What is Bitcoin Lightning Network? How Does it Actually Work?

Let’s talk about a challenge that Bitcoin faces in its journey to become a super-efficient currency for everyday transactions. You see, for Bitcoin to really shine as a go-to money solution, it needs to handle loads of transactions super quickly. But here’s the catch: the way Bitcoin is built, it can’t process as many transactions as we’d like, especially when compared to big players like Visa or American Express.    

Now, let’s introduce the hero of our story: the Lightning Network. Think of it as a cool extra layer that sits on top of the regular Bitcoin system. It’s like giving Bitcoin a turbo boost for making lightning-fast, super-cheap transactions.

Imagine this Lightning Network as a bunch of secret tunnels (we call them payment channels) where you can zap your Bitcoins around instantly. You don’t have to wait for the regular Bitcoin process to give you a thumbs-up. Nope, Lightning Network lets you do your thing without the wait.

So, you can send and get your Bitcoins in a snap, just like that. No more twiddling your thumbs for minutes or hours waiting for things to happen. Bitcoin Lightning Network is like the express lane for your Bitcoin transactions, making them speedy and wallet-friendly.   

What is Bitcoin Lightning Network?

The Lightning Network is a layer-2 infrastructure constructed above the Bitcoin blockchain, which means it exists independently of the Bitcoin system yet connects with it. It is composed of a collection of small gates that enable users or businesses to transfer funds without using the blockchain to validate the transfer. 

It is identical to the present payment method used by firms such as Visa and Mastercard. Whenever you need to transfer money for something, it is not finalized immediately. Instead, there is a short confirmation of cash from the customer and a query from the vendor for the transfer to go ahead. The actual settling of payments takes time—days or weeks in some circumstances.      

The Bitcoin Lightning Network is powered by a group of nodes that transfer money, and transactions are normally completed with QR codes rather than complicated cryptographic keys. In principle, it might enable thousands, if not millions, of payments to occur immediately, making minor transactions more cost-effective.

What Was the Need for Lightning Network?

Blockchain technology came into the technological landscape over a decade ago. However, over the last couple of years, two main issues have surfaced in this technology, transaction speed, and cost. In theory, the Bitcoin blockchain can process 10 transactions per speed (TPS). But, practically, this speed is between 3 to 7 TPS. 

Blocks in a network are simply collections of payments. A blockchain’s architecture limits the number of transactions that can be contained in a block. If your payment record is not included in the current frame, it is added to a backlog. Based on the number of transactions waiting in the mempool, that backlog can take somewhere from a few minutes to a full day or more to process.

The Blockchain is based on a settlement technique known as proof-of-work. That’s where miners spend their computational power while attempting to complete a challenging puzzle. Miners collect processing fees to offset the expense of the hardware and energy required in that computation.

The network functions effectively and fees are reasonable when the network is smaller and the amount of transactions that need to be confirmed are few. But, due to the limited room in each newly minted block, transaction costs rise as the network size increases. As a result, when blockchain has more users, the transactions with the highest fees are prioritized for processing.

Due to these reasons, Dryja and Poon created Lightning Labs in 2016, a firm committed to the development of the Bitcoin Lightning Network. Despite changing team members, Lightning Labs attempted to make the network suitable for the core Bitcoin blockchain. 

After Bitcoin’s SegWit-based soft fork in 2017, which freed up room for additional transactions to accommodate each block and fixed a lengthy Bitcoin flaw known as transaction malleability, a miracle became conceivable. The flaw allowed users to create bogus transactions, deceive the network, and keep Bitcoin in their wallets.

How Does Lightning Network Work?

As it bypasses the primary Bitcoin system, the Lightning Network is quicker and less expensive. It is surrounded by an unorganized structure. Funnels are ad hoc peer-to-peer links that allow the transmission of payments. Channels can handle any number of transactions. Subnetworks that transmit transactions keep the network running. 

