In response to the shortcomings of Bitcoin, the Lightning Network was developed with the aim of increasing the speed of transactions. In addition to increasing the speed of the script, the Lightning Network is taking impressive steps to increase privacy and anonymity for users. Since its launch, it has grown by leaps and bounds, reaching several stages in a short period of time.
The Bitcoin Lightning Network, which is widely considered the best option to compete with the rapidly changing cryptocurrency environment, still has some factors hindering its further development.
From a technical point of view, the Bitcoin Lightning Network can be described as a second-level protocol that is built on top of the Bitcoin blockchain to allow users to transfer BTC through their digital wallets, such as WallBTC, BitTeam. It is a peer-to-peer mechanism to facilitate payments through bidirectional payment channels without the need to delegate the storage of funds.
In other words, the Lightning Network is like having a direct channel between two parties that allows them to perform transactions between them without having to record every transaction in the block chain.
This provides the parties with an almost instantaneous transaction and reduces the amount to be paid as a fee to a minimum.
History of the Bitcoin Lightning Network
Just 6 years after the launch of Bitcoin, the scalability problem could no longer be ignored. According to Coinmarketrate.com at that time, the market capitalization of the asset increased to $10.90 billion, while daily volumes amounted to about $32 million.
Adoption was slowly gaining momentum, while the backlog in transactions and fees remained a source of concern for the community. On January 14, Joseph Poon and Thaddeus Drija teamed up to publish a Lightning Network whitepaper. This 59-page document laid the foundation for the further development of the network.
The growth of the Lightning Network gave rise to the famous Bitcoin Lightning Torch in 2019. The launch of “Torch” took place 292 times before it reached a hard-coded step that showed how global the network has become.
Since then, the Lightning Network has received support from nominal leaders of the cryptocurrency community, such as Jack Dorsey, Changpeng Zhao, Andreas Antonopoulos and Elizabeth Stark.
How the Lightning Network works
The Lightning Network is a Layer 2 protocol based on the Bitcoin blockchain. It uses the existing infrastructure and security of the crypto asset with the ultimate goal of improving the scalability of the network. Andreas Antonopoulos called it a “second-level routing network”.
Parties wishing to use the capabilities of the Lightning Network will have to create a channel. Creating a channel will require users to commit an amount called a financing transaction.
To create a channel, users will need to create a multi-signature wallet that they can all access with their own private keys. After creating wallets with multiple signatures, users will have to deposit BTC into the wallet, and then prepare for the stage to perform several transactions between them.
Funds can be transferred between the parties within the channel, while the maximum limit is the amount allocated for the channel when it is opened. The balance is updated by the parties using their private keys.
The algorithm uses the balance to decide who gets and how much they should get, and after the channel is closed, the information is recorded in the blockchain. This gives the advantage of combining multiple transactions and combining them into a single transaction before writing them to the block chain, which saves time and money.
To provide additional security for transfers, a Hashing Temporary Blocking Contract (HTLC) is used. HTLC is, in fact, a channel contract that is implemented through the blockchain and is usually intended for revocation.
The use of CheckLockTimeVerify creates the possibility for penalties, which forces each party to act in good faith during transactions. Security nodes have also been deployed to monitor the network for fraud.
Advantages of the Bitcoin Lightning network
The Bitcoin Lightning Network offers significant advantages to the ecosystem. The most serious advantage that it offers to users is the speed of transactions. The Lightning Network offers users a speed that usually cannot be obtained in a conventional Bitcoin blockchain.
The speed of transactions in the Lightning Network is set in less than a minute, while some transactions can be completed in less than 5 seconds. On average, the PTC network takes 10 minutes to confirm a transaction, and this can vary greatly, which makes the speed offered by the Lightning network revolutionary.
Another advantage that it offers is the “granularity”, meaning that users can make payments in denominations of less than one satoshi. For example, millisatoshi are paid to intermediate nodes as a routing fee.
Privacy is raised a step higher due to the nature of transactions on the network, because details are not publicly recorded in the block chain. Funds can be redirected through other channels that hide the source and purpose of the transaction.
The network provides an answer to the constant question about the scalability of the blockchain. It removes the limit on the number of transactions per second for Bitcoin, and raises it to unprecedented heights. It is said that the Lightning network can allow up to 1 million transactions per second, while the Bitcoin network can only process 7 transactions per second.
The disadvantage of the Lightning Network
Despite all the positive aspects associated with the Lightning Network, work on it is still ongoing, since certain shortcomings affect the network. The most serious of the disadvantages affecting the network is the fluctuations in prices for military-technical equipment, which prevent the asset from fulfilling its role as a means of exchange.
Another source of concern for users of the network is the security gaps that arise as a result of its use. The first area of the security problem is that staying online for such a long period of time exposes the nodes to risk compared to the computer on which the private keys are stored. Offline transactions are possible, but they are fraught with risk, since they create the opportunity for fraudulent closing of the channel.
Malicious actors can create many channels and cause their simultaneous expiration, which will cause an overload in the blockchain. This poses a serious risk, since funds may be stolen as a result of overloading. Thaddeus Drija noted that this “may be the biggest systemic risk” of using the Lightning Network.
Another disadvantage of using the Bitcoin Lightning Network is the fees associated with it. The fee is charged when the channel is opened and closed, and there is also a need for a commission for routing payments moved between channels. Someone may argue that the fees are insignificant, but they still exist, and may deter some people from using the Network.
Metrics of the Bitcoin Lightning network
The Bitcoin Lightning network has been steadily gaining popularity since its creation and continues to grow. In April, the number of nodes in the network was 10,000, and fast forward to August, and their cost is much higher than 22,781 BTC. In the last month alone, the network has grown by as much as 20%, as 1,821.29 BTC are blocked in more than 56,000 channels.
The speed of Network adoption has increased in South America, and El Salvador’s decision to legalize Bitcoin has also led to an increase in Network usage in this country. In 2020, the Lightning Pool was launched, giving users the opportunity to earn income, and this served as an incentive for further implementation.
The exchanges did not stand aside, as they also adopted the Network.
Satoshi Nakamoto’s invention changed the financial landscape of the world after the asset class he created grew dramatically and reached a market capitalization of more than $1 trillion. The growing proliferation has exposed the scalability problem that has plagued Bitcoin.
The network has practically changed the rules of the game for Bitcoin, as it offers unprecedented speed, privacy and lower fees. These functions have led to a wider distribution, as well as to the installation of simply impressive indicators.
Although it has its drawbacks, it is still a work in progress that has huge potential to significantly improve the Bitcoin network.