The Lightning Network is a payment protocol that is tiered to blockchain-based virtual currencies such as bitcoin or Litecoin. Also known as a “layer 2” payment mechanism, the lightning network intends on speeding up off-chain transactions on the BTC network. It has been designed sophisticatedly, using a number of payment layers in order to facilitate quick transactions between participating nodes. This latest innovation aims to offer a solution to the BTC scalability issue, which refers to the Bitcoin network’s restricted ability to manage massive volumes of transaction information on its infrastructure in a short period of time.
Lightning Network acts as a two-party transaction mechanism in which parties may send and receive funds from one other. In addition to handling transactions outside of the ledger mainnet (level one), layer two helps in increasing the manageability of blockchain technology while simultaneously benefitting from the robust decentralized security paradigm of the mainnet (layer one).
We all know cryptocurrency is in bloom these days, with millions of investors all across the world. Nevertheless, some limitations encompass these virtual assets as some people are still highly reluctant to put their resources into it; Scalability being the main barrier. Indeed, for cryptocurrency to gain broad acceptance, it must first prove that it is scalable. A blockchain network, if correctly deployed, can process millions to billions of operations per second, if not more. Because it transacts and settles transactions off-chain while charging minimum fees, the Lightning Network can help make immediate micropayments. This can, in turn, address the conventional “can you buy latte with cryptocurrency?” dilemma while also speeding up latency and lowering expenses (such as energy costs) affiliated with Bitcoin’s blockchain.
However, even with the best of intentions, the Lightning Network is still striving to solve this issue. It also has to tackle newer issues, such as cheap routing costs and malicious assaults. For example, a tiny cost is charged to establish and cancel a payment channel on the internet. On top of these minor costs, there are routing fees, which are paid to nodes that are responsible for verifying transactions. After then, the issue arises as to why a node would wish to verify the transaction if the routing price is so minimal.
Miners less often validate smaller transactions since they will receive fewer fees for certifying tiny transactions, which is a pretty straightforward response. A routing fee is charged to traders because they’ll have to wait an extended period of time before their transaction is verified. A fraudster can take advantage of this situation fully as he may open a number of payment channels at the same time and then cancel them all at once. Those channels must then be authenticated in order to avoid getting in the way of real ones, causing congestion on the network. As a result of the congestion, the attacker has the potential to withdraw cash before authorized counterparties become aware of these problems.
You see, there are certain pros and cons associated with the use of lightning network. Let’s find out more about it.
Becoming Familiar with the Lightning Network
The lightning network was initially suggested by Thaddeus Dryjya and Joseph Poon in 2015, and work on it has been ongoing since then. As mentioned earlier, the lighting infrastructure was created to address the issue of bitcoin’s poor processing time and capacity. The number of bitcoin transactions per second has to approach tens or hundreds of thousands per second in order for bitcoin to realize its full potential as a daily means of transaction, equivalent to credit cards or digital payment platforms.
Bitcoin is based on a decentralized structure, which necessitates the agreement of all nodes inside its infrastructure before any transaction can be successfully completed. This is important for the safety of the network yet, imagine if the number of these nodes increases in the future? Surely, authorizing and maintaining connections will become more costly and time-consuming. Moreover, with an increase in BTC popularity, there is a manifestation in the number of transactions per second. This rise in the number of transactions necessitates a significant increase in the processing capability of the computers used to carry out those operations. Furthermore, the amount of energy required to calculate this information is massive, making it unreasonably costly to keep bitcoin running for day-to-day operations.
Establishing a secondary layer on top of Bitcoin’s primary blockchain was the solution presented by the lightning network to tackle this scalability issue. Multiple payment mechanisms between parties or cryptocurrency users make up the second tier of the bitcoin architecture. A lightning network circuit is a transaction mechanism that allows two parties to communicate with one another. When opposed to ordinary transactions that take place on the bitcoin blockchain, these activities are handled in a unique way. They are only published on the main network when a channel is opened and closed between the two parties.
