A Complete Guide to Lightning Network: The Future of Bitcoin
The Lightning Network (LN) is an overlay network, which means it’s not a blockchain, a side chain, a state chain, or another kind of chain. It is a peer-to-peer network that works alongside Bitcoin and secures its transactions with Bitcoin.
Lightning Network makes advantage of the Bitcoin blockchain’s consensus rules and security to offer speedy and low-cost transactions.
Now, as we’ve busted a widespread myth that LN is a blockchain, let’s have a look at the history of the lightning network.
History of Lightning Network.
Thaddeus Dryja and Joseph Poon, two academicians, suggested the Lightning Network in 2015, in a paper titled “The Bitcoin Lightning Network.” Their papers were based on first discussions about payment mechanisms by Satoshi Nakamoto, Bitcoin’s enigmatic creator.
Nakamoto disclosed payment channels to fellow engineer Mike Hearn, who released the discussions in 2013.
The article’s summary outlines an off-chain protocol made up of payment channels.
Due to the existence of off-chain payment channels, two unknown parties can exchange value without blocking up the mainnet. Off-chain channels are intended to address Bitcoin’s scalability issue.
The proposed Lightning Network’s off-chain payment channels were designed to solve Bitcoin’s lack of scalability by allowing for a variety of smaller transactions to existing without congesting the network.
The Lightning Network is an off-chain scaling solution for Bitcoin that enables immediate payments across the network.
When Lightning Network was introduced?
Dryja and Poon launched Lightning Labs (together with a few other collaborators) in 2016, a firm committed to developing the Lightning Network. Despite several team member changes over time, Lightning Labs strived to ensure that the protocol was compatible with the main Bitcoin network.
A breakthrough became feasible after Bitcoin’s SegWit-based soft fork in 2017, which freed up room for additional transactions to fit in each block and fixed a long-standing Bitcoin problem known as transaction malleability. The flaw allowed users to create bogus transactions, deceive the network, and keep Bitcoin in their wallets.
Developers may build apps on the Lightning Network straight away, thanks to pre-launch testing. Simple services like wallets and gambling sites were among those that took use of the Lightning Network’s microtransactions.
Lightning Labs eventually released a beta version of their Lightning Network application to the Bitcoin mainnet in 2018. At this point, famous personalities such as Twitter co-founder Jack Dorsey began to get involved with the project.
Dorsey, for example, recruited a group of developers to focus only on Lightning Network development and paid them in Bitcoin. In the future, he also intends to integrate the Lightning Network into Twitter.
In which Bitcoin Improvement proposal (BIP) LN was introduced?
Dryja and Poon stated that Visa reached a high of 47,000 TPS during the holidays in 2013. To compete with Visa’s TPS, Bitcoin would need to handle 8TB of transactions every block, which was far above the existing blockchain’s capabilities.
Initially, Bitcoin could only process seven transactions per second, assuming each transaction was about 300 bytes in size. Furthermore, Bitcoin’s blocks only had a one-megabyte transaction limit at the time. Thus, there was no way for 47,000 Bitcoin transactions to fit in a single block.
Joseph Poon and Thaddeus Dryja created the BIP linked with the Lightning Network in 2015. The protocol makes BTC’s tx architecture more scalable by allowing off-chain immediate payments.
This is accomplished mainly by establishing micropayment channels, which would enable money transactions to take place without the danger of counterparty theft.
From a technological viewpoint, we can see that the value of LN is enabled by the introduction of multi-signature wallets, which allow an endless number of transactions to take place without the need to keep the accompanying data on the original BTC blockchain.
The only data stored on the blockchain is the total amount of BTC accessible in the linked wallet and the contribution percentages of the participating parties.
Finally, in addition to facilitating rapid transactions, the Lightning Network enables cross-chain payments and smart contract use.
Payment channels are mechanisms that allow us to construct Bitcoin transactions that are secured by the blockchain but are not recorded on the blockchain
The channels allow us to take these transactions off-chain. These transactions can occur only between two peers in the same trustless manner that Bitcoin supports but without being validated without the rest of the network.
We can significantly increase the scale and capacity of the Bitcoin blockchains and accelerate the settlement of transactions from minutes to seconds and allow for microtransactions.
The Lightning Network uses payment channels to make Bitcoin transactions fast, very cheap and equally secure as the Bitcoin network while increasing privacy.
Payment channels rely on a series of Bitcoin security primitives. They compose these primitives together using the scripting language to create a second layer above Bitcoin that uses the underlying trust from the Bitcoin security primitives to accelerate and increase capacity for Bitcoin transactions.
How does the Lightning Network work?
LN allows two parties, for example, a consumer and an ice cream shop, to establish a peer-to-peer payment channel. Once created, the channel will enable users to communicate a limitless number of near-instant and low-cost transactions.
It functions as its own tiny ledger, allowing users to pay for even smaller items and services like buying a pastry without interfering with the Bitcoin network.
To establish a payment channel, the payer must deposit a specific quantity of Bitcoin into the network. Once the Bitcoin is secured, the receiver can invoice the amount as they see fit. If the consumer wishes to keep the channel active, they can add Bitcoin regularly.
Both parties can transact with each other over a Lightning Network connection. When compared to regular Bitcoin blockchain transactions, some transactions are processed differently. For example, when two parties open and cancel a channel, the main blockchain is updated.
The two parties can transfer payments forever without informing the main blockchain. Because all transactions inside a blockchain do not need to be authorised by all nodes, this technique dramatically decreases transaction latency.
Individual payment channels between the parties are combined to build Lightning Network nodes capable of routing transactions. As a result, the Lightning Network is the result of several payment systems being connected together.
When the two parties have completed their transaction, they can shut the channel. The information from the channel is then aggregated into a single transaction and delivered to the Bitcoin mainnet for recordkeeping.
Consolidation stops dozens of small transactions from spamming the network at the same time by merging them into a single transaction that nodes must validate in less time and effort.
Smaller transactions get in the way of larger ones without payment channels, congesting the network and adding more for nodes to validate.
Let us understand the working of LN with the help of a real-life scenario.
Assume Jimmy visits a neighbourhood ice cream shop every day and wishes to pay with Bitcoin. He could make a tiny transaction for each ice cream cup, but the transaction may take an hour or more to validate due to Bitcoin’s scalability difficulties.
Jimmy will also have to pay the Bitcoin network’s exorbitant fees, despite his small transaction. Small transactions may be completed using traditional payment methods such as a card since firms such as Visa can handle more than 24,000 TPS. In comparison, Bitcoin can validate 7 TPS on a typical day.
Jimmy can use the Lightning Network to establish a payment channel with the ice cream business. Each ice cream purchase is tracked through that channel, and the business is still compensated. The transaction is low-cost, if not free, and quick.
When the Bitcoin that launched the channel is spent, Jimmy can choose whether to shut it or fund it. When you close a channel, all of its transactions are published to the main Bitcoin blockchain.
The Lightning Network is used to construct a smart contract between two parties. The agreement rules are programmed into the contract at the time of formation and cannot be changed.
Smart contract code also guarantees that contract fulfilment is automated, as contracts are created with predefined conditions that both parties agree.
When specific circumstances are met, for example, when a client pays the proper amount for ice cream, the contract automatically fulfils without the participation of a third party.
Once verified, the Lightning Network anonymizes transactions within a payment channel. Anyone can only observe the total transfer of wealth, not the individual transactions that comprise it.
It is entirely feasible to perform transactions outside of the blockchain without any limitations. Because off-chain trades wind up on the mainnet once payment channels are closed, they may be trusted to enforce the blockchain.
All transactions are decided by the mainnet. Off-chain protocols have their ledger, that is constantly connected to the main chain, which is critical to the Lightning Network’s design.
When the lightning network sounds so promising, why it is not being used like Ethereum?
Lightning has been ignored and not used as it is challenging to set up a lightning node.
The users and miners want to install software and run their mining operations that do not involve any effort, whereas setting up a lightning node (LND) is difficult as the learning curve is not simple.
To set up an LND:
1. You need to install “Go” & LND
2. after which you need to configure the lightning node and sync the graph
3. The next step involves finding your wallet and locking in the funds
4. After which, you need to open a channel
5. The process comes to an end after you connect the Zap mobile wallet.
Because it is difficult to set up a lightning node, the learning curve behind it is not easy; lightning has been disregarded and not used.
Another reason for the current inefficiency of Lightning Network is a lack of payment routes among individuals. LN is not yet widely used by merchants, online shops, and other businesses, making it difficult for individuals to utilize it for daily payments.
Non-decentralized blockchains, such as Tron with its TRC-20 standard, Solana, and others, have lower payment choices and are operational. Therefore, projects and developers prefer protocols that are easier and less expensive to create Dapps.
The primary barrier is still the typical person’s access to this technology and the user experience, which has to be enhanced further.
Even today, you can operate a lighting node and be pretty secure (if you carefully choose your node’s parameters) — this is where you’d need to be more computer knowledge to be safe.
Undoubtedly, adoption will also be the most challenging part of the Lightning Network. The problematic aspect will be persuading individuals to lock up a specific quantity of Bitcoin for the payment channel.
Why Lightning network is superior to the other blockchains?
The Bitcoin blockchain, which is just 400 GB in size, operates on the Proof of Work (PoW) consensus mechanism and may be accessed and utilized by anybody globally, making it genuinely decentralized and accessible.
Other blockchains are shifting to the Proof of Stake (PoS) consensus method, which has an inherent weakness of being controlled by a small number of stakeholders with large balances in their Validator Nodes.
LN offers the following mentioned significant advantages which no other competitor can provide:
· Payments are made instantly.
· Not reliant on miners.
· Micropayments are accepted.
· Suitable for multi signatures.
· Reduces blockchain load.
· Reduces blockchain load.
· Reduces wait time.
· Aids in scalability.
The majority of PoS Chains have massive blockchain sizes. For example, Tron developers recommend 10 TB of storage to run a validator node with at least a 16-core processor.
The Solana developers propose 2 TB of storage and a 12 Core CPU to run a Validator node. This puts the wealthy at an advantage once more.
Why you should have a lightning node running in your system?
Lightning node is a software that connects to and interacts with the main blockchain network and the Lightning Network. The term “primary blockchain” refers to any blockchain network on which LN may be used, such as Bitcoin or Litecoin.
The Lightning Network’s nodes differ from those in the Bitcoin network primarily in how they verify transactions. The Bitcoin network requires nodes to validate every transaction on the blockchain. In contrast, Lightning nodes only verify transactions that connect directly with them.
A Lightning node serves as the entry point into the Lightning Network. To explore the LN technology and experience everything it offers, you must have at least one node functioning. Anyone, regardless of network, may run a node thanks to decentralization.
If you host an LN node, you will support the cause and assist in the widespread adoption of LN. Payments on the Lightning Network are instant and atomic, as they do not require block confirmations.
Lightning can be used at retail points of sales terminals, in user-to-user device transactions, or any place where quick payments are necessary.
To maximize the potential of LN, there must be as many nodes as feasible and numerous payment channels available among individuals and companies to enable free LN transactions and prompt payments.
Apart from broader adoption setting up new and more lightning nodes will help in:
1. Micropayments.
Micropayments have the potential to enable the creation of new marketplaces. Lightning allows users to transmit funds as small as 0.00000001 bitcoin without incurring any custodial risk.
Presently, the bitcoin network mandates a far larger minimum output size and a set per-transaction charge, making micropayments unfeasible. Lightning enables small bitcoin payments to be made using actual bitcoin transactions.
2. Faster Scalability.
To fulfil demand from automated payments, the bitcoin network will need to accommodate orders of magnitude more transaction volume.
The growing number of internet-connected devices necessitates the development of a platform for machine-to-machine payments and automated micropayment services.
Lightning Network transactions are carried out on the blockchain without the delegation of trust and ownership, allowing users to carry out practically limitless transactions with other devices.
Hosting an LN node will reward you in various ways, such as:
1. You contribute to the network.
2. You will have complete control of your cryptocurrency.
3. By hosting your node, you eliminate the need to entrust the safekeeping of your money to third parties.
4. Furthermore, you won’t have to worry about trusting the information of another node because you will download the blockchain’s entire history onto your node.
5. Routing payments allows you to earn Sats.
6. Once your node is up and operating, you may be able to send Lightning payments over the network and receive a few Sats in exchange.
LN has the potential to decentralize micropayments & make them accessible for good truly. There should be as many nodes running as possible for lightning to become a proper solution for free micropayments.
Currently, there are 20,000 Lightning nodes and 60,000 payment channels holding 2000 bitcoins in custody.
