What is Lightning Network

An overview of the Lightning Network payment protocol provided with an example of its practical application, description of it working proccess as well as its benefits

Currently, there are so many news about Lightning Network but what it actually is? Some developers have suggested that Lightning Network could be a revolutionary change for the cryptocurrency industry, so let's see what the idea stays behind it.

Though intended as e-cash, Bitcoin can now hardly be used for everyday payments due to relatively high fees and longer wait time. Lightning Network (LN) is a second-layer solution that enables instant transactions with very low or even nonexistent fees.

Example

Everyday Kate grabs a cup of coffee on her way to work. One day the coffee shop starts accepting cryptocurrencies. Kate decides to pay for her coffee with bitcoins. She goes to the coffee shop, and she and the manager set up a bitcoin payment channel using Lightning Network. She sends 5 bitcoins to the channel’s address. The channel balance sheet now shows Kate having 5 bitcoins, and the coffee shop — 0. Next day she orders a cup of coffee and pays with her mobile wallet app that supports LN transactions. The coffee costs 0.1 bitcoins. The transaction takes less than a second, and the balance sheet has been updated: Kate — 4.9, the coffee shop — 0.1 bitcoins. If at one point Kate decides that she doesn’t like their coffee any more, they will close the payment channel with the bitcoins distributed according to the last balance update. And Bitcoin’s blockchain will only have recorded two transactions throughout the entire existence of the channel.

How does it work?

Developed by Lightning Labs, Lightning Network is a payment protocol built on top of Bitcoin’s blockchain. It creates a network of payment channels between its users. A payment channel is a set of smart contracts and a multisignature address (which requires two or more specified users to sign transactions). Initially, Lightning Network had security issues but they were resolved with the introduction of SegWit, a soft fork, which separates transactions from signatures to allow for more room in a block. Though originally proposed for Bitcoin, Lightning Network can see implementation for other cryptocurrencies, such as Litecoin.

Why LN?

LN transactions are fast because they are not recorded on the blockchain, there are no block confirmations to wait for. LN transactions are cheap because they do not need miners to process them. Two parties do not need to create a separate channel, the network itself will find the shortest route through other channels. LN transactions are more private, as they are not stored on the public blockchain. LN transactions can be as tiny as one satoshi (0.00000001 bitcoins). To try it for yourself, go to Satoshis.place. It is an interactive website, where you can draw on a 1000x1000 drawing board paying one satoshi per each painted pixel.

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