Lightning Network Explained

/Lightning Network Explained

Lightning Network Explained 2018-05-22T15:13:49+00:00
Lightning Network Explained

Bitcoin Lightning Network: Full Analysis

Quick inner navigation:

  1. What is lightning network?
  2. How does the Lightning Network work?
  3. How can the lightning network be used?
  4. What are the features of the Lightning network?
  5. Is Lightning decentralized?
  6. Is the lightning network a coin?

The inception of Bitcoins as a means of a transaction is an invention that undoubtedly disrupted the financial world. Bitcoin also paved the way for hundreds of other cryptocurrencies that are transforming the way business is carried out in.

Over time, the Bitcoin network has been experiencing an increasingly growing number of users. The increasing number of customers, however, led to scalability issues on the crypto’s blockchain, amounting to bottlenecks such as over delayed transaction times and enormous transaction fees.

On 24th August 2017, Bitcoin implemented the SegWit protocol to expand its channels, hence the capacity to accommodate the ever-increasing number of customers efficiently. However, the SegWit installation is yet to make the significant change anticipated by both developers and users.

The focus is now on the Lightning Network, a solution which developers believe once unveiled will propagate Bitcoin towards its long-term objective of taking charge of the world’s commercial environment. Surprisingly, there seems to be a tremendous underlying power beneath the ‘lightning idea,’ as the concept initially designed for Bitcoin is now borrowed by other players in the crypto industry such as Ether, Ripple, and Litecoin, and Zcash.

What is the lightning network?

The lightning network has been endorsed as a solution to Bitcoin’s scalability problem. It is a ‘second layer’ grafted on top of the blockchain and facilitates instant transactions across the network of users. The peer to peer payment system is designed with bidirectional payment channels, having no third parties involved in the transactional process.

Who is the team behind the lightning network?

The Llightninnetwork isis the brainchild of Thaddeus Dryja and Joseph Poon. The duo came up with the idea in 2015 and drafted a white paper outlining how a network can be integrated ontop of the Bitcoin blockchainto drive back and forth payments in a speedy, secure, and trustless manner.

The Lightning Lab

The lightning lab comprises a team of dedicated professionals who have come together to develop the lightning network. Founded by Olaoluwa Osuntokun, the team is based in San Fransisco. Elizabeth Stark is the Co-founder and CEO of the Lightning Lab. Once they exhaust their project, the team envisions achieving cheap, fast, and private transactions, open to everyone in the world.

What are the features of the Lightning network?

  1. Instant payments: The project pictures immediate payments of in milliseconds or seconds. This will take place without worrying about times made to confirm a block of transactions. The average times to approve a transaction on Bitcoin’s blockchain over the recent months has lingered between 15 minutes to as long as 16 hours. Immediate payments will, therefore, be such a giant achievement of the blockchain.
  2. Scalability: The issue of scalability facing Bitcoin is what led to the introduction of alternative coins – altcoins. Bitcoin’s blockchain has for such a long time been overwhelmed by the large number of its users, leading to slowed transaction processes when many users are transacting at the same time. Currently, the blockchain can handle an average of 7 transactions per second. Compared to VISA, which averagely handles 1,667 operations per second, Bitcoin (among other blockchains) have a long way to go. The Lightning network is targeting a capacity of millions to billions of transactions per second, which will be a game changer.
  3. Low costs: By the end of 2017, there was a worldwide outrage by Bitcoin users over the whacking transaction fees the network imposed on them. Users paid an average of $28 to make a transaction on the blockchain, the craziest of them being a user who paid $16 to send Bitcoins valued at $25. The lightning network will put to an end the transaction fees that regularly soar to colossal levels by allowing transacting and settling to be conducted off the blockchain. The system promises users meagerfees upon its launch, accompanied by instant micropayments.
  4. Cross blockchains: With the new technology, it will be possible to route payment across more than one blockchain securely, these will include those blockchains hosting different altcoins as well as the sidechains topped on a given crypto’s blockchain. To make this a reality, there will be a set of various blockchain agreement policies. Additionally, as long as the different cross blockchains support the cryptographic same hash function, it will be feasible to make transactions between them with no need for third parties.

