Bitcoin is a fantastic cryptocurrency. It gives you power over your capital, helps you communicate with people halfway around the world, and is unaffected by any government or bank. However, it also, like anything else, has limits. If you've ever attempted to submit a transaction during an especially busy day, you've probably found that Bitcoin transfers will take a long time to complete, and costly transactions are only validated once every 10 minutes on average. It might take days to get verified if you didn't attach a big enough fee. Unfortunately, this implies that Bitcoin is not scalable with its present shape. Bitcoin can only process 7 transactions per second, while Visa can process up to 65,000 transactions per second.
This number could rise into the double digits with additional updates, but it's still nowhere near conventional payment. Processors of this kind become a serious problem daily. Micro-transactions: One of the key reasons why Bitcoin can't be used as a means of trade is the network's slowness and high cost of sending small transfers.
Wouldn't it be wonderful if we could conduct transactions instantly and without fees? The Lightning Network comes into play here. The Lightning Network is a series of rules constructed on top of Bitcoin's Blockchain that is intended to make micropayments easier. As a result, since Bitcoin is a layer one solution, the Lightning Network is a layer two solution.
The idea was first presented in 2015, and it has been in the works ever since. Its key premise is that minor transactions can be registered off-chain rather than directly on Bitcoin's Blockchain. It has all of the advantages of Bitcoin but none of the disadvantages.
How Does The Lightning Network Work?
The Lightning Network is built on the basis of payment channels. To put it another way, if I want to transact with a friend, we create an off-chain payment channel. The payment channel is now available, and a lot of transfers between me and my friend will take place without ever entering the main Blockchain.
Funds can be exchanged as easily as the accounts of the users can connect over the internet. When we're about to conclude our business, we conduct a closing transaction on the main Blockchain, essentially settling all of our prior transactions. This is similar to my friend and me writing down how much one of us owes the other without ever sharing money before he and I decide to pay the bill.
Let's see if my friend and I want to place some small bets on the World Cup. We may end up costing a lot more than we expected if we pay these bets on level one, Bitcoin Blockchain, due to fees. On the other side, if we don't pay enough fees, we might end up having to wait for hours for the money to change hands. It's a whole different game if we use the Lightning Network. When you open a payment channel, you each deposit a certain sum of money that serves as a security deposit; the amount must be equal to or greater than the value that will be transacted in the future.
Let's say that my friend and I want to make a set of bets totaling one Bitcoin. As a result, we create a payment channel between us and each of us places a security deposit of 0.5 Bitcoins. This is the only payment that makes it to layer one of the Blockchain. Payments will now be made only between me and my friend. Keep in mind that if one of us wants to back out of the deal at some time, we will simply take our deposit and withdraw without informing the other. Let's pretend I've lost a bet and need to refund 0.1 Bitcoin to a friend. We'll both sign a deposit in our off-chain ledger, which is similar to a small wallet, saying that I now have 0.4 Bitcoins and he now has 0.6 Bitcoins. If my friend needs to leave with the winnings at some time, he will simply show the network our signed ledger, and the deposits will be returned according to the current balances. A frog protection mechanism is also integrated into the Lightning Network. If I want to bail out now and get my entire 0.5 Bitcoins back, my entire deposit will be sent to my friend; such severe penalties are in effect to deter participants from attempting to cheat.
Remember that the Blockchain would only ever show two transactions: one for opening the payment channel and depositing the currency, and one for closing it and settling the bill, even though my friend and I transacted a thousand times. Any exchange in between was essentially free and instantaneous.
But that's how the Lightning Network's core feature operates. It means I'll have to deposit money for any new person I want to associate with, which is unrealistic to solve this problem. I may use the Lightning Network to jump between linked payment networks. This means that if I have a payment channel with a friend and he has a payment channel with his sister, I'll ask my friend to pay his sister on my behalf through their open payment system.
The network effect makes the Lightning Network even more efficient because all you have to do to transact with someone is find a way to them through other network members who already know each other. It makes no difference if the channel passes through a hundred separate intermediaries, allowing the Lightning Network to scale globally.
Furthermore, the Lightning Network expands the use of Bitcoin as a payment processor. One fascinating example is that you can start streaming workload, which means that you can pay workers only for the minutes or even seconds they perform since there is no overhead.
Before the Lightning Network completes its trial phases and becomes fully operational, there is already a long way to go. Nonetheless, including Bitcoin's many drawbacks, this is huge news, as it allows for near-feeless lightning transfers. Bitcoin will eventually be able to take the place of credit cards, cash, and other forms of P2P transactions.
