All About Lightning Network
By: Pratyush Singh
Tags: Cryptocurrency, Blockchain Technology, Blockchain, Bitcoin, Lightning Network

Many believe bitcoin is future of financial transactions. However scalability is a great issue.

Let’s take an example:

V isa can roughly process 4000 TPS and has a capacity to handle up to 65000 TPS. While Bitcoin transaction speed draws down to 7 TPS for 1 Mb Block size which is super slow.

This kind of issue is too big to go unnoticed when we talk about scalability. Bitcoin Lightning network was a solution proposed to this problem.

Bitcoin Lightning Network was first proposed as the lightning White paper in 2015 by Joseph Poon and Thaddeus Dryja. Afterwards Block-stream launched a payment system for web retailers.

From April 2018 to August 2018, the Bitcoin Lightning Network had a monthly growth rate of about 15% and one can get paid (a little) for using Bitcoins Lightning Network.

Average fee on Lightning network is one satoshi, worth a fraction of a cent, per hop.

What is Lightning Network?

People have been talking about lightning network and the buzz around the topic is increasing rapidly. The lightning network is most efficient solution available for scalable, Instant Bitcoin/Blockchain transactions.

This is because On average, it takes about 10 minutes to find each block in bitcoin network. This is way too costly and time taking. Real use cases seems non feasible with such slow transaction speeds. The average block time can actually be slightly shorter or longer depending on if the total hash power of the Bitcoin network is growing or shrinking. Ignoring this detail though, this is why 6 confirmations take about 1 hour on average.

The lightning network is a “second layer” payment protocol that operates on top of a blockchain( most commonly bitcoin). It theoretically enables fast transactions between participating nodes and has been touted as a solution to the bitcoin scalability problem.

Why it is required?

The transaction fees on bitcoin network have skyrocketed to over $30 in the past couple of months, but lightning network solution might save the day for the digital currency in 2018. It is hailed as one of the most potent solution available. Without fast transaction speed of blockchain networks it’s availability to masses still remains a dream.

How it works?

A multi signature wallet which holds some amount of bitcoin (provided by at least one of both parties) is set up. The wallet address is then saved to the public Bitcoin blockchain including a smart contract that proves how much of the bitcoin deposited belongs to whom. After this payment channel is set up once, it is possible for these two parties to conduct an unlimited amount of transactions without ever touching the information stored on the Blockchain. With each transaction,both parties sign an updated balance sheet in order to always reflect how much of the bitcoin stored belongs to whom. When there is dispute or the payment channel is closed, both parties use the most recent signed balance sheet to pay out their shares of multi-sig wallet.

Benefits

Tiny payments are possible. Payments are settled instantly. Improved privacy. Allows user to transact with each other directly rather than broadcasting their business to the entire world.

Shortcomings

No offline payments. Not ideal for large payments. If one of the peers is not active users might have to wait for hours to close a payment channel. Encourages centralization in payment hubs.

Conclusion

Though lightning network is still new and being tested to it’s limit, it clearly depicts that solution to the problem is approachable. Lightning network can reduce the load on main blockchain network by broadcasting latest balance sheet to the blockchain network and thus multiple transaction between two parties can easily be summarized as one.It is quite safe too and can be used to pass payment from first to third through second in the payment channel.

Right now we have a proof of concept implementation running on bitcoin testnet. Chances are it might get open to everyone till the end of 2018. Who know’s? I am waiting ! Are you?

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