The Lightning Network was first proposed by Joseph Poon and Thaddeus Dryja in 2016 and was developed to solve the problem of Bitcoin’s slow transaction times and throughput. So, What is Bitcoin Lightning Network? How Does It Work? Let’s find out with Coinminutes through the article below.
What Is Bitcoin Lightning Network?
Bitcoin Lightning Network is a second layer or off-chain solution to the scalability problem. This means that Lightning is a second layer built on top of the BTC blockchain – the network has its own nodes and software to communicate with the main blockchain through mini-ledgers called channels.
By building on the existing chain and using smart contracts, the Bitcoin Lightning network can increase the speed of transactions and reduce the associated costs. Channels on the Lightning network can be likened to your own payment service for faster and cheaper BTC transactions. To ensure security on these channels, the network uses Hashed Time Lock Contracts (HTLC), which in turn allow users to set conditions to avoid fraud.
To simplify, we can understand that we will not need to record all transactions on the blockchain network. Instead, the Bitcoin Lightning network will create a layer on top of the Bitcoin network and it allows users to create a channel for transactions between any two users on that layer. These channels will exist until requested to cancel because they only exist between 2 people. And what’s more, transactions will be almost instant and fees will be extremely low or even 0.
Key Technological Concepts of the Lightning Network
- Multisig Wallets
From a technological standpoint, a Lightning payment channel established between two entities, or between an individual and a merchant, functions as a multisignature wallet, commonly referred to as a “multisig wallet.” In this context, funds are deposited into the payment channel through a designated “funding transaction” on the Bitcoin blockchain. The disbursement of funds can only occur subsequent to mutual agreement by both parties involved in the payment channel, necessitating their joint confirmation of any updates to the account balances. Consequently, the execution of a transaction via the Lightning network entails the negotiation of new account balances in the background.
- Commitment Transaction
Within a commitment transaction, both parties mutually pledge to honor the most recently concurred-upon account balance. This safeguards against the necessity for trust between payment partners for the successful conclusion of a transaction, as reliance is placed on the robustness of the Lightning Network. Through the endorsement of the commitment transaction, payment channel partners affirm their commitment to the existing account balance. This, in turn, facilitates the seamless disbursement of funds when required, obviating the need for the parties to seek reapproval from one another.
- Hash time-locked Contracts
Hash time-locked contracts (HTLCs) represent a fundamental technical element within the Lightning Network. Their significance is notably pronounced in the context of facilitating routing.
How Does Bitcoins Lightning Network Work?
Bitcoin Lightning Network is built on distributed information technology, allowing parties within a network to interact with each other quickly and securely. The system works by creating fast payment channels between two parties, where transactions can be made quickly and securely without needing to be confirmed on Bitcoin’s blockchain. When two parties want to make a transaction, they open a payment channel and make quick transactions on it. These transactions do not need to be confirmed on Bitcoin’s blockchain, so they can be performed faster and at lower costs than direct transactions on the blockchain. Once transactions have been made on the payment channel, both parties can close the channel and transfer the transactions to the Bitcoin blockchain for storage. This will help increase security and ensure the integrity of transactions.
Why Is the Lightning Network Necessary?
We all know about Bitcoin’s scalability, and arguments for using Bitcoin to process larger numbers of transactions have been presented since the inception of the network. These debates have led to numerous Bitcoin forks and periods of debate over transactions involving modifications to the underlying Bitcoin protocol to accommodate large numbers of transactions.
Currently, the Lightning Network is one of the leading solutions presented for scaling Bitcoin, and importantly one that does not require changes to the underlying protocol. If the Lightning Network is successful, it will fundamentally change the Bitcoin scaling debate and increase the potential use cases for Bitcoin.
Pros and Cons of the Lightning Network Bitcoin
Pros of the Lightning Network Bitcoin
- Scalability: Addresses the scalability issue of the native Bitcoin blockchain by taking transactions off the main chain and processing them in layer-2 blocks.
- Speed: Transactions on the Lightning Network are faster and more efficient compared to on-chain transactions, thanks to the two-party consensus mechanism known as a payment channel.
- Micropayment Support: Enables swift micropayments, a crucial feature for the usability of Web3 applications like gaming, by allowing transactions at much lower fees than the Bitcoin blockchain.
- Low Energy Requirements: Reduces the energy required to operate nodes, contributing to a more sustainable and environmentally friendly approach compared to on-chain transactions.
- ESG Credentials: Improves Bitcoin’s environmental, social, and governance (ESG) credentials by lowering its overall energy footprint and aligning with sustainability concerns.
Cons of the Lightning Network Bitcoin
- Cost and Friction in Channel Setup: Setting up payment channels on the Lightning Network can be expensive and cumbersome, requiring users to move funds onto the network and lock them into a channel.
- Counterparty Risk: Users face the risk of funds being stuck on a channel due to technical issues or the counterparty closing the channel and taking the funds. This introduces a level of risk that is being addressed by watchtowers and Lightning service providers.
- Functional Scalability Limitations: The Lightning Network’s design, with payment channels between two parties, can be less seamless for businesses that need to transact with multiple counterparties. Opening and managing individual channels for each counterparty can be complex and exposes the business to counterparty risks on each channel.
How Can You Get Started with the Lightning Network?
If you want to make transactions using Lightning Network Bitcoin but don’t know where to start, let Coinminutes guide you in detail. If you need to deposit some BTC into a Lightning-compatible wallet, popular wallets include Custodial wallets and Non-custodial wallets.
Custodial wallets include Strike, Blue Wallet, and Wallet of Satoshi. This is a suitable platform for beginners, as it simplifies sending and receiving cryptocurrency by managing your private keys. For example, if you lose your password, you can still reset it.
The next platform you can use is Non-custodial wallets, with options including Muun, Breez, Phoenix, and Zap. These wallets are user-controlled and are suitable for more experienced traders. If you lose or damage your wallet or forget your password, you may lose access to your funds. So make sure you learn how to backup or restore whichever wallet you choose.
The Lightning Network is facing many challenges today, but the protocol is still relatively new and has huge growth potential. Hopefully, the above article about Bitcoin Lightning Network by Coinminutes has brought useful information to you.