Everyday users—or business nodes execute a program on their computers, devices, or Raspberry Pis. As a result, the Lightning Network remains decentralized. To initiate utilizing Lightning Network, any quantity of Bitcoin must be stored in a transaction channel. The money could then be used on the Lightning Network until the route is deactivated.

When someone wishes to acquire payment, they generate a receipt, which is a long alphabetic sequence of digits that is frequently represented by QR codes. The payer just scans the invoice with their Lightning Wallet and verifies the payment.

Whenever a transaction is done, a confirmation message is delivered over the network to the individual who submitted the initial request. This is known as a P2P network, and it implies that payment processing does not rely on a single entity. This usually occurs in a matter of seconds, hence the name “Lightning.”

Transactions are not susceptible to long wait periods or excessive fees because they are not conducted on the Bitcoin network. As a result, extremely small transactions, known as micropayments, can be made for as low as one satoshi. When a user is done utilizing the network, he can terminate that tunnel and quit, and then use their Bitcoin on the conventional Bitcoin blockchain again.

How Can You Use the Lightning Network?

Assume you wish to do business with your favorite coffee house. To begin, you’d have to transfer some BTC to a digital wallet that involves additional signatures or keys to be released. These are typically known as multi-sig wallets. The Lightning Network enables users to join into a contract that guarantees payment, so producing a balance sheet.

When you order a coffee, a fresh financial report is generated, and you sign it with your key to indicate what’s left in your account and the coffee store’s account. If you no longer intend to purchase coffee from that coffee business, you can terminate the link, and the associated financial report is permanently recorded on the blockchain. Payment conflicts can also be resolved by going to the two parties’ most recent signed balance statement. 

Let’s explore other ways you can connect to the network:

• In case you can’t create a direct link to your favorite purchasing point, the system will determine the quickest route between you and the shop by utilizing other network members.
• If it all seems complex to you then you can download a mobile application from the app store of your Android. Bitcoin Lightning app will create a link automatically. 
• Blue Wallet is a custodian business that hosts a node for you if you wish to utilize the Lightning Network. It will manage your assets for you.

Let’s dive into the Benefits of the Lightning network:

What are the Benefits of Lightning Network?

The prominent benefits of the Lightning Network are quicker and less expensive payments, allowing the transfer of funds in a manner never before feasible. Users would be obliged to pay significant charges for a simple transaction and afterward wait an hour or more for it to confirm without Lightning Network. Little payments have to wait longer because miners prefer to verify bigger payments. After all, the rewards are higher.

The Lightning Network is a layer that sits on top of the Bitcoin network. Because of this relationship, Lightning Network continues to benefit from Bitcoin’s security measures. People can therefore use the primary chain for larger transactions and the Lightning Network’s off-chain for tiny ones without being concerned about security. 

Crypto advocates have also been experimenting with atomic swaps, which is the act of transferring one coin to the other without the assistance of a private entity or exchanges. Atomic Swaps are more convenient than exchanges since they provide near-instant swapping with minimal to no costs or wallet transfers.

The Downside of Lightning Network 

To use the Lightning Network, one must have a wallet that is suitable for it. While it is simple to find a Lightning Network wallet, it must be funded from a standard Bitcoin wallet. The initial transaction from a regular digital wallet to a Lightning Network wallet incurs a fee, so users lose some Bitcoin to interact with the protocol. Users must lock their Bitcoin after depositing funds into the Lightning Network wallet to build a payment channel.

Transferring Bitcoin across accounts can be inconvenient and costly, which discourages new users. However, certain wallets can handle both on-chain and off-chain payments without incurring fees, and the ease is expected to improve with time.

Concluding Thoughts

The rising popularity has created several problems for blockchain technology. The Bitcoin blockchain can process very low transactions per second. Bitcoin Lightning network comes into action to solve these scalability issues.  

The adoption of digital currencies and transactions on them has put a significant strain on blockchains in only just few years’ time. While there have been minor changes—and in some cases forks—to help networks manage increased demand, the Lightning Network, if successful, could pave the way for wider acceptance of cryptocurrencies and their applications.