed through your channel as well.

Now that you are loaded, you can connect to any Lightning node of your choosing to create a channel. Now, users can select your channel based on its technical and financial specifications. Every time someone sends transactions through your channel, you receive your transaction fee.

The Lightning Network – One of the Most Promising Developments in the Sector

After over two years of Beta testing, the Lightning Network continues to see added functionalities. Today, this vibrant decentralized ecosystem is seen by many as Bitcoin's best hope of fulfilling its destiny as a peer-to-peer electronic cash system. For these reasons, the Lightning Network holds a critical position in the industry.