Created in 2015 by Joseph Poon and Thaddeus Dryja, Lightning Network (LN) is a project designed as a payment protocol that can be used as an off-chain solution for the scalability problem faced by the Bitcoin blockchain.
Notably, the very first blockchain by cryptocurrency Bitcoin can only process up to 7 transactions per second. Thus, LN was created as an attempt to alleviate the network congestion of the Bitcoin blockchain. The network solves scaling problem by creating a second layer on bitcoin’s main blockchain, consisting of multiple payment channels between parties or bitcoin users.
How Lightning Network Works
In order to perform transactions between two parties, users need to create a muliti-signature wallet, that can be accessed with private keys. Essentially, transactions are redistributions of the funds stored in the shared wallet.
The actual distribution of funds happens when the channel gets closed. The algorithm uses the most recently signed balance sheet to determine who gets what. When the channel is closed, the information about its initial and final balance is broadcasted to the Bitcoin blockchain.
Notably, LN is using multi-signature and smart contracts in the platform to enable users with fast and secure transactions. However, big transactions still require decentralized security and thus advisable to be done on the original layer of the blockchain.
Why Lightning Network?
The Lightning Network is said to be able to take the transactions per second figure of Bitcoin and other cryptocurrencies to unprecedented heights of at least 1 million transactions per second. Also working towards an off-chain solution for the scalability problem, LN may reduce the traffic on the Bitcoin blockchain.
With LN, transactions will be almost instantaneous. This will eventually lead to cryptocurrency market making a huge step towards being able to compete with traditional payment systems like Visa and PayPal.
Transactions with LN will take place within the Lightning Network channels and outside of the blockchain, thus, users will only need to pay a very low fee. Hence, this will lead cryptocurrency to be used to make payments in retails, cafes and bars.
However, it is notable that LN is a new development that still undergoes processes of improvement and enhancement. Thus, there will be various hiccups such as it’s not fully operational, with its complexity of channels. It is best that we wait until the network is fully developed to leverage on its instant micropayments, increased anonymity and almost non-existent fees.
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Nurul is an English Language graduate who is highly passionate on writing, she literally breathes on it. An avid reader and a critical thinker, she covers on blockchain news during day and weeps at sad novels at night.