List of items in this article:
- What is Lightning Network?
- What does a lightning Network do?
- How does a lightning network work?
- Advantages of Lightning Network
- Disadvantages of Lightning Network
What is Lightning Network?
The Lightning Network is a “layer-two” network that stays on top of the Bitcoin blockchain. It lets transactions be processed off-chain fast and economically. Consequently, this is enabling Bitcoin scalability. Also, the number of Bitcoin miners is a lot in the whole cryptocurrency market. But they have some problems, like transaction fees in the time of network density.
Bitcoin is the world’s biggest cryptocurrency. And it operates on Bitcoin Blockchain. With a current market cap of over USD 600 Billion. It acts as a form of decentralized digital ledger. It will form blocks by collecting transactions.
These transactions are verified by “Bitcoin miners” who run a network of strong computers. That it will challenge to solve cryptographic puzzles and add the next block to the chain.
What does a lightning Network do?
The popularity of Bitcoin is increasing as a result of that it cause some problems dealing with the huge number of transactions on Bitcoin Blockchain.
Because of this design, a narrowed number of transactions have permission to enter in each Bitcoin block. Also, unprocessed transactions stay in a row to be put to the next block.
As traditional payments foundation can process thousands of transactions per second. Bitcoin can only process 2-7 transactions per second.
And also a new block will be added every ten minutes. This causes virtual “traffic jams”. This happens at peak times withholds up to a day.
Bitcoin’s proof-of-work system is also energy-intensive as many miners are competing with each other at the same time. This shows extensive costs, which the miners offset mostly through the block reward they get and also by collecting transaction fees.
In times of peak network density, fees have pierced to an overplus of $50. The Lightning Network addresses these problems.
How does a lightning network work?
The Lightning Network contains channels that let in nearly instant transactions among participants in the system.
The idea that follows Lightning is that each transaction won’t need to be on record on the blockchain.
As an alternative, only the transaction that makes the channel and the exit transaction will be recorded on-chain. And all other transactions are recorded in the Lightning Network.
Let’s look at an example when two users want to send funds to each other fast and so easily from time to time. They can structure a channel by making a multi-signature wallet and adding funds to it.
After that, they can perform an unlimited amount of transactions supported by these funds. Necessarily, these are off-chain transactions documented using a kind of digital registry supported by a time clock.
Both sides digitally sign and update their copy after each transaction usually by scanning a QR code.
The actual distribution of the primary funds in the wallet only occurs on the blockchain itself. That is when the channel is closed, based on the final balance sheet.
If there is any quarrel, both sides can use the most newly signed balance sheet to retrieve their funds. And also both users have the choice to unilaterally close the channel, and end their relationship.
When the payment channel is closed, the updated balance is verified on the blockchain, as a result, users can use their remaining Bitcoin again on the standard network.
This channel among the two users also makes part of a web of correlated channels. Funds can be moved to anyone else with a Lightning wallet. This work will be done with the most economical space among the sender and recipient chosen maker by algorithms.
Advantages of Lightning Network
- Lightning network is a solution to eliminate the scalability of bitcoin through transactions outside the main network. This idea will reduce bitcoin network traffic.
- This network greatly reduces transaction time and speeds up transactions.
- Another use of this payment system is in automatic financial transfers.
Disadvantages of Lightning Network
- Unlike transactions on the main blockchain network, in the Lightning network, the parties must be online.
- The parties may regularly monitor payment channels to ensure the security of their assets.
- Lightning network is not yet suitable for large payments.
- Opening and closing a payment channel should be done on the main network, which has a higher fee.