Is Lightning decentralized?

The subject of a decentralized Lightning Network has been of such a great concern to many potential users, observers, and critics. According to the description provided on the networks official website, ‘Lightning network is decentralized and will be utilizing smart contract functionality in the blockchain to facilitate instant transactions across a network of entrants.’

In its whitepaper, the lightning network is described as a solution to Bitcoin’s scalability issues desirable enough to cover all transactions in a way that doesn’t sacrifice the decentralization and security that the current network provides.

There are different schools of thoughts that have emerged contrary to the lightning network’s team idea of a ‘decentralized lightning platform.’ A good example is a post that was put up on Medium on June 27, 2017, by Jonald Fyookball, outlining a mathematical proof why the lightning network cannot be a decentralized Bitcoin scaling solution. A week later after the post, on July 3, 2017, Diane Reynolds came up with a counteracting piece shunning away such criticism. He developed a simulation with 10 million users crediting the fact that it is technically possible to have a decentralized lightning network.

As at now, the decentralization subject remains mere speculation of events or vision. Until fully realized by the network, no one can really tell of its possibilities or impossibilities.

How does the Lightning Network work?

The problem

Bitcoin’s blockchain is majorly faced with two challenges which include; slowness in the manner in which transactions are processed and hefty transaction fees.

The transactions are generally slow because they have to be registered on the blockchain (public ledger viewable to every participant). To fasten the process by which your transaction is recorded on the blockchain, you motivate miners (the computers verifying transactions on the blockchain) with a reward in the form of transaction fees. However, there is no limit to the amount of transaction fees which you can pay to the miners to encourage them to process your transaction as soon as possible.

Miners have, therefore, the liberty to be based towards transactions tagged along with large transaction fees. This results in a delay for transactions with lowerfees and can take up hours or even days to process. Consequently, more transactions on the blockchain would mean a slower network.

The solution

The lightning network eliminates the need for all transactions to be recorded on the blockchain. If there are only two participants (A and B) directly linked to a given transaction, there is certainly no need for every other participant (C, D, E, …) on the network (nodes) to have knowledge of whatever transaction is taking place between the two participants (A and B).

The lightning network takes the payment process off the blockchain by having only minimum information recorded. Here is how it executes it.

Micropayment channels

Assume the two of us want to transact among ourselves, the lightning network lets us open something referred to a payment channel between us and register it on the blockchain. Through our payment channel, we could transact as many times as possible.

The beauty of our payment channel is that the only time we will touch it again after its opening is when we will want to close it. It is then that we will record on the blockchain the events of occurrence that took place on the payment channel for the entire duration that it remained open.

The idea of payment channels between two participants creates many micropayment channels that would be barely required to transact on the blockchain. This means that billions of transactions could be carried out at lightning speeds in a day between participants with low computational power.

More on the payment channels…

The payment channels serve more like a safe where two participants deposit equal amounts of money, and each put a lock on it. The deposits made on the payment channels are recorded as opening transactions on the blockchain. Since the funds in the safe are ‘locked by each person,’ no one participant can spend the funds in the safe without the consent of the other.

Bidirectional payment channels

While putting funds (me and you) into the ‘safe,’ which in this case is the lightning network, we both send our equal share of the money into a common 2-of-2 multi-signature address, for example, 5 BTC each. The transaction is recorded as an opening balance on the blockchain by each one of us creating a 2-of-2 multi-signature transaction that allocates 5 BTC to each of us.

To put this transaction into effect, I will sign one payout transaction and pass it over to you to sign. Equally, you will have to sign one payout transaction and pass it over to me for the same. The transactions are only valid if each payout has two signatures.

Making a payment on the channels

Sticking to our payment channel with 10 BTC under lock with each one of us owning an equal amount, suppose I want to pay you 1 BTC, we will each generate a payout transaction as before. However, the payout will indicate that you get 6 BTC and I get 4 BTC. To make sure that none of us utilizes the old payout transaction of 5 BTC each, only the most recent of its version is valid, i.e., the 6 BTC-4 BTC payout; this is implemented by the blockchain’s smart-contract algorithms.

