First of all, what is the Lightning network?
This method of payments is a scaling solution to address the slow transaction speeds and high transaction fees when using bitcoin. As the story goes, Bitcoin has successfully revolutionised the ways in which we make payments and manage our finances and assets without intrusion of government processes or banking restrictions. However, the limitations around bitcoin have always hindered its ability to be sustainable and that is where the Bitcoin Lightning network attempts to fill the gaps. By skirting around the main Bitcoin blockchain and acting as a “second layer”, users are able to make vast amounts of cheap transactions per second whilst still benefiting from the decentralisation and security of the main Bitcoin blockchain.
So, how does it all work?
The Lightning network uses smart contract functionality to enable instant payments in the blockchain, across a network of participants. These smart contracts create off-chain payment channels between parties. These are direct payment lines that happen on top or outside of the main blockchain network. For example, you can create a payment line between yourself and your local supermarket in which you pay for your weekly shopping of groceries. Once the payment line is open, you can make an unlimited number and amount of payments whilst transacting at a fraction of what it would cost on the main blockchain network.
Through the Lightning network, your payment channel will have its own ledger where the transactions are recorded away from the main Bitcoin blockchain and each party will hold the rights to close or renew the payment channel at their discretion.
Let’s say the two parties decide to close the payment channel, what then happens is all of the transactions that occurred are consolidated and then broadcast to the main blockchain ledger. Consolidating the smaller transactions allows for the larger transactions to be validated in a quicker manner. Without these payment channels, your supermarket transactions would get in the way of the larger transactions, slowing down the Bitcoin network for everyone.
Notably, you could still decide to purchase your groceries through a normal Bitcoin transaction. However, each time you make a purchase, you would have to pay the network fees which may cost more than the groceries itself. When using the Lightning Network, the only fees you pay are to open and close the payment channel. That’s it!
Now let’s take a look at the impact this method of payments can have in the long term. For the future of transactions, the Lightning network welcomes the following benefits:
Instant Payments
Lightning-fast blockchain payments are made without having to worry about confirmation times and its security is enforced by blockchain smart contracts without having to create a transaction on the main network for individual payments. Also, payment speed is measured in milliseconds rather than in seconds. To be specific, the Lightning Network is capable of handling 1,000,000 transactions per second whilst the main Bitcoin blockchain can only handle approximately 7 transactions per second. This combination of benefits results in an overall better experience for every user on the network.
Scalability
Billions of transactions can be performed across the network within seconds. That level of capacity can withstand the tests of time in the face of future innovations in comparison to legacy payment trails. You’re also able to attach a payment to an action or a click, and you can do this without having custodians.
Low Cost
By transacting and settling off-blockchain, Lightning allows for dramatically lower fees which paves the way for emerging use cases such as instant micropayments.
You may now be wondering who came up with this bright and innovative idea…
Thankfully, researchers Joseph Poon and Thaddeus Dryja, founded the Lightning Network in January 2016, based on musings by Satoshi Nakamoto, the pseudonymous creator of Bitcoin.
The two argued that a network of micropayments was the missing piece of the puzzle in fixing the scalability issues of the Bitcoin network, rather than attempting to change the network itself to allow for more transactions as this would’ve required a lot more work to be done.
Lightning Labs, a blockchain engineering lab, initially helped to launch the beta version of the Lightning Network in March 2018, alongside a host of individuals and other companies including the likes of Blockstream. It was initially funded via a $2.5 million seed round, which included notable investor Jack Dorsey (whose company Square has since funded several grants for Bitcoin and Lightning Network projects). This first version of the Lightning Network was launched on Bitcoin in March 2018 and The Lightning Network was the first attempt at a second-layer solution, but others have followed since.
In the grand scheme of things, if you are an avid follower of cryptocurrencies and the origins of Bitcoin, it is easy to see that the Lightning network is actually an essential part of fulfilling Satoshi Nakamoto’s original vision. The white paper for Bitcoin presented a solution for creating a payment network that is not reliant on trust or an intermediary. It was never intended to be an investment vehicle with huge returns and totally outcompete all other forms of payments and money. Yet, the numbers suggest that Bitcoin’s popularity is based on the latter.
This high demand is what makes Bitcoin transactions high enough for fees to be unreasonable for many commerce platforms that wouldn’t necessarily need instant confirmations. Therefore, the Lightning network doesn’t only allow for a greater number of transactions and transaction speed, but it also allows for bitcoin payments to be cheap enough to be used in the first place.
As an innovative and forward-thinking company, it’s clear to understand why at CoinMode, we base our payment systems on the evolving technology of Lightning network payments. To deliver an exceptional experience to everyone of our users, we must have the quickest, cheapest and most sustainable methods in place.
-
If you would like to join an ever-growing network of Financial Technologists, to be kept up to date with current and ongoing news, events and opportunities within the industry, you can register your interest here!
Liz. #FTWL
Comments