Lightning Network: What it is and How It Functions

June 23, 2021 | 

When it was launched back in 2008, Bitcoin had taken the trading industry by storm. It was both a curiosity and a new novelty that everyone saw potential in but at the same time doubted by the more seasoned traders. And this is for good reason. Digital assets are fickle things. Not only are cryptos an entirely new concept, but they are found to be highly volatile, making their market behavior entirely unpredictable.

Fast track to the present and we find Elon Musk tweeting his withdrawal of support from Bitcoin and immediately regaining trust from it. This only shows how fast things could change for the cryptocurrency industry, whether in market value or public opinion.

But probably one of the major things that need to be addressed here is scalability. This compounds the primary concern of energy consumption on Bitcoin mining which was actually the reason behind Musk’s temporary withdrawal from using BTC for Tesla.

Scalability, for the uninitiated, refers to the ability of a chain to accommodate multiple transactions within a given period. In the case of Bitcoin, while it is institutionally capable of processing 7

transactions every second, it had since become congested. What that had resulted in are longer processing times and unreasonable transaction fees.

Ultimately, the system needs reform. If it were to be turned into a complete payment system, then it needs to step up. Right now, there is simply no competition. Mainstream payment gateways are still in vogue, just take a look at Visa that records an average of 24,000 transactions per second and peaks at 50,000.

Throughout the years, Bitcoin’s developers have tried improving the crypto’s scalability, aiming at making transactions with Bitcoin fast. However, the matter stands that a consensus has yet to be reached. But there is one viable option that developers and traders can look at.

Enter the Lightning Network.

Lightning Network: What it is and How It Functions

What is the Lightning Network?

The concept that Bitcoin’s Lightning Network is built around is the acknowledgment that there is no actual need to keep records of BTC transactions within a blockchain. The network’s job then is to give permission to users to create channels for payment within an extra layer. These may subsist until such a time that they may no longer be proven necessary. This is because these channels are set up between two parties. Such permits greater speed in transactions, with fees being low to none at all.

But how does this work exactly? With the aim of making transactions with Bitcoin fast, the Lightning Network mandates users to create a multi-signature wallet, a crypto storage unit that both parties involved in a transaction can access through their own access codes, duly called, Private Keys. They can deposit any amount that they choose into the wallet. After which, they will be allowed to make unlimited transactions with each other. This is made possible as the transactions are actual redistributions of the funds that had been stored within the wallet. If Party A wants to send, say 3 BTC to Party B, A needs to transfer the right to ownership B. The distribution takes place once the channel closes. The algorithm is responsible for deciding which party gets the asset; it does this through the usage of the latest signed balance sheet.

Once the channel closes, it is only then that the transaction is announced across the Bitcoin blockchain. Simply put, the Lightning Network permits it users to administer transactions outside the blockchain and then put them own to record as a singular one. Should the technology be made industry practice, then there would be no need for a dedicated channel to besetup. A user would already be able to send transactions speedily to other users they had already transacted with prior. The system recognizes the need for shorter and easier routes around Bitcoin dealings.

This makes working with Bitcoin fast, ultimately resolving the issue of scalability. In addition, it cuts needless fee accumulation, effectively making it enticing Bitcoin traders.

Who is Behind the Development of the Lightning Network?

The Lightning Network first came into cryptocurrency trading lingo through Joseph Poon and Thaddeus Dryja’s 2015 White Paper. Work undertaken for the development is being handled by Blockstream, Lightning Labs, and ACINQ. Building and implementation of the protocol are written by the personnel in charge from the aforementioned entities through different programming languages.

There are also other implementations such as Lightning Onion, Lightning Network Daemon, Rust Lightning, and C-Lightning, just to mention a few. The discussion on other potential projects can be found in a number of White Papers that are available for pubic eyes online. Apart from these sources, interested parties wanting to learn more about Lightning Networks can also look into web, desktop, and command-line interfaces, mobile applications, explorers, and miscs.

It is worthy of note that the Lightning Network also benefits from insights given by Bitcoin community members.

Resolving One Issue While Creating Another: The Security Question in the Lightning Network

While the concept of being able to deal directly with other Bitcoin is completely attractive to those trading with the crypto for a long time, it does create a new concern. Security is a matter that needs to be addressed in subscribing to the Lightning Network. Given that the system works on top of the blockchain, it is evidently bereft of any security measure. As this is the case, the network could only be used for small transactions as large transactions need to be made through a more decentralized system with an equally decentralized security.

Of course, we have yet to see the Lightning Network’s complete development for us to ascertain its capabilities in off-chain security. However, preliminary data strongly suggest the compatibility of BTC and LTC test blockchains, making for sound conditions when trading. This is definitely a nod to the right direction; the pros outweighing the cons.

Lightning Network: What it is and How It Functions

What We Could Take Away: Would the Lightning Network be a Hit or a Miss?

There is definitely a promise with the Lightning Network. All security concerns aside, if this new protocol is set into place, transactions through Bitcoin would be simplified.

As of writing, BTC traders are in eager anticipation of the system, especially now that a number of development efforts are being made for the system to work across different cryptocurrencies, something that the entire Cryptocurrency trading industry could look forward to.

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