What is The Bitcoin’s Lightning Network?
Over the years, ever since Bitcoin was first proposed by Satoshi Nakamoto, one of its biggest challenges to date is scalability. While this is a major problem affecting Bitcoin, it is not the only one faced with this challenge, as other veteran cryptocurrency systems are also battling issues surrounding scalability. One important question that might probably be going through your mind at this point is what is the meaning of scalability.
Ever since the emergence of Bitcoin technology, it has only been able to process around seven transactions per second. At its earlier stage, this was enough; however, over the years, the system has become congested, which has resulted in transactions taking longer to process as well as a high amount of transaction fees.
For years now, the Bitcoin community has come up with numerous proposals and ideas on how to improve Bitcoin scalability and overcome the present limitations of the blockchain technology; however, they are yet to reach an overall resounding consensus, which is why there are various Bitcoin-like networks, branching out from the original one. One of the proposed solutions that this article will focus on is called “The Lightning Network.”
What is the Lightning Network?
At one point in time, one of the fastest and most efficient ways of long-distance communication was through the sending of a telegram. Now, this was done by going to your local post office, filling a form, and paying for the message based on how many letters were in it, after which the message would be telegraphed to the closest telegraph office before a postman finally delivers the telegram to its destination. In this case, there were numerous individuals involved in the process of sending the short message, plus you also had to pay for it. This analogy is similar to how the Bitcoin network currently operates, which leads us to the lightning network.
The Lightning Network refers to a network present on the blockchain and serves the purpose of facilitating peer-to-peer transactions. This feature is not exclusive to Bitcoin alone, as some other cryptocurrencies like Litecoin have incorporated it into their system. The Lightning Network is also known as a “layer two or off-chain solution,” which provides individuals the benefit of carrying out transactions without the need of recording every transaction on the blockchain. The Lightning Network and the Bitcoin Network are separate from each other. The Lightning Network has its software and nodes; however, it still communicates with the main chain. In this case, users are tasked with creating special transactions on the blockchain before they can exit or enter the Lightning Network.
The first transaction is a way of building a form of smart contract with another user. Let’s say the smart contact is holding a private ledger with the other user. Users are capable of writing numerous transactions to this ledger, plus they are only visible to users and their counterparty; however, none of the parties involved can cheat as a result of unique set up features.
This mini ledger is referred to as a channel, plus at any time, either party can publish the current state of the channel to the blockchain, after which the balances available on the channel are distributed to the individual parties on-chain. The name Lightning network is not just for show as their transactions are very fast. Users don’t need to wait for block confirmations, and transactions can be carried out swiftly based on how fast your internet connection is.
Why Do We Need Lightning Network?
The Lightning Network, or rather LN, is simply one of the most reasonable approaches to solving the problems associated with the scalability of the Bitcoin blockchain. Coordinating and making changes to a broad ecosystem like the Bitcoin blockchain is not only tricky, but it also presents possible risks like potentially damaging bugs and hard forks. Experimentation, in this case, can be hazardous as well as pose a possible threat, especially with a large amount of value at stake.
However, it is safe to say that the use of the Lightning Network provides numerous benefits, some of which include;
Every ten minutes, approximately, Bitcoin blocks are being created, plus they are capable of holding a large number of transactions. A limited resource is block space, which is why users have to bid against other users in other to get theirs included promptly. All miners are first of all interested in getting paid, which is why they include transactions with higher fees.
In a situation where there are only a few users sending funds simultaneously, you can set a low fee transaction, which will most likely be included in the next block. However, when many users are trying to carry out transactions simultaneously, this causes the average fee to rise. With the Lightning network, users can pay fees which are for opening and closing the user’s channel. Once the channel is open, users and their counterparty can carry out numerous transactions for free, after which the final state of the blockchain must be published.
Block space will be used more efficiently if more users rely on off-chain solutions such as the Lightning Network. High frequency and low-value transfers can be made in payment channels, while block space can serve the purpose of channel opening and closing as well as for larger transactions. Through this, the system would become accessible to a wide range of users, which will allow it to scale in the long run.
There is a limited amount of bitcoin which can be sent during a transaction; however, the Lightning network allows you to surpass the minimum amount, which is one of the reasons why it is more appealing for micropayments. Regular transaction fees make it impractical to send little amount on the main chain. However, within a channel, users can freely send a fraction of a Bitcoin. There are numerous use cases in which micropayments are perfectly suited. Some are already of the opinion that they could be a possible replacement for subscription-based models, which allows individuals to pay little amounts each time they use a service.
Another benefit that the Lightning Network offers is that it provides users with a high level of confidentiality as parties involved don’t necessarily need to make their channels known to the broader network. While the transaction might be visible on the opened channel, no one will be able to tell what is going on inside except for the participants who choose to make their channel private.
Ever since the launch of the Lightning Network in 2018, its growth has been impressive as well as progressive. Though there is still some technical proficiency when it comes to operating a lightning node, however with the numerous developments taking place, it is safe to say that these barriers will be reduced over time, and the Lightning Network would become an essential aspect of the Bitcoin ecosystem.
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