What is the Bitcoin Lightning Network?

The problem with Bitcoin’s scalability became overtly evident during the 2017 bull run, when the network was overtaxed, and transaction fees crept up to $30. The BTC blockchain can only handle a maximum of 7 transactions per second, which puts it far below the speed which it would need for use as a transactional currency.

Multiple proposals have been made to deal with BTC’s scalability issue including: increasing the block size, as well as other efficiency improvements to decrease the amount of computing resources required. The Lightning Network is a solution which seeks to take some of the transactions off-chain. The Lightning network is considered a layer 2 solution, because not every transaction is settled on the Bitcoin blockchain. The lightning network can theoretically do 500 transactions per second, per channel. With over 35,000 channels, it can potentially achieve over 17 million transactions per second. (The Bitcoin Lightning Network whitepaper can be viewed here .)

The Lightning Network grew quickly, but has stalled and remained flat in 2019. Currently it has 10,600 nodes, 35,100 channels, and network capacity is 850 BTC.

Payment Channels provide an Off-Chain Approach to Scalability

The Lightning Network improves the speed of the network by keeping some of the transactions off of the blockchain. It does this using payment channels. Payment channels are the basic building blocks of the Lightning network. Users can open a channel, then route the payment through any other open channel as a node to reach their recipient.

How do Payment Channels Work?

A lightning payment requires that two transactions be added to a Bitcoin block. In order to create a payment channel, two parties must first deposit funds into a multi-sig wallet address. This is called a funding transaction. Funding transactions open up the channel on the Lightning Network.

The total funds that are committed to the channel by the two parties, is the total amount that can used for transactions. Once the channel is established and funds are added, the two parties can start signing and exchanging transactions. These are called commitment transactions.

Commitment transactions are not broadcast to the Bitcoin network, they are done off-chain. 1000’s of commitment transactions can be done, without having to interact with the Bitcoin network. This increases the scalability and throughput of the network.

Closing the Channel and receiving payment

When the two parties decide that they want to close the payment channel, they can make a closing transaction which will be mined and included in the Bitcoin block. The closing transaction resolves the final balance between the two parties. In a Bitcoin lightning network transaction, there are only two transactions that have to be mined, this includes the opening and the closing transactions.

Once a user has received funds, they do NOT have to cash out in order to re-send the funds that they have received. They can re-route the payments that have been made to other providers, without closing the channel.

Lightning Network offers New Applications for Payments

In addition to speeding up TPS on the network, lightning allows for new types of payment applications. These new applications include streaming services which pay by minute, or even second. This type of payment is currently unavailable with other payment methods, due to high fees on credit card transactions.

Social micropayments are another use case that becomes feasible with LN. It allows for social tipping on networks like Twitter or Instagram. Social tipping can become a way to reward users for creating good content or participation in the network.

Top Lapps of 2019 on the Lightning Network

Here is a link to reviews of the best lightning network applications of 2019. Top Lapps include:

  1. tippin.me – a social network tipping app.
  2. lnsms.world – a world-wide sms texting app.
  3. lncast.com – content monetization app.
  4. sparkswap.com – atomic swap app.
  5. satoshis.games – game app.

Negatives of the Lightning Network

Some critics say that the lightning network is centralized due to the fact that a large number of payments flow through the same channels. Centralization could be an issue. Some believe that it might actually encourage centralization into payment hubs. This can be visualized by the graph below:

Andres Antonopolus refutes the statement that the Lightning Network is centralized. He also refutes a number of common misconceptions about the LN.

Benefits and Improvements coming to the Lightning Network

Some of the benefits of the Lightning Network include improved privacy, speed, as well as the ability to earn money by running a node. It has improved privacy, with all transactions being encrypted and routed through multiple nodes.

Soon to be updated features include a better wallet experience with alot of the complexity of the network being hidden from users. Users will soon be interacting with the Lightning Network without even realizing it!