Nov 6, 2021
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What is a Lightning Network?

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The Lightning Network (LN) is a second layer added to the Bitcoin network allowing off-chain transactions between participants. Lightning Network is frequently referred to as a game-changer in the evolution of cryptocurrencies. Its purpose is to reduce the expenses of Bitcoin’s blockchain by speeding up transaction processing times. In 2015, two developers, Thaddeus Dryja and Joseph Poon came up with the idea for the lightning network.

Even though the Lightning Network has grown and developed since its inception, issues still exist. Bitcoin’s price volatility has kept it from becoming a widely accepted payment model for both consumers and businesses. There are other charges associated with using Lightning Network because transactions must still be completed on the blockchain.

What Is the Lightning Network ?

The Lightning Network is a 2nd protocol that allows Bitcoin transactions that aren’t recorded on the blockchain. Lightning payments are swift and inexpensive since they are not recorded on the blockchain and do not require mining.

How Does It Work?

Like the Bitcoin network, the Lightning network is made up of nodes that run the Lightning Network software.

However, unlike the Bitcoin network, Lightning transactions are not broadcast and stored openly by all network users. Individual Lightning nodes, on the other hand, conduct private transactions with one another. To make such payments, lightning nodes employ channels.

 

What is the difference between a Lightning Payment Channel and a Standard Payment Channel?

A Lightning channel is a two-way payment channel that allows both parties to make and receive money. The Lightning Network is made up of media, each of which has a set bitcoin capacity. This capacity is distributed between the two parties to the channel, with Lightning transactions transferring bitcoin from one side to the other.

 

Creating a Lightning Path

By depositing bitcoin in a 2-of-2 multisig address, two participants establish a Lightning channel. This transaction is recorded on the Bitcoin blockchain, and the Lightning channel is launched after it is confirmed. Once installed, a Lightning channel allows both parties to carry out an unlimited amount of transactions at a low cost and in real-time. When the two parties have completed their transactions, they can terminate the channel with another on-chain Bitcoin transaction that reflects the net change in their respective balances.

Using a Lightning Channel for Transactions

A payment channel is a shared pool of funds between two parties. This channel is used for lightning transactions, which re-distribute monies kept in the multisig address. There is no additional token or representation of bitcoin created by the Lightning Network. Therefore these monies are always stored in the multisig address. The channel’s balance is updated whenever bitcoin is spent through it—from party A to party B. These modifications, however, are not recorded on the blockchain.

Advantages of the Lightning Network

The Lightning Network’s apparent benefits include faster and cheaper transactions, as well as the ability to make micropayments in ways that have never been feasible before. Users would be charged for a simple transaction without the Lightning Network and then wait an hour or more for it to validate. Smaller transactions have longer wait times because miners prefer to validate more significant transactions since they earn more money.

The Lightning Network is a layer that sits on top of the Bitcoin network. Onlookers can’t see individual transactions on the Lightning Network payment channels; only the total package transactions are secret. Because of the connectivity, the Lightning Network continues to benefit from the security mechanisms of Bitcoin. Users can then use the leading blockchain for more significant transactions and the Lightning Network’s off-chain for smaller transactions without fear of security issues.

Cryptocurrency fans have also been experimenting with atomic swaps, which is the act of transferring funds from one cryptocurrency to another without the use of a third party or an exchange.

Lightning Network’s Drawbacks

To use the Lightning Network, one must first have a wallet that is compatible with it. While finding a Lightning Network wallet is simple, users must fund it using a standard Bitcoin wallet. Users lose some Bitcoin to engage with the system because the initial transaction from the traditional to the Lightning Network wallet costs a fee. Users must lock up their Bitcoin after depositing funds into the Lightning Network wallet to build a payment channel.

Transferring Bitcoin between wallets can be inconvenient and costly, which discourages newcomers. However, some wallets can handle both on-chain and off-chain payments without incurring fees, and the convenience will only get better with time.

Before spending the funds, either party in the payment channel must actively terminate a channel and receive the Bitcoin. It’s impossible, for example, to withdraw a small amount of cash while leaving the channel open. Even closing or opening a payment channel needs an initial transaction known as a routing fee, which both parties must make. While the premise of starting a channel is straightforward, all of these additional fees can quickly add up.

Transferring Bitcoin between wallets can be inconvenient and costly, which discourages newcomers. However, some wallets can handle both on-chain and off-chain payments without incurring fees, and the convenience will only get better with time.

Before spending the funds, either party in the payment channel must actively terminate a channel and receive the Bitcoin. It’s impossible, for example, to withdraw a small amount of cash while leaving the channel open. ClosingClosing or opening a payment channel needs an initial transaction known as a routing fee, which both parties must make. While the premise of starting a channel is straightforward, all of these additional fees can quickly add up.

Finally, even if the Lightning Network resolves all of its concerns, regulators must be considered. Regulators may find it challenging to comprehend the Lightning Network sufficiently to establish appropriate legislation. If authorities have trouble, mainstream crypto users may have trouble using the Lightning Network. Even if regulators understand the protocol, the Lightning Network’s secrecy may prevent it from being approved. Anonymous transactions may put off legislators because they can only view a completed transaction after a user closes their payment channel, not the individual transactions.

The Lightning Network’s Future

Adoption of the Lightning Network, on the other hand, is increasing. According to DappRadar, the Lightning Network has over $110 million in Bitcoin locked up. This might include people who pay for goods and services, use applications, gamble, and so on.

Some apps, like Lightning Network compatible wallets, are critical to network usage. Because the Lightning Network is a separate protocol from Bitcoin’s main net, it necessitates a unique wallet for users to construct payment channels. Traders can’t use the Lightning Network until their wallets are optimised. If the Lightning Network’s acceptance grows, the industry can expect further wallet development.

It’s also worth noting that Lightning has progressed to the point where it can now be used as a layer-two solution on various projects. Cryptocurrency exchanges are also beginning to support the protocol, allowing as many traders as possible to use it. Traders using the Lightning Network can withdraw tiny amounts of Bitcoin quickly and cheaply (even when Bitcoin is congested). Due to Bitcoin’s existing infrastructure, users may face hefty transaction fees and long wait times if the Lightning Network is not implemented.

The Lightning Network has also included Watchtowers, a third-party security service made up of numerous specialised nodes. From time to time, some nodes go unavailable.

A participant can pay a small price to a watchtower and submit a signifier linked to the channel transaction instead of leaving their channel unattended. The tower uses the signifier to distinguish the user’s channel from the rest and monitors it.

Suppose the watchtower detects malicious behaviour, such as an effort by the opposing party to block the payment channel. In that case, the funds will be promptly frozen and refunded to the offline user. The watchtower will also penalise the malicious party, who will remove their funds from the channel.

The Bottom Line  

The Lightning Network is a constantly changing concept that has the potential to alter Bitcoin’s blockchain significantly. However, the network could not be the answer to all of Bitcoin’s problems. Additionally, as the network evolves and improves, new issues may arise inside the cryptocurrency ecosystem. In the future, much will be dependent on new technological research and development.

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