The first public comment made by James A. Donald on Bitcoin’s 2008 debut was this: “The way I understand your proposal it doesn’t seem to scale up to the required size.” Ten years later, scaling is still a major problem for Bitcoin Lightning Network and other veteran cryptocurrency systems.
What does Scalability mean? Bitcoin can only process around 7 transactions per second throughout its existence. Although this was sufficient at the beginning, it has become congested over the years. Transactions take longer to process, and transaction fees can be very high.
Bitcoin must be able to to compete with existing payment systems if it is to ever become a full-fledged alternative. It’s not even close. You can easily see the enormity of the situation by comparing Bitcoin’s 7 transactions per second with Visa’s 24,000 average and its peak of around 50,000 transactions/second.
The Bitcoin community has made many suggestions over the years to improve Bitcoin’s scalability. However, there is no consensus. We currently have many Bitcoin-like Networks that are branching from the original. One solution is currently under development that may work. It’s the Lightning Network in Bitcoin.
What is the Bitcoin Lightning Network?
Telegrams were the fastest and most efficient method of long-distance communication at one time in human history. You would need to visit your local post office to fill out a form, pay for the message, and then go to the cashier. After that, the message was telegraphed to the nearest telephone office for transmission to the far end. The telegram would then be delivered to its destination by a postman.
It was a complex process that involved many people to send a short message. You also had to pay a lot for it. This is the current status of the Bitcoin Network. The Lightning Network is basically like having someone you want to chat to on speed dial: all you have to do is press “1” and your friend’s phone will ring.
Simply put, the Bitcoin Lightning Network idea might have sounded like this: We don’t need to keep track of every transaction on the blockchain.
What is the secret to it?
- Enter Danny and Jon. They might be friends, relatives, or just a couple. However, they must send money quickly, frequently, and with minimal fees to each other. They created a Lightning Network channel.
- First, they will need to create a multi-signature (or wallet) that both of them can access using their private keys. They then each deposit a specified amount of Bitcoin into the wallet, say 3 BTC.
- They can then perform unlimited transactions between them. If Danny wishes to send Jon 1 BTC, she will need to transfer the ownership rights of that amount. They then use their private keys together to sign an updated balance sheet.
- When the channel is closed, the actual distribution of funds takes place. To determine who gets what, the algorithm uses the balance sheet that was most recently signed. If Jon and Danny decide to close the channel, Jon will get 4 BTC and Danny 2 BTC.
- The channel’s final and initial balance are broadcast to the Bitcoin blockchain only after it has been closed. The Lightning Network in bitcoin allows users to perform multiple transactions without having to go through the main blockchain, and then records them all as one transaction.
- The Lightning Network could eventually be able to answer the endless debate about whether it is possible to buy a cup of coffee in Bitcoins. It seems that it may work. The Network of Lightning channels will allow you to make almost any purchase without incurring any fees.
- This technology could eventually make centralized cryptocurrency exchanges more secure and eliminate the hassle of trading them.
Who invented it?
Currently, three teams work together to develop the Lightning Network. They are Block stream, Lightning Labs, and ACINQ. Other members of the Bitcoin community also contribute. Other implementations are also in development. The full list is available here. This means that they can seamlessly co-exist.
It will be used where, when, and why?
- The Network is still in its infancy. There is no software that real-life users of the Network could use to make transactions. The current implementations are also very buggy. Lightning Network developers advised users to use the tested of Bitcoin to learn more about the Network and not spend real money.
- Developers advise users to be patient as the Network’s code requires extensive testing. The Lightning Network must prove that it is safe and usable before it can be fully adopted by Bitcoin users. Experts predict that a functioning Lightning Network will take anywhere from several months to a few years.
- The reason the Network will be used is simple: Scalability. The Network that solves the main problem of Bitcoin will be most likely adopted by another cryptocurrency.
- This could lead to cross-chain atomic switch technology being further developed, which would be a significant step towards creating truly decentralized cryptocurrency exchanges.
The Lightning Network is still in development, as we have already mentioned. Here are the top benefits of the Bitcoin Lightning Network that you can enjoy if it succeeds:
Once the Network goes live, transactions will not take longer than a few minutes to be confirmed. No matter how busy or slow the Network is, transactions will happen almost instantly. This will allow cryptocurrency to take a huge step towards becoming a payment system like Visa, MasterCard, and PayPal.
Transaction fees will not be charged as transactions will take place in the Bitcoin Lightning Network. This is one advantage of the Lightning Network. Bitcoin can now be used to pay in bars, shops, and cafes.
Lightning Network claims to be capable of transferring Bitcoin and other cryptocurrency transactions at an unprecedented rate of 1,000,000 transactions per second. Users will be able to send money between blockchains as long as they share the same cryptographic haveh function, which most major ones do. This technology is truly revolutionary.
Security and anonymity.
Most cryptocurrencies are not completely anonymous. It is possible to trace the transactions from one wallet into another. The Lightning Network transactions are not traceable because most transactions occur outside the main blockchain. Therefore, it will be nearly impossible to track all micropayments made via Lightning channels.
It is not fully operational.
The main problem with the Lightning Network is that it isn’t fully operational at the moment. This means there is no way to fully assess how great it is. Its concept is great, but it’s not yet possible to know if it will look as amazing once it is.
The complexity of channels.
The Lightning Network is a network of channels that, once established, should allow seamless transactions. It is impossible to predict what could happen if the payment takes too long. The fees can quickly add up if the transaction has to pass through multiple intermediaries.
The Network’s current version has channel caps. This setup makes it possible for users to have liquidity in the Lightning Network channels or outside of them on the main blockchain. This situation is not ideal, especially for people with limited resources.
There have been concerns raised about the formation of “hubs”, which are a type of nodes with large capital that will allow most transactions to go through. Many Bitcoin enthusiasts view this as a further centralization of Bitcoin’s network. However, it is unlikely such hubs will make any significant profits from transaction fees.
It is important to note that both the benefits and drawbacks of Bitcoin Lightning Network are still very much speculation.
Do I need to use the Bitcoin Lightning Network?
Lightning Network is not for advanced users. The best, if not the most important thing, you can do is wait to see if the lightning Network lives up the hype.
Keep in mind that the Lightning Network isn’t the only scaling idea out there. It’s not the undisputed leader in the race with Bitcoin Cash (BCH). There is no end to the fierce debate between Lightning supporters and BCH enthusiasts. One of these proposals could win, but they could also coexist or find a different solution.
The Lightning Network sounds very exciting. Consider what you use your Bitcoins for if it does deliver. The Lightning Network might not be necessary if you are only using the tokens for long-term investments. It doesn’t appear safe to trust it with large transfers.
The Lightning Network is a great alternative to Bitcoin, provided it meets all expectations. It seems to be able to solve most of Bitcoin’s problems, including instant micropayments, anonymity, and almost no fees.