Between those two actions, the parties have the ability to transfer cash between themselves indefinitely without telling the main blockchain of their activity if they want. Because all transactions inside a database are not needed to be accepted by all nodes, this strategy significantly speeds up the pace of a transaction by orders of magnitude. Numerous payment channels between different parties unite to create a network of efficient nodes capable of routing transactions amongst themselves. The Lightning Network is formed as a consequence of the linkages between multiple payment methods.
The Lightning Network was created, in part, to assist Bitcoin in functioning more like the digital currency that its creator, Satoshi Nakamoto, had imagined. Compared to Bitcoin’s primary blockchain, it can execute transactions “off-chain” far more swiftly and inexpensively — with costs that are often fractions of a penny or less. Lightning transactions use fewer resources than operations on the mainline blockchain, which is another advantage. While the primary Bitcoin network (layer 1) can normally manage less than ten transactions per second, the Lightning Network (layer 2) has the potential to process millions and millions of transactions per second. That’s a pretty impressive figure, for sure!
How Does Lightning Network Operate?
The Lightning Network is a decentralized payment network that employs smart contracts to construct off-blockchain payment solutions between participants. Once these transaction routes have been built, monies may be moved between the participants in a very instantaneous manner. Because of this clever design, the network does not have to generate pairs among all individuals. Take, for example; we have three users: A, B, and C. Users A and C both have channels built with user B, yet, the user B only has a channel with user A and has no link with user C. Monies may be freely transmitted between all of the people involved in the network without any delays or complications.
Lightning addresses have the same appearance as traditional Crypto addresses, and the payments system for users is quite identical. Therefore, users don’t really find these new payment channels difficult to comprehend. It is possible for users to terminate their payment route at any moment and reconcile their ultimate credits on the main network.
Given that just the opening and closure of money transfers are documented on the Bitcoin core blockchain, the whole Bitcoin network may operate at a quicker pace. Furthermore, Lightning Network transactions have the potential to be more private than transactions done on the mainstream chain. This is because layer one is completely transparent and public.
On a more technological level, smart contracts and multi-signature protocols are the two basic approaches adopted by lightning networks. Given a situation when one or both parties finance a channel, the first transaction or the funding transaction is made. The exchange of two keys (public and confidential, respectively) is the first step in an ideal multi-signature setup. On the other hand, in the event of a lightning node, these signatures are not transferred. This is done in order to prevent the transaction from being recognized by the primary blockchain network.
Instead, the two parties exchange a single key, which may be used to authenticate transactions (also known as commitment transactions) among parties. Using a lightning network, the parties involved may perform unlimited commitment operations amongst themselves and other stations. They only swap their master keys after the connection between them has been closed up completely.
A Lightning-compatible account is required if you wish to conduct transactions on the Lightning Network. To do so, you must first transmit some Bitcoin (for example, from your Coinbase account) to your E-wallet. There are plenty of options to consider. Wallets that are both “custodial” and “non-custodial.” Pick the one you are more comfortable with.
- Custodial Wallets
Wallet of Satoshi, Blue Wallet, and Strike are examples of the most-known custodial wallets. These are generally recommended for beginners since they make the process of sending and receiving cryptographic messages easier by maintaining your private keys. If you forget your password, you’ll be able to recover it by logging in again.
- Non-Custodial Wallets
Zap, Munn, and Phoenix are examples of famous non-custodial wallets. These wallets are managed by the user himself only and are preferred by more professional ones since no one else has access to your private keys. Losing or damaging your wallet as well as forgetting your password might result in the loss of access to your cash.
Advantages of Lightning Network
The apparent advantages of the Lightning Network are that online transactions are completed quicker and at a lower cost, allowing virtual operations in a manner that was previously impossible. Users would be forced to pay large fees for a simple exchange and then wait hours or more for that to be validated if the Lightning Network were not in place. Smaller transactions have longer wait times because miners prefer to authenticate bigger transactions since they gain more incentives for doing just that.
