Lightning Network

What is Lightning Network?

The Lightning Network is a second-layer technology that works on bitcoin. It makes transactions very fast and reduces transaction fees by establishing private channels for transactions between parties.

The main use case of the Lightning Network is to make multiple micropayments at a very high speed and low cost.

How fast is Lightning Network?

The lightning network establishes a secure private channel between sender and receiver. By doing so, the transaction will be done in a matter of milliseconds and seconds. That is because the transaction happens on the second layer and is not yet finalized on bitcoin’s main network.

How low are the transaction fees?

Lightning Network is a second layer technology and the transactions are done using private channels. Let me explain with an example:

“Imagine if you were going to send some bitcoin to your friend Matt for a book. You create a channel and send it using the lightning network, after the transaction is done, you won’t finalize and close the channel because you’re going to send some bitcoins to Matt in the coming days.

Now, you have done 5 transactions and have sent 100$ worth of bitcoins to Matt in those transactions. Now you’re ready to close the channel. By doing so, 1 transaction will be done in the bitcoin main net in which you will be sending Matt 100$ worth of bitcoins. The sum of all your transactions in layer 2 is now done on layer 1.”

Is Lightning Network Cross BlockChains?

According to Lightning.Network:

“Cross-chain atomic swaps can occur off-chain instantly with heterogeneous blockchain consensus rules. So long as the chains can support the same cryptographic hash function, it is possible to make transactions across blockchains without trust in 3rd party custodians.”

What does it mean? The Lightning is helpful to facilitate atomic swaps that enable one cryptocurrency to be exchanged with another without the middling and involvement of intermediaries, like crypto exchanges.

The bottom line, it enables and facilitates decentralized crypto swaps. Now let’s find out exactly how the lightning network works.

How does Lightning Network work?

Lightning uses smart contracts functions to make instant payments across parties happen. It’s also decentralized so there is no need to trust 3rd parties.

Lightning network’s goal is to become a tool you use to make daily transactions using bitcoin, which means it has to be able to make hundreds of thousands of transactions per second, such as credit cards and electronic payment methods. This is a problem for bitcoin because making a transaction in bitcoin usually takes time because of its decentralization. A transaction has to be validated by nodes before it can be approved.

This means, if the number of transactions increases, approving and storing transactions will become expensive and will need more time. Also if the number of transactions increases it will require orders of magnitude improvement in the processing power of the mining systems that are required to execute transactions on the bitcoin blockchain. Plus, it will need such enormous energy to compute the information and do the mining, this means bitcoin is very expensive for day-to-day use cases.

This is where the lightning network enters. The lightning network creates a second layer which is applied on bitcoin’s main blockchain. The second layer consists of multiple payment channels between the parties. The lightning channel is a transaction mechanism between bitcoin users which they can use to send or receive payments from each other.

Though they are different from the transactions made on bitcoin’s main network. The bitcoin’s main network gets updated only when the lightning channels are opened or closed.

When the parties create a lightning channel they can make endless transactions that usually take less than 1 second to be confirmed and with no transaction fees. In other words, it doesn’t need to check it up with the main net and be in sync with it for the transactions, until the channel is open.

Individual lightning channels between various parties come together to create a network of lightning nodes that can route transactions within themselves.

What’s wrong with the Lightning Network?

Well, you might be thinking if the lightning network is so great and all, why isn’t it being used worldwide as a way to make micropayments? There are a few reasons for that, we’ll cover some of those reasons in this section.

It doesn’t completely solve the transaction fee problem:

Though the Lightning Network was introduced as a solution for bitcoin’s rise of transaction fees problem, it doesn’t completely solve the problem altogether.

Bitcoin’s transaction fee rises when the network is clogged. In other words, the cost of validating your transaction is related to how crowded or slow the network is. Bitcoin’s transaction fee plays a major role in the lightning network’s main costs.

More precisely, there are 2 main types of costs in the lightning network, the first is the same as bitcoin transaction fees for opening and closing lightning channels. The second is the routing fees for lightning channels. The second one costs roughly 0$ right now and will probably stay that way for a long time.

Safety problems

If you’re going to use the lightning network to send or receive bitcoins, you have to be online. Nodes have to be online at all times to send or receive payments.

For the fact that you have to be online to use the lightning network, and you have to use your private key to log in, there is always this possibility of losing your coins.

If the computer you’re storing the private key in gets hacked or hijacked, it could result in the loss of your precious coins. Although it is possible to use cold storage, cold storage is one of the safest methods of using the lightning network and is safer than other storing methods no matter the use case.

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