How does the Bitcoin Lightning Network work? Beginner's guide

The Lightning Network is a second layer added to the Bitcoin (BTC) blockchain that enables off-chain transactions, or transactions between parties that are not connected to the blockchain network.

What is the Lightning Network in Bitcoin, and how does it work?

The Lightning Network allows people to send bitcoin by interacting with a Bitcoin network node rather than a digital currency wallet. This removes the need to hold digital currency, which makes it safer and more convenient than other options such as sending directly from a private key or offline storage, and eliminates the need to trust a third-party service.

The Lightning Network (abbreviated LN) is 'Lightning' in reference to the lightning bolt that is so common in lightning-inspired art. The Lightning Network is a second layer scaling solution for the Bitcoin blockchain that is built on top of the Bitcoin protocol and provides an on-ramp to the block chain so as to offer a more scalable solution to Bitcoin adoption for the masses.

Miners are rewarded with bitcoins for submitting transactions to the Lightning Network. This is achieved through \"blocks\" being validated by miners, which then get a reward for doing so.

It is What it is: a second-layer solution to the Byzantine Generals Problem built on top of the Bitcoin blockchain.

The Lightning Network allows users to “pay” other users by instantly transferring digital currency, Allowing them to avoid expensive, slow, and inconvenient exchange platforms like Coinbase

What is the Lightning Network in Bitcoin

The Lightning Network is a second layer added to the Bitcoin (BTC) blockchain that enables off-chain transactions, or transactions between parties that are not connected to the blockchain network. The second layer is made up of many payment channels between parties or Bitcoin users. A Lightning Network channel is a two-party transaction technique that allows parties to send and receive money. By managing transactions outside of the blockchain mainnet (layer one), layer two improves the scalability of blockchain applications while still benefiting from the mainnet's robust decentralized security model.

The lack of scalability is a major impediment to the mainstream adoption of cryptocurrencies. A blockchain network, when appropriately scaled, can process millions to billions of transactions per second (TPS). In this context, the Lightning Network charges low fees by transacting and settling off-chain, allowing for new use cases such as instant micropayments, which can solve the traditional "can you buy coffee with crypto" conundrum by shortening processing times and lowering the costs (energy costs) associated with Bitcoin's blockchain.

While the intention is good, the Lightning Network is still struggling to tackle the problem and has even introduced new issues such as low routing prices and malicious assaults. To start and close a payment channel, for example, there is a minor cost. Routing fees, on top of these minor costs, are paid to nodes that validate transactions.

The question now is why would a node want to validate a transaction with such a cheap routing fee?

The obvious argument is that miners do not frequently validate smaller transactions because they will earn lesser fees for doing so. As a result, traders must pay a routing fee and may have to wait a lengthy time for their transaction to be confirmed. In terms of harmful assaults, a bad actor may open many payment channels and then cancel them all at the same time. Those channels must then be authenticated, which causes network congestion by getting in the way of authorized ones. During a traffic jam, the attacker may be able to withdraw funds before legitimate parties are aware of the situation.

In a paper titled "The Bitcoin Lightning Network," two researchers, Thaddeus Dryja and Joseph Poon, proposed the Lightning Network in 2015. Satoshi Nakamoto, the anonymous creator of Bitcoin, had previously discussed payment mechanisms in his writings. Mike Hearn, a colleague engineer, told Nakamoto about payment channels, and the conversations were released in 2013.

The abstract of the study describes a payment channel-based off-chain system. Due to the off-chain nature of payment channels, two untrusted parties can transfer value without clogging the mainnet. The purpose of off-chain channels is to address Bitcoin's scalability issue. Dryja and Poon went on to say that during the holidays in 2013, Visa had a peak of 47,000 TPS.

To even get close to Visa's TPS, Bitcoin would have to handle eight terabytes of transactions per block, which is far beyond the existing blockchain's capabilities. Bitcoin could only handle seven transactions per second at first, assuming each transaction was roughly 300 bytes. Plus, at the time, Bitcoin's blocks had a one-megabyte transaction limit, thus there was no way that 47,000 Bitcoin transactions could fit in a single block. The Lightning Network's off-chain payment channels were designed to address Bitcoin's lack of scalability by allowing multiple, smaller transactions to exist without clogging the network.

