Lightning Network is a new payment protocol that is designed to operate on top of a blockchain based crypto coin like Bitcoin. It aims to solve Bitcoin’s scalability issues by enabling fast and cheap transactions.

The protocol was proposed in a white paper by Joseph Poon and Thaddeus Dryja back in 2015. The document describes a network that sits on top of the Bitcoin blockchain and later settles on it. It’s made up of user-generated channels that are used to send payments back and forth between two parties in a secure and trustless manner. This means the involved parties don’t need to trust or even know each other.

 

How it works

Imagine two individuals, Alvin, and Kelvin who maybe work together and need to send money to each other quickly, regularly and with minimal fees. Therefore they decide to set up a channel on the Lightning Network.

To start, they create a multi-signature wallet, one they can both access using their respective private keys. Then both proceed to deposit a given amount of Bitcoin in equal amounts like five BTC each into the wallet. After this, they can conduct an unlimited number of transactions between themselves. It’s important to note that the transactions are just redistributions of the funds that are stored in the shared wallet.

So the process will work like this, let’s say Alvin wants to send 2 BTC to Kelvin, he will have to transfer the ownership right of the bitcoins to Kelvin. Then both of them will use their private keys to sign and update the balance sheet.

However, the actual distribution of the funds will only occur when the channel is closed. To determine who gets what, the algorithm of the protocol uses the most recently signed balance sheet. So, if the two workmates decide to close the channel after the first single transaction, Alvin will get 3 BTC, and Kelvin will receive 7 BTC.

It’s only after the channel has been closed that the information about the opening and closing balance is broadcasted to the bitcoin blockchain. So simply put, lightning Network enables users to conduct many transactions outside the main blockchain and when the channels are closed record them as a single transaction on the main blockchain.

Interestingly, once the technology gains mass adoption, there will be no need to set up dedicated channels to send funds to different people. Instead, one will be able to send payments to other individuals using channels other people they have already connected with. The system will automatically find the shortest route.

However, since the system works on top of the blockchain, it’s important to understand that the system will lack the blockchain’s security. This means the payment network will be ideal for small or even microscopic transactions. Bigger transfers that need decentralized security will have to be done on the original layer.

Cross chain atomic swaps is also another interesting feature of the Lightning Network that is currently being tested. It involves transferring tokens between different blockchains. The feature will enable the swapping of any crypto coin with a different one without going through exchanges. Eventually, the technology could render unsafe centralized exchanges obsolete.

 

Progress So Far

Although the protocol was initially designed to solve the scalability issues of Bitcoin, currently the technology is being developed for some other crypto coins such as ether, Litecoin, Zcash, Ripple, and Stellar. Already Litecoin has announced its plans to launch its version at the same time as Bitcoin.

Currently, three startups are working on three different lightning implementations. The three include Blockstream, ACINQ and Lightning Labs. In December of 2017, they conducted test results that included live transactions and proved that the versions were interoperable.

Blockstream is working on the LN version written in C; Lightning Labs is developing a Lightning Network Daemon (lnd) that is written in Golang and, ACINQ is working on a Scala implementation.

Already the first version of the lightning specifications that set out the rules of the protocol has been published. It’s a positive sign that should encourage the development of other applications and implementations.

 

Benefits Of Lightning Network

1. Scalability – It is believed that Lightning Network will take the transaction per second of Bitcoin and other crypto coins into unprecedented levels of at least one million per second.

2. Security and anonymity – Most of the existing cryptocurrencies are not fully anonymous. Tracing transactions from one wallet to another is possible. However, with the lightning network, the majority of transactions will take place outside the main blockchain, and they will be impossible to trace.

3. Cross-chain atomic swaps – So far the first test of cross blockchain transactions worked out smoothly which is quite exciting. When the protocol is fully implemented, users will be able to send funds from one blockchain to another without the need to trust third-party intermediaries like exchanges. The only condition for the system to work is that the two blockchains have to share the same cryptographic hash function.

4. Miniscule transaction fees – When the network goes live, users will not have to wait for several confirmations for every transaction that they make. Transactions will almost be instant, and users will have to pay the tiniest of fees. This is going to help crypto coins to compete with traditional payment systems like MasterCard, Visa, and PayPal.

 

Cons Of Lightning Network 

The lightning Network is still work in progress, and for now, there is no telling how well it will work. From what we understand so far, possible disadvantages of the network could be;

1. The existence of channel caps. Currently, the amount of Bitcoins stored in shared wallet between two users after they establish a channel is the maximum amount that is stored on the channel. This can create a situation where users have to choose between having liquidity within the channels and outside on the main blockchain. For users with limited resources, this can be an unpleasant situation.

2. The existence of complexity among channels. So far we know that Lightning Network is seen as a web of channels which once established should allow for smooth transactions. What we don’t know is what will happen when the payment has to take a very convoluted path.

 

Latest developments

Last week data released by 1ML.com revealed that the number of active nodes, channels and the overall transaction capacity experienced over the past month on the Bitcoin Lightning Network was at its highest point since its inception.

The numbers over the past month look like this;

• The number of Lightning nodes stood at 6,085 and was up 14.55 percent.
• The number of Lightning channels stood at 24,647 and was up 27.2 percent.
• The network capacity stands at 656.94 bitcoin (BTC) and was up 15 percent.

 

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