In 2016, Thaddeus Dryja and Joseph Poon proposed a “lightning network” protocol to allow fast and cheaper transactions without the need for a block size change.
The scalability issues of Bitcoin allow the blockchain to congeal smaller transactions. This was created by the Lightning Network.
Since it takes an average of 10 minutes to process each block in Bitcoin’s block chain, only a small number of transactions can happen. Thaddeus Dryja and Joseph Poon suggested in 2016 that rapid and cheap operations on the network could be made possible without having to change the block size. The “Lightning Network,” they called it.
On top of the Bitcoin block chain, the Lightning Network creates a second layer that employs micropayment channels generated by users to perform transactions better.
These transactions are significantly faster than regular bitcoin transactions, as they do not have to be transmitted to the whole network. And since no miners need incentives, the transaction fees are low or not.
How does it work?
Consider the main blockchain of Bitcoin as a highway and the Lightning network as several side roads, which reduce congestion on the highway from smaller transactions.
First, a multi-signature wallet is set up by two parties who want to negotiate (which requires more than one signature to enact a transaction). There is a bitcoin in the wallet. The payroll will then be saved to the Bitcoin blockchain and the payment channel is set up.
Both parties can now conduct an unlimited number of transactions without ever touching on the blockchain information. Both parties sign up for an updated balance sheet with every transaction, reflecting the amount of bitcoin stored in the wallet.
Once the two parties have completed transactions and the channel is closed, the balance results are recorded. In the event of dispute, both parties can retrieve their share of the wallet by using the most recently signed balance sheet.
There are no direct channels required to be transacted on the Lightning Network – payments may be sent to someone with persons with whom you are connected via channels. The network finds the shortest route automatically. It is the aim of the network to enable users to make minor transaction fees or delays.
Where’s the Bitcoin Lightning Network now?
A beta version was launched in 2018, but it was not fully operational. Since then, the number of nodes in the Lightning Network has doubled over the year, making the project closer to its goal of making bitcoin a viable daily currency.
CoinDesk’s Bitcoin Lightning Network Chart
In July 2020, the network went from 6 040 nodes to 12 675, an increase of 105%. It should be noted that only public nodes are included (nodes accessible to anyone). The total number of nodes is far higher if private connections are included (nodes accessible only to permissioned users).
The Lightning Network is facing challenges to solve Bitcoin’s Scalability issues, despite significant growth in recent years. Security is the most challenging problem. Since nodes in the Lightning Network always have to be online, they are increasingly vulnerable to attacks. While the network aims at reducing transaction fees on Bitcoin’s major network, its own set of additional opening and closing costs and routing fees are included. These are issues that are expected to be addressed over time, given the development and optimisation of its technology.
Exchanges are also beginning to use the technology to optimise bitcoin removals and deposits for their users. Kraken has recently announced that the Lightning Network will be adding support in 2021, along with CoinCorner from the United Kingdom, Vietnam’s VBTC, and OKCoin from San Francisco. The adoption of Lightning by prominent exchanges is good news for the future of the network and while most agree that it will not solve all future challenges for Bitcoin, it will certainly play an important part in the future of the cryptocurrency.