Lightning Network is a layer 2 solution that is designed for Bitcoin. With the aim of addressing two significant challenges to the blockchain, scalability and transaction fees. Bitcoin needs a scalable solution to help reduce fees and speed of transactions in order to become a more globally adopted peer-to-peer cash system.

What is Lightning Network and How Does it Work?

The Lightning Network was first proposed by Joseph Poon and Thaddeus Dryja in 2016, it

was developed by Lightning Labs. The network is deployed on the internet and runs on thousands of nodes located around the world.

Lightning Network uses micropayment channels to scale Bitcoin’s blockchain capabilities, making transactions cheaper and more effective by increasing the amount of transactions that can be completed per block.

Bitcoin does have its share of critics, however, due to limitations such as its scalability and transaction speed. Bitcoin can only process up to 7 transactions per second (tps), technically there are no limits to the number of tps that can occur under Lightning Network, the number of transactions is only limited by the capacity and speed of each node. 

Mining fees can also fluctuate vastly based on demand, due to limited block space transactions can incur hefty fees and in some cases make the transaction negligible for the miner to process.

On the lightning network users can send as little as 0.00000001 Bitcoin without high fees.

Users have the ability to swap from processing transactions on the main blockchain, which is mainly used for bigger transactions, to an off-chain network that is used to help facilitate smaller transactions. 

Lightning Network offers greater privacy with its transactions as only the opening and closing of a channel can be viewed on the blockchain. This is where all transactions within the payment channel between shop owner and customer are consolidated into a single transaction that is then transmitted to the Bitcoin mainnet for record. 

How Does It Work?

The Lightning Network acts as its own ledger that uses smart contracts to establish a secure network which allows for high volume, high speed and low fees. 

Once a channel is set up both parties can engage in unlimited transactions that are fast and cheap, it operates on an autonomous ledger that offers users the capability to make payments for even the smallest goods and services, such as ice cream, all without causing further congestion on the Bitcoin network. 

Below we will go over an example:

• In order to start a payment channel a user must have a Lightning Network enabled bitcoin wallet. To find the right Bitcoin wallet for you check here.

• Person A is required to lock a specific amount of Bitcoin within the network based on the amount Person B is after, funds are placed into a two-party multisignature channel. 

• This could take place between a customer and a shop owner, after this is complete you can conduct transactions until both participants opt to conclude them, the customer and shop owner can then close the channel.

• When utilizing the Lightning Network channel both parties can transact with each other, and the transactions within the channel deviate from the standard Bitcoin blockchain transactions, only opening and closing a channel is recorded on the main blockchain. 

• All transactions within the channel are consolidated into a single transaction that is then transmitted to the Bitcoin mainnet for record. This process helps to stop congestion on the Bitcoin blockchain by not firing loads of small transactions simultaneously overwhelming the network. 

The Lightning Network does have its disadvantages however, payments can only be made to users who are connected to the payment channel, normal cryptocurrency transactions are not affected by this limitation and do not require the user to have a Lightning Network-compatible wallet.

Conclusion

The Lightning Network plays an essential part in being able to complete multiple transactions for little cost and conducting them at lightning speed. Generally, it is preferred to use the network for smaller transactions such as buying goods and services, users can do as many transactions as required once a channel is open. Lightning Network is the leader in technological development with multiparty financial transactions with Bitcoin. Participation in the network is open to all.  

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This article is intended for educational purposes and is not financial advice.