Dryja and Poon (together with a few other contributors) formed Lightning Labs in 2016, a firm committed to the development of the Lightning Network. Lightning Labs managed to make the protocol compatible with the core Bitcoin network despite many team member changes over time. After Bitcoin's SegWit-based soft fork in 2017, which freed up room for additional transactions to fit in each block and fixed a long-standing Bitcoin flaw known as transaction malleability, a breakthrough became conceivable. Users were able to create bogus transactions, deceive the network, and keep their Bitcoin in their wallets as a result of the flaw.

Developers could build apps on the Lightning Network straight away thanks to pre-launch testing. Simple use cases such as wallets and gambling sites were among the apps that took advantage of the Lightning Network's microtransactions.

Lightning Labs released a beta version of its Lightning Network implementation to the Bitcoin mainnet in 2018. Public celebrities like Twitter founder Jack Dorsey began to get involved with the initiative around this time. Dorsey, for example, employed a group of developers to work solely on the Lightning Network and paid them in Bitcoin. In the future, he wants to integrate the Lightning Network into Twitter.

How does the Lightning Network work?

This protocol allows two parties, such as a customer and a coffee shop, to establish a peer-to-peer payment channel. Once formed, the channel allows them to send a limitless number of nearly instantaneous and low-cost transactions. It functions as its own ledger, allowing users to pay for even smaller goods and services like coffee without disrupting the Bitcoin network.

The payer must deposit a particular quantity of Bitcoin into the network to establish a payment channel. The recipient can invoice any amount of Bitcoin once it has been locked in. If a consumer wants to keep the channel active, they can add Bitcoin on a regular basis.

Both parties can transact with each other utilizing a Lightning Network channel. Some transactions on the Bitcoin blockchain are treated differently than typical transactions. When two parties open and stop a channel, for example, only the main blockchain is updated.

The two parties can transfer funds forever between themselves without informing the main blockchain. This technique significantly reduces transaction latency because all transactions inside a blockchain do not need to be approved by all nodes. Individual payment channels between the parties are combined to construct Lightning Network nodes capable of routing transactions. As a result, the Lightning Network is the result of the interconnection of numerous payment systems.

When the two parties have completed their transactions, they can close the channel. The information from the channel is then combined into a single transaction and delivered to the Bitcoin mainnet for recordkeeping. Consolidation prevents dozens of small transactions from flooding the network at the same time by combining them into a single transaction that takes nodes less time and effort to confirm. Smaller transactions get in the way of larger transactions without payment channels, clogging the network and adding more for nodes to validate.

Let's imagine Mike goes to a neighborhood coffee shop every day and wants to pay with Bitcoin. He could make a modest transaction for each coffee cup, but the transaction could take over an hour to validate due to Bitcoin's scalability concerns. Mike will also have to pay the Bitcoin network's hefty fees, despite the fact that his transaction is insignificant. Traditional payment methods such as a card work for small transactions because organizations like Visa have the infrastructure to process more than 24,000 TPS. Bitcoin, on the other hand, can validate seven TPS on a regular basis.

Lightning network transactions between Mike and a local coffee shop

Mike can set up a payment channel with the coffee shop using the Lightning Network. Each coffee purchase is tracked in that channel, and the business is still compensated. The transaction is both inexpensive (perhaps even free) and quick. Mike can then choose whether to shut the channel or replenish it once the Bitcoin that began it has been spent. When a channel is closed, all of its transactions are added to the Bitcoin blockchain.

A smart contract is created between two parties using the Lightning Network. The agreement rules are coded into the contract upon creation and cannot be broken.

Contract fulfillment is also automated with smart contract code, as contracts are created with pre-determined requirements that both parties agree to. When such conditions are met, such as when a consumer pays the exact amount for a cup of coffee, the contract is automatically fulfilled without the intervention of a third party. Once a transaction has been validated, the Lightning Network anonymizes it. Anyone can only observe the overall value transfer, not the individual transactions within it.

It is perfectly possible to perform transactions outside of the blockchain without any constraints. Because off-chain transactions wind up on the mainnet once payment channels are closed, they may be trusted to enforce the blockchain. All transactions are decided by the mainnet. While off-chain protocols have their own ledger, the mainchain, which is at the heart of the Lightning Network's design, is always connected to it. Off-chain protocols can only exist if there is a mainchain to build on.

The Lightning Network's apparent benefits include faster and cheaper transactions, as well as the ability to make micropayments in ways that have never been feasible before. Users would have to pay significant fees for a simple transaction without the Lightning Network, and then wait an hour or more for it to validate. Smaller transactions have longer wait times because miners prefer to validate larger transactions since they earn more money.