A network of payment channels

The micropayment channels by themselves do not solve Bitcoin’s scalability issue since they only create a relationship between two parties. To solve the scalability menace, we have to have a large network of payment channels.

Now that you and I can transact through our payment channel just like many other participants in pairs without including a single transaction on the blockchain, you might be asking yourself what happens in case you are to transact with a new party whose dealings you do not have a prior knowledge to, and where perhaps one of the two parties in a channel can defraud the other.

To curb fraud, the lightning network operates based on the theory of six degrees of separations which states that one participant is connected to another by just a few links.

A good example is where you want to transact with Alice who is only known to me but new to you. Since creating a new payment channel with every new partner would be inefficient, the lightning network routes your payment through the system.

In a bid to connect you with Alice, your wallet will find the shortest route between you and her with sufficient liquidity and least fees. Take an instance where you would want to pay Alice 1 BTC; since I am directly connected to both of you, I will serve as the bridge to complete your transaction. I will pay Alice the 1 BTC, after which you will reimburse me for the payment. Once we are all in agreement on the transaction, we can sign off the process and allow for immediate spending.

The blockchain as an arbiter

With the bidirectional payment channels and a network of payment channels, the lightning network operates in a similar manner as to how we engage in legal contracts with others without necessarily going to court. This makes it possible to conduct millions of transactions off-blockchain transactions at super-fast speeds, only upon non-cooperation between the transacting parties would transactions be delayed.

How can the lightning network be used?

The actual lightning network release date is not yet out. Nevertheless, it might just be sooner than you expect. The good news is that you, me or any other interested party can try out the new promising system today and even set up a lightning node. You can experience the network on Bitcoin Testnet which is a clone of the Bitcoin’s network with valueless coins. The Testnet makes it possible to experiment with different software that needs fabrications as well as carry out millions of transactions without having to worry about security.

Below is how you can perform payments to different wallets and services

Web-based wallets

HTLC.me is a good example of a web-based lightning wallet. The wallet allows you to make payments immediately without any configurations. All you need to do is open a new browser and transmit payments back and forth or ask a friend to set up a similar wallet.

Desktop wallets

The Lightning App Wallet and Zap are two good examples of desktop wallets where you can experience the lightning network’s functionality. Both of them utilize Lightning Network Daemon (lnd) as their backend client.

lnd is a full execution of the Lightning Network Node that is currently deployed on testnet3 (The Bitcoin Test Network). In its current state, Ind can run several functions including; creating and closing channels; completely handling all channels states, managing a fully-authenticated channel graph, finding paths within the lighting network and passively transacting incoming payments, autopilot channel management, and updating the broadcasted fee schedules.

The Lightning App Wallet is developed by the same company that develops LND. To set up the wallet, you simply have to visit their Github page, download the latest version of the wallet, and install it on your desktop computer.

Mobile wallets

Finally, there are a number of mobile wallets which you can explore to experience the lightning network on your Android Device. These include C-lightning, LND, and Éclair all of which are available on Google Play Store.

Neutrino is another example of an experimental platform developed with Lightning Network Mobile users in mind.

Is the lightning network a coin?

If you have come across utility tokens, especially those developed on Ethereum’s blockchain to serve some specific purposes, you might be puzzled by the fact whether the lightning network is in itself a coin operating in a likewise manner.

Well, the lightning network is simply a layer atop the current Bitcoin’s blockchain, set up to facilitate the native Bitcoin transactions efficiently at fast speeds off-blockchain. This is achieved through bidirectional payment channels established between users, that if interlinked form a network of payment channels.

In a Nutshell

The lightning network is certainly the most anticipated future of Bitcoin as a universal means of transaction. The technology envisions off-loading a huge chunk of transactions from the blockchain freeing it up from the bloating which it currently experiences and is likely to experience in the future if a workable alternative solution is not sought. Through the network, users will be able to carry out millions of transactions at lightning speeds and at low transactional fees like has never been witnessed before.

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