“The Lightning Network has the potential to revolutionize the world of cryptocurrencies”.
Thanks to blockchain technology, cryptocurrencies have some unique properties, such as they cannot be easily hacked or deactivated, and can be used by anyone to pass value anywhere in the world without the intervention of a third party. However, to guarantee the maintenance of these properties, significant limitations have had to be accepted, including the transfer rate is limited and the number of transactions per second (TPS) that a blockchain network can process is relatively low.
To overcome the limitations of blockchain technology, various attempts and proposals have been made to solve Bitcoin’s scalability problems and be able to support the world’s population, but only one implementation has managed to stand the test of time, the Lightning Network. A concept that is gaining strength in the crypto market.
Lightning Network activity skyrocketed in 2021, thanks to El Salvador adding an entire country and Twitter integrating Bitcoin Lightning tips.
What is the Lightning Network?
The Lightning Network is a response to the scalability problem that has plagued the Bitcoin protocol. It is a network that is deployed on top of a blockchain to facilitate fast peer-to-peer transactions, the Lightning Network is what is called an off-chain or layer 2 (second layer) solution, which allows individuals transact without the need to record each transaction in the blockchain.
On the other hand, the Lightning Network helps lower transaction costs by enabling instant off-chain transactions with much lower fees. In addition, this protocol gives the possibility of reactivating the option of micropayments and automation. Currently, the minimum amount of Bitcoin that can be sent per transaction is approximately 0.00000546 BTC, but the Lightning Network allows you to transfer the smallest unit currently available, which is known as a satoshi (0.00000001 BTC).
How does the Lightning Network work?
This protocol allows the creation of a payment channel between two parties, which allows sending an unlimited number of almost instantaneous and cheaper transactions. It acts as its own small ledger for users to pay for even smaller goods and services, without affecting the Bitcoin network.
To start a channel on Lightning, participants must leave network-locked funds on escrow with a 2-of-2 scheme. There are only two keys capable of signing, and both are required in order to move coins. Once the Bitcoin is locked, the recipient can carry out the transactions of the amounts they deem necessary.
By using a Lightning Network channel, both parties can transact with each other indefinitely without the need to tell the main blockchain. Since it is not necessary for all nodes to approve all transactions within a blockchain, this protocol speeds up transaction times substantially. Lightning Network nodes capable of routing transactions are formed by combining individual payment channels between stakeholders. Having the Lightning Network as the result of linking many payment systems.
Finally, when the two parties decide to end the transaction, they can close the channel. All channel information is then consolidated into a single transaction, which is sent to the mainnet for logging, streamlining the dozens of small transactions made into a single transaction, thus requiring less time and effort for nodes to process and validate it.
What actually happens in the first transaction is that the Lightning Network creates a kind of smart contract between two parties. This smart contract contains a private ledger (accounting ledger), to which many transactions can be added and can only be seen by the two parties included in the transaction. The smart contract code ensures that contract fulfillment is automatic, and makes transactions within a payment channel anonymous once validated. All anyone can see is the total transfer of value, not the individual transactions within it.
Only if there is a main chain to build, can protocols exist outside the chain. While the off-chain protocols have their own ledger it is the ledger that is always integrated back into the main chain, thus making the main network the arbiter of all transactions which is central to the design of Lightning Network.
The implementation and adoption of the Lightning Network is on the rise and is making the future of cryptocurrencies even more promising, thanks to the benefits it brings to the network and the market. Using the Lightning Network has several advantages to bring cryptocurrencies to the world population offering one of the best options to improve the scalability of Bitcoin, making transactions faster and cheaper, providing high levels of security and anonymity, reducing the level of transaction traffic within the main network and allowing automated micropayments. Furthermore, the Lightning Network is not exclusive to Bitcoin it is also compatible with other cryptocurrency projects, such as Litecoin which has already integrated it.