The Lightning Network is a layer on top of the Bitcoin blockchain that is connected to it. Because of the connection, the Lightning Network continues to benefit from Bitcoin's security protocols. Users can then use the main blockchain for larger transactions and the Lightning Network's off-chain for smaller transactions without fear of security. The Lightning Network payment channels also allow private transactions, as observers can only see the total package, not each individual transaction.

Cryptocurrency fans have also been experimenting with atomic swaps, which is the act of switching from one cryptocurrency to another without the use of a middleman or an exchange. Atomic Swaps are more beneficial than exchanges since they provide near-instant swapping with little fees and no wallet transfers.

Cons of Lightning Network

To use the Lightning Network, one must first have a wallet that is compatible with it. While it is simple to find a Lightning Network wallet, users must fund it using a standard Bitcoin wallet. Users lose some Bitcoin to engage with the system because the initial transaction from the traditional to the Lightning Network wallet costs a fee. Users must lock up their Bitcoin after depositing funds into the Lightning Network wallet in order to build a payment channel.

Sending Bitcoin between wallets can be inconvenient and costly, which discourages newcomers. However, certain wallets can handle both on-chain and off-chain transactions without incurring fees, and the ease will likely improve with time.

If one of the payment channel participants wants to withdraw funds, they must first actively stop a channel and obtain the Bitcoin back before they can use it. It's not possible, for example, to withdraw a small amount of money while leaving the channel open. Even stopping or starting a payment channel necessitates an initial transaction known as a routing fee from both parties. While the premise of creating a channel is straightforward, all of these additional fees make the process more expensive than many potential customers are willing to pay.

Offline transaction scams are one of the most serious issues with the Lightning Network. If one party in a payment channel chooses to close it while the other is offline, the funds can be stolen by the former. It's too late to accomplish anything when the latter party eventually connects. The fraudster can just go unnoticed because there is no way to contact them.

In addition, there are flaws in the Lightning Network, such as blocked payments, which are outbound transactions that are not verified. A stopped payment will be refunded by the Bitcoin network, but it may take days to receive because genuine transactions receive higher priority than stuck transactions when it comes to verification.

Finally, even if the Lightning Network resolves all of its concerns, regulators must be considered. Regulators may find it difficult to comprehend Lightning Network sufficiently to establish appropriate legislation. If authorities have trouble, mainstream crypto users may have trouble using the Lightning Network. Even if regulators understand the protocol, the Lightning Network's secrecy may prevent it from being approved. Legislators may be put off by anonymous transactions because they can only view a completed transaction after a user closes their payment channel, not the individual transactions done within it.

The future of Lightning Network

Adoption of the Lightning Network, on the other hand, is increasing. According to DappRadar, the Lightning Network has over $110 million in Bitcoin locked up. This might include people who pay for goods and services, use applications, gamble, and so on.

Some apps, like as Lightning Network compatible wallets, are critical to network usage. Because the Lightning Network is a separate protocol from Bitcoin's mainnet, it necessitates the usage of a new wallet in order for users to construct payment channels. Traders can't use the Lightning Network until their wallets are optimized. The industry should expect more wallet developers to integrate Lightning Network functionality if Lightning Network popularity continues to expand. Dedicated users can also become nodes, reducing transaction times on the Lightning Network.

It's also worth noting that Lightning has progressed to the point where it can now be used as a layer-two solution on a variety of projects. Cryptocurrency exchanges are also beginning to support the protocol, allowing as many traders as possible to use it. Traders that use exchanges that use the Lightning Network can withdraw tiny amounts of Bitcoin quickly and cheaply (even when Bitcoin is congested). Due to Bitcoin's existing infrastructure, users may face large transaction fees and long wait times if the Lightning Network is not implemented.

The Lightning Network has also included Watchtowers, a third-party security service made up of numerous specialized nodes. Some nodes go offline on occasion, leaving their payment channels vulnerable to offline transaction fraud. A participant can pay a small price to a watchtower and submit a signifier linked to the channel transaction instead of leaving their channel unattended. The watchtower uses the signifier to distinguish the user's channel from the rest and monitors it.

If the watchtower detects malicious behaviour, such as an effort by the opposing party to block the payment channel, the funds will be promptly frozen and refunded to the offline user. The watchtower will also punish the harmful party by deducting payments from their account.

No comments
Post a Comment

    Reading Mode :
    Font Size
    lines height