In the beginning, things were a lot simpler.
When Bitcoin was first introduced, the blockchain could handle fast