What is the Lightning Network

 

What is the Lightning Network?

Lightning Network is analogous to driving in the ‘city bus’ which is way cheaper than traveling in the ‘taxi’- from Thimphu to Paro. It can be also compared to a Bank of Bhutan Branch office which also serves the customer, then the customer visiting the Bank of Bhutan HQ where so many customers are in queue-the customer can withdraw/deposit cash faster in branch office (due to less customers) than wasting time at the HQ in the queue.

Lightning Network is a layer-2 solution on the Bitcoin blockchain aimed at improving the scalability of the blockchain. Lightning Network is associated with Bitcoin. While bitcoin was created as p2p electronic cash system, and without any intermediary, the creator(s) seem to have not thought of the scalability and the transaction throughputs.

While at the initial stages, there was not much of a hassle, but at the later stages, the blockchain found hard to balance across decentralization, scalability, and the security. The scalability in this section means the ‘transaction time’ taken to complete in the blockchain. Ethereum has the transactions per second (TPS) of 30, while Solana has 65,000 TPS, and Bitcoin only 5 TPS. Thus, with such competition, the only scalable solution left for Bitcoin and Ethereum is on the layer-2 solution to speed up the transaction speed.

In Feb, 2015, Joseph Poon and Tadge Dryja came together to solve the issue namely, ‘the increase in transaction fees’. And the name of the solution is Lightning Network. In Jan, 2016, a detailed white paper on Lightning Network was published with attracted more developers to collaborate with the duo.

Within a couple of years after the white paper and developer collaboration, Lightning Labs (the company that maintains the Lightning Network) released a beta version for developers to test. This started attracting heavyweights in the tech industry to take notice of the plans of Lightning Labs and the value the layer-2 solution can add to the greater ecosystem. 

Some of the noteworthy features and products built over the Lightning Network are as follows:

• Loop: Loop allows users to make a Lightning transaction to an on-chain Bitcoin address or send on-chain Bitcoin directly into a Lightning channel.
• Pool: Pool helps manage the liquidity needs of the Lightning Network user.
• Taro: Taro helps issue or mint assets on the Lightning Network.
• Faraday: Faraday is a data analytics tool that helps node operators optimize channels and the flow of funds.

The lightning network leverages the concept of payment channels allowing transacting parties to send an unlimited number of transactions that are nearly instant and inexpensive. It acts as its own ledger for users to pay for even smaller goods and services, without affecting the Bitcoin network.

The two parties can transfer funds to each other indefinitely without informing the main blockchain. As all transactions on the layer-2 protocol do not need to be approved by all nodes, it substantially speeds up transactions. 

Lightning Network nodes capable of routing transactions are formed by combining individual payment channels between the concerned parties. Therefore, the Lightning Network is the outcome of many payment channels being linked together.

Eventually, when the two parties decide to finish transacting, they can close the channel. All of the channel’s transactions are then consolidated into one transaction, which is sent to the Bitcoin mainnet to be recorded. Consolidation ensures that many small transactions do not clog the network at once. Some of the advantages of Lightning Network are:

• Scalability
• Speed
• Micropayment support
• Low energy requirements.