You might be wondering what is a Lightning Network? In this article, we’ll cover how the Lightning Network works, it’s benefits to the cryptosphere, and the future of the Lightning Network.

In a 2015 white paper, Joseph Poon and Thaddeus Dryja presented their Lightning Network idea as the solution to enhance the acceleration of transactions on Bitcoin’s blockchain. The main idea is that the network sits on top of the blockchain and will settle payments between users with private channels without registering them on the primary ledger.

The Lightning Network is an off-chain network that allows users to set up private channels between themselves to record their transactions, which will only become part of the blockchain once the channel is closed and the final balance is settled. Its underlying idea is that not all transactions need to be recorded on the blockchain.

The network is built in a way to allow users to transfer money to each other without having to make all their transactions public on the Bitcoin blockchain. This is done by disciplining uncooperative participants through time-based script extensions like CheckSequenceVerify and CheckLockTimeVerify.

In its simplest form, the Lightning Network is a decentralised system used for instant and high-volume micropayments, with the added benefit of reducing the risk required to trust third parties.

How does it work?

The Lightning Network uses multiple steps to achieve its end result. To understand the network better, let’s take a look at these steps. For the network to be capable of functioning, it needs to be connected to a wallet. This isn’t an ordinary cryptocurrency wallet, though. It needs to be a multi-currency wallet. This wallet is then set up by at least one party involved, and the wallet address is then saved on the public Bitcoin blockchain. The wallet is set up alongside a balance sheet, the purpose of which is to prove how much of the asset belongs to whom.

After this is set up, the two parties involved can partake in a large number of transactions without needing to request information stored on the blockchain. Because of this, the sender and receiver are able to carry out their transactions directly. This is done by each party involved modifying the balance sheet with each transaction. This accurately shows how much cryptocurrency the wallet holds and who the owner is.

After each transaction, and after the sheet has been updated, both parties keep hold and have access to the transactions recorded. This stops the need to upload all transactions onto the Bitcoin blockchain. If there’s ever a time where the payment channel is closed, the parties can use the balance sheet to pay out their share of the wallet. This means the Lightning Network can only be used for micropayments, and large payments need to be done through the Bitcoin main network.

As it stands, the Lightning Network is one of the largest developments regarding multi-party smart contracts in the world. It achieves this by taking advantage of Bitcoin’s built-in scripting language to lock BTC in and out of Lightning channels across its network.

Benefits to the cryptosphere

Not only are transactions faster with the Lightning Network, but it also improves the overall privacy of Bitcoin. The network allows Bitcoin to be an even more popular cryptocurrency as no matter how small the payment, it will be settled instantly. This will help Bitcoin in terms of widespread adoption and gives it a higher chance of being accepted as a form of payment throughout the world.

As we briefly discussed, the Lightning Network improves the overall privacy of Bitcoin. All transactions completed on the network are encrypted and anonymous. They are only stored on the blockchain after the payment channel is closed and the balance is paid out to both parties, making it practically impossible to hack into.

The Lightning Network also allows for cheaper transaction fees. The two-layer scaling solution developed for BTC has played a large role in scaling. The network now has more than 5,150 nodes and around 18,500 open payment channels, making way for a far more advanced payment system. The estimated transaction fee on the network is $0.049 for around 42 transactions.

Final thoughts and the future

The Lightning Network has the potential to supercharge the cryptocurrency industry and eradicate any doubts regarding its supremacy over traditional banking. With effective microtransactions and no more latency and scalability issues, cryptos will lead the payments industry.

In an article by Coin Rivet, we discussed a new feature of the Lightning Network which allows users to receive funds from other users without the need to create a Lighting invoice first.