What is the Lightning Network?
The Lightning Network is a second layer to the Bitcoin blockchain (and other cryptocurrencies) that was added in order to help transactions get completed faster without having to wait for confirmation from the entire system. This feature allows users to make smaller transactions without having to wait too long for them to be confirmed. Compared to the operations made on the blockchain of Bitcoin, these ones are faster, cheaper, and much easier to confirm.
A Brief History of the Lightning Network
The second-layer payment protocol of Bitcoin was an idea of Joseph Poon, who is a researcher focused on the scalability of blockchains, and Thaddeus Dryja, a research scientist at the digital currency initiative lab at MIT. The whitepaper for this proposal was published on January 16, 2016. However, Satoshi Nakamoto’s invention of Bitcoin in 2008 prompted a discussion about the idea of off-chain scalability. The first full, secure Lightning payment on a non-test network was made almost a year and a half later on the Litecoin Network.
Understanding the Lightning Network: How does it work?
The protocol is based on the idea of peer-to-peer transactions. Once the payment channel is created, it allows both parties to conduct as many transactions as they want without paying high fees or waiting very long to get confirmation. In order to establish the payment channel, the person who will act as a payer needs to lock a certain amount of bitcoin into the system. When that step is complete, the person who will receive the funds can then choose the amount. If the recipient wishes to continue using the channel, they can add more bitcoin on a regular basis.
When using a second-layer protocol channel, both parties can transact with each other. When compared to ordinary transactions on the Bitcoin blockchain, some payment operations are handled differently. For example, when two parties open and close a channel, they are only updated on the main blockchain.
The two parties that participate in the transaction can transfer funds between themselves without informing the main blockchain, and that significantly reduces the time it takes for the whole operation to be completed. Lightning Network nodes capable of routing transactions are formed by combining individual payment channels between the concerned parties, which means that the protocol is the result of all those channels that were linked together. When the two parties decide that they no longer want to complete transfers, they can close the channel, and the whole information will merge into one transaction, which will then be sent to the mainnet for recording. This whole operation means that the main network receives the notification of a single transfer rather than information about multiple transfers.
What are some of the Lightning Network’s use cases?
Some of the use cases for this system include:
- optimization of the power grid: nowadays, electricity producers, traders, and grid operators have to prepay a couple months before they receive payment for the electricity from the consumer. This means that they are forced to calculate their costs, which can hardly be accurate in times of economic crisis and price increases. The additional costs of the energy prices are influenced by the existence of intermediaries in payment processing, increasing costs for administration in billing and risk management. The second-layer protocol reduces these costs by equalizing the speed of the transfers of both energy and money;
- M2M payments: machines can also process transactions by using this system because of the programmability of the payments in this system. It’s important to note that the machines do not process these transfers themselves; they are confirmed by their owners, but machines can be authorized to complete certain operations themselves;
- cross-border payments: because of its speed and reliability of transfers, this system can also be used for international transactions, regardless of the distance between the two parties that conduct the operation.