The Lightning Network is linked to the Blockchain network and exists as a layer on top of it, providing additional security. This relationship between the first and the second layers is mutually beneficial; both can use additional security mechanism. This creates an extra protective layer covering BTC transactions and makes it easier for users to send and receive money. Users may now pick between the mainstream blockchain for larger purchases and the Lightning Network’s off-chain for smaller purchases without having to worry about the security of their interactions anymore. This new technology likewise ensures that operations are kept secret since observers or monitors can obviously not see each individual transaction but only the whole package in general.
Moreover, cryptocurrency aficionados have also tested the practice of switching one crypto for another without involving a third party or an exchange. This is called an Atomic Swap. When compared to an exchange, Atomic Swaps are much more convenient since they allow for near-instant exchanging with next to no costs or wallet-based transfers.
Disadvantages of Lightning Network
In order to make use of the Lightning Network, one must first get a wallet that is interoperable with the system. While it is simple to locate a wallet that is compatible with this new network, a customer must first fill the wallet with Bitcoin from a standard Bitcoin wallet. Because the first transaction from a regular wallet to a Lightning Network account incurs a charge, users will lose some Bitcoin in the process of interacting with the protocol.
Also, customers should start locking up their Bitcoin after depositing money into the Lightning Network wallet in order to establish a medium of exchange successfully. Transferring Bitcoin between wallets may be a time-consuming and costly endeavor, which discourages new users from becoming involved. Although some wallets can handle both on-chain and off-chain transactions without charging fees, the accessibility is expected to increase as time goes on.
If any member in the transaction channel intends to withdraw some money, they must actively terminate the payment channel and get the Bitcoin back before they may use the funds. In order to withdraw a small amount of money while keeping the communication line is not feasible and definitely not recommended, though. Also, please note that the process of shutting or creating a payment method necessitates the execution of a first transaction, known as a routing fee, by both involved parties. While the notion of starting a route is straightforward, the addition of all of these additional fees makes the whole process more costly than many prospective users are willing to pay.
One of the most serious issues with the Lightning Network, on the other hand, is the prevalence of offline transaction frauds. If one party in a payment route decides to terminate the channel while another party is not online, the former party has the ability to steal the cash from the latter. When the later party eventually connects, it’s obviously too late to do something about a situation or take action to prevent or stop the robbery. The scammer might simply choose to stay offline, with no method to communicate with them.
Furthermore, the Lightning Network has several other flaws, such as “stuck payments,” which are outgoing operations that haven’t been approved yet. When a payment is stopped on the Bitcoin network, it will be refunded, but it may take several days to get the refund since genuine transactions are given more precedence than blocked payments when it relates to authentication.
Even though the Lightning Network is able to resolve all of its challenges, there is still a matter of regulators to contend with. Regulators may find it challenging to comprehend the Lightning Network in sufficient detail to adopt appropriate regulations. If authorities have difficulty implementing the Lightning Network, it is possible that mainstream cryptocurrency users would have trouble implementing it as well.
Even if authorities are familiar with the technology, they may still be wary of allowing the Lightning Network to operate because of its secrecy. As a result of the fact that lawmakers can only see a finished transaction when a customer ends or closes its payment gateway, rather than the individual transactions conducted inside a channel, anonymized transactions may drive legislators away.
Lightning Network’s Long-Term Prospects
The Lightning Network is benefiting from an increase in adoption. It is estimated that there is approximately $110 million in BTC bound within the Lightning Network, according to DappRadar.
Some applications, such as wallets that are compatible with the Lightning Network, are necessary to use this newer technology. Because the Lightning Network is indeed a distinct protocol from Bitcoin’s mainnet, it necessitates the usage of a new sort of wallet for members to build payment channels. Unfortunately, traders who do not have optimized wallets will be unable to make use of the Lightning Network.
If the Lightning Network’s popularity keeps increasing, the industry should anticipate an increase in the number of wallet developers that include Lightning Network compatibility in their products. It’s also worth mentioning that Lightning’s development has progressed to the point where it can be used as a layer-two alternative on a variety of programs. A growing number of cryptocurrency exchanges are indeed beginning to implement this new protocol, ensuring that many more traders as practicable have access to the Lightning Network.