What is the Lightning Network and How does it Improve Blockchains?

A Lightning Network directly fixes a cryptocurrency’s scalability problems. This means it allows instant transactions that are low cost. Additionally it can support many more transactions on the network.

As a result it is perfect to use for cryptocurrency micropayments. Like for example for buying your morning cup of coffee.

The Lightning network was first proposed and designed for Bitcoin. However it can be used on any blockchain.  

How the Lightning Network Works

The Bitcoin Lightning Network is a layer 2 solution. That means it works on top of the Bitcoin’s blockchain which is known as Bitcoin’s core or layer 1.

Transactions are still peer-to-peer with the Lightning Network. Similarly to the core layer. Therefore it maintains the blockchain’s decentralised quality.

It is made up of multiple payment channels that Bitcoin users set up themselves. They set them up using what are known as multi signature wallets.

However you do not need to set up direct payment channels with everyone. If other individuals or companies have existing payment channels, the network will funnel your funds where they need to go.

How payments are made across payment channels in a mesh network

Moreover the network will use the shortest available path to make the payment. At the same time the network will ensure that the accounts have enough balance to make payments.

The Lightning Network is an off-chain method of settling transactions. So parties do not settle transactions on the blockchain unless they need or want to. Additionally the Lightning Network can support unlimited transactions.

Bitcoin Lightning Network – Why Is It Needed?

Bitcoin’s blockchain can only handle a maximum of 7 transactions per second (tps). In fact it is extremely slow when compared to other payment methods. Additionally it is also expensive to make payments.

Consequently small payments are not even worthwhile. Like for example to buy your daily morning cup of coffee. This is because it is more expensive to pay the processing fee than making the payment itself.

So although Bitcoin is a great form of money, the scaling limitation is a problem. If nothing was done to address the issue, it would keep it back from ever becoming a mainstream payment method.

For Bitcoin to succeed it has to scale to compete with other payment methods. For example here is an article from 2017: credit cards process 5,000 transactions per second.

To clarify credit cards are a form of payment method, but Bitcoin is a monetary system in its own right. In other words it has to outperform individual payment providers. Plus it has to enable many more payments to satisfy the whole financial system.

As a result it needs to rival and compete against the entire banking system for it to be feasible. This is where the Lightning Network comes in to fix the problem.

Bitcoin Lightning Network Transactions Per Second

As such the Lightning Network is only restricted by the amount of users on the network. So the more users there are on the network that use Lightning, the better. In fact if the Lightning Network is set up well, it can potentially support millions to billions of transactions.

As a result it would outperform even the most popular mainstream payment providers.

How a Bitcoin Lightning Network Wallet Works

1. Multi Signature Wallets

To use the Lightning Network you would require a multi signature wallet address. A multi signature address is a digital wallet. It is set up to require more than one person to sign off on transactions. This makes it highly secure.

2. Smart Contracts

Behind the scenes the multi signature wallet works by using a smart contract. However you and another party can set up a multi signature wallet only if both of you agree. This is because setting it up would require both of you to exchange your wallet public keys.

How the Wallet Works

You can create a multi signature address with your coffee shop so you can pay for coffees. You would need to place more Bitcoin than you would use to buy 1 coffee in the wallet. Otherwise it would not be worthwhile setting up the payment channel.

After that you can order your coffee.

Each time you get a coffee both you and the coffee shop have to verify you got a coffee. Consequently the wallet knows that a transaction occurred and record’s it on the balance sheet. The multi signature wallet keeps the records for all the coffees you bought.

how-a-lightning-wallet-works

Either you or the coffee shop can decide to close the multi signature address at any time. Since both you and the shop would have signed off on each transaction the wallet can easily settle the funds.

As a result the funds get distributed by the smart contract according to the last approved transaction. So if there are any unspent leftover funds they are returned to you. On the other hand the spent funds go to the coffee shop.

Once you close the multi signature wallet, the wallet settles the payment with the blockchain. Therefore it will take a little longer to process and cost more. However you would have saved a lot of fees by using the Lightning Network to offset the cost.

How To Use The Bitcoin Lightning Network

Using both a smart contract and multi signature wallet sounds more complex than it sounds. In fact most people on the Lightning Network have no idea they are using multi signature wallets and smart contracts. The wallet interfaces that support Lightning easily allows people to set up payment channels. Additionally they do not use jargon words.

To use the Bitcoin Lightning Network you need to use a wallet that supports Lightning. There is a small selection of good Bitcoin Lightning Network wallets. They work just like any regular crypto wallet.

Some wallets are just slightly more complex to use, but they all work similarly to one another. For example you can have a look at the Muun wallet screenshots below:

Muun wallet screenshot 1
Muun wallet screenshot 2

As you can see at the bottom of screenshot 1, you have settings, security and wallet. These options are self-explanatory. If you go on wallet you can send or receive Bitcoin funds to your wallet.

However one main difference between wallets is that some are custodial and others are non-custodial.

To clarify custodial wallets are wallets where you do not have access to the private keys. The service you sign up to has access to them instead. This means you are not fully in control of your funds.

On the other hand with non-custodial wallets you will have full control of your funds. Only you have access to your wallet. As a result you are fully responsible for your wallet.

So you should make sure to back up your seed phrase of your wallet securely. This is because you cannot contact any service provider to get access. If you are locked out of your wallet you are locked out for good if you do not have your seed phrase.

Best Non-Custodial Bitcoin Lightning Network Wallet

There are not that many Bitcoin Lightning Network wallets that are fully non-custodial. Additionally the wallets listed below are compatible on both Android as well as Apple mobile phones.

Most popular non-custodial wallet
This wallet separates your on-chain Bitcoin transfers and your off-chain Lightning Network transfers. You can access either networks by the use of a third party service. The service can transfer funds between the different networks at your request.
Visit Muun
This wallet automatically sets up a Lightning Network channel for you. Additionally it lists apps that have a payment channel with the Lightning Network already set up. So you can buy from any businesses from the list using Lightning.
Visit Breez

Advantages of the Lightning Network

Transaction times

Executes instant transactions that take milliseconds to seconds.

Scalability

Able to execute million to billions of transactions per second.

Micropayments

Instant micropayments to allow you to pay easily for your cup of coffee with minimal fees.

Privacy

Details of individual payments are not publicly recorded on the blockchain.

Fees

There is no interaction with the blockchain so fees are lower.

Safe

Very safe. When a payment channel is closed only the latest signed document is used to unlock the money. The wallet will distribute the funds accordingly.  

Future Payments

The Lightning Network has a time lock feature. This enables payments to be executed in the future.

Trust

Two parties that formed a multi signature address cannot trade outside of the address. So neither party can randomly remove funds from the wallet. As a result neither party needs to trust the other. The parties place their trust in the network itself.

Refunds

There is a script that would allow refunds for a period of time. It is there just in case one party disappears and leaves the other hanging.

Atomic swaps

Atomic swaps is the ability to exchange different cryptos without using an exchange. You can make payments or transactions across different blockchains instantly. That is to say even if the blockchains have different consensus rules.

The only requirement is that the blockchains need to have the same cryptographic hash function.

The Disadvantages of The Lightning Network

No support for offline payments

People cannot receive payments if they are offline. This is a big deal for anyone that does not have an internet connection 24/7.

Cost of interacting with the blockchain

You still need to have some interactions with the blockchain. For example opening and closing a payment channel still involves on-chain transactions. Whenever an interaction with the blockchain happens you will get charged higher fees.

Bugs

The network has issues with payments getting stuck every so often. The network of course will refund a stuck payment back to you. However it does take several days for someone to manually take care of the issue.

Idle funds

Payment channels require you to lock up a portion of funds. They require higher amounts than the cost of 1 product or service. The funds are just sitting in the wallet idle which could put off potential users.

Progress On The Lightning Network

As with any new technology there are still bugs that developers need to iron out as they develop the network. In fact a number of researchers and developers (even from universities) have pitched in their time to check for vulnerabilities in the network.

Together they have managed to identify a few issues that the developers have already fixed. Thanks to team collaboration they made significant progress with the network. As a result it has led to an increase in network adoption.

Network Adoption of The Lightning Network

lightning-network-capacity-chart

Bitcoin Archive referencing Glassnode

History of the Lightning Network

In February 2015 the Lightning Network white paper draft got published by Joseph Poon and Thaddeus Dryja. You can find the Lightning Network white paper here.

It took some time for development. Then after a couple of years Blockstream made the first test micropayment on Litecoin in May 2017.

After that the Lightning Network got tested on Bitcoin by pseudonymous individual called Hodlonaut in January 2019. The test was called the Bitcoin Lightning Torch.

Hodlonaut sent 100,000 satoshis to another Bitcoin Lightning Network user. That user then added another 100,000 satoshis to the payment and sent to the next user.

That user also added another 100,000 satoshis and so on. That is to say until they reached 4,390,000 satoshis. That final amount collected was dontated to the non-profit Bitcoin Venezuela organisation to promote Bitcoin.

Other Blockchains With The Lightning Network

When the Lightning Lab launched the Lightning Network on Bitcoin, they also launched it on Litecoin at the same time. In fact was straight forward for the developers to do this. This is because Bitcoin and Litecoin have very similar infrastructure.

However the expansion of the Lightning Network didn’t stop there. The Lightning Lab moved on to implement Lightning on other blockchains. Like for example on Zcash, Raiden and Decred.

Other Articles In This Section
Decentralized finance in Bitcoin. Find out more about Bitcoin’s DeFi.
The Lightening network. How does it work?
Taproot upgrade. Upgrades and improvements to the network.
Crypto Mining. Can you mine Bitcoin for a profit?

Frequently Asked Questions

What is the Lightning Network?

A lightning network fixes a cryptocurrency’s scalability problems. This means it can support many more transactions that are instant and low cost. As a result it is perfect for micropayments like to buy your morning cup of coffee.

Who runs the Lightning Network?

Developers set up the Lightning Network and wallet apps connect to the network. The Lightning Network is made up of payment channels that Bitcoin users set up themselves. Users can be either individuals or companies.

How do I use the Lightning Network?

You can use the Lightning Network by using a wallet that supports Lightning. There are only a select amount of apps that are recommended to use. See your Lightning Network wallet options here.

Does Bitcoin Lightning Network have a coin?

The Bitcoin Lightning Network uses Bitcoin (BTC) just like the Bitcoin core layer.
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