Scale with Speed: An Overview of the Bitcoin Lightning Network
The Bitcoin Lightning Network is a stand-alone system that has been hailed as the answer to all of the issues preventing Bitcoin’s mainstream acceptance. It claims to address the dreaded scaling issue, allow for quick transactions, low transaction costs, and the removal of transactions from the blockchain. How can a system that isn’t based on Bitcoin’s core provide these benefits? How can it break Bitcoin’s established standards by allowing secure transactions with 0 confirmations? What is the Bitcoin Lightning Network, and how does it work?
In this post, we’ll look at what the Bitcoin Lightning Network is, how it can provide the guarantees it does, and where it is right now.
Explanation of the Bitcoin Lightning Network
Lightning Nodes and Channels
In that it operates in a networked fashion, validates transactions, and communicates with other nodes, a Lightning node is similar to and unlike a Bitcoin node in that it holds funds acts as an automated financial intermediary, actively monitors Lightning “channels” for malicious behavior and responds defensively (this is explained in detail later), and so on.
HOW TO MAKE A LIGHTNING CHANNEL
Creating a new Lightning channel is similar to creating a multi-signature bitcoin wallet that requires both of your signatures to approve a transaction, with one exception: according to the Lightning Network white paper, you each receive a signed, but as-yet-unbroadcast, “Commitment Transaction” that returns your initial deposits to you. In this manner, if your friendship hits a snag or one of you needs money, you can terminate the channel unilaterally by announcing this transaction, and everyone gets their due amounts.
MAKING QUICK TRANSACTIONS WITH PEOPLE TO WHOM YOU HAVE CHANNELS
Let’s say you went out for lunch again one day and ended up owing Bob 8,000 satoshis (0.31 USD as I write this). To settle this sum using Bitcoin at this time, you’d have to spend 0.10 USD and wait an hour, making it unfeasible. However, you can do this for free using Lightning by simply changing your “Commitment Transaction” with a new transaction that both of you may hold on to. In this time, though, Bob has 8,000 satoshis more than you have. (If you’re thinking of cheating by broadcasting the previous transaction now, wait until the Closing a Channel part.)
MAKING QUICK TRANSACTIONS WITH PEOPLE YOU DON’T KNOW
Let’s say Bob invites another of his buddies, Al ice, and after a long hour of eating sandwiches, you’re both in debt to Al ice because the business only accepted Coinye (a defunct cryptocurrency abandoned after Kanye West sued), which Alice had. Now, presuming Bob has a channel open with Alice, you can pay Al ice through Bob using Lightning. Your node calculates the best path between you and Al ice — in this scenario, with Bob acting as the financial intermediary — and the middlemen can all send money forward for a little charge if they like.
LIGHTNING NODE VS. LIGHTNING WALLET
We used the term “node” in the example above, which makes you think you’d have to maintain your Lightning node up and operating on the internet 24 hours a day, seven days a week. Yes, you would be correct. The Lightning Network is designed to keep nodes online at all times, allowing it to run at near-maximum capacity. In addition, if no one is online to supervise a cheating attempt and it succeeds, the channel will close unilaterally, leaving you without cash.
Additional Readings and Resources
I hope you now have a better understanding of what the Lightning Network is all about. It’s merely a messaging system based on exchanging cryptographic tokens underneath it all. It isn't flawless or broadly applicable just yet, but that doesn't make it any less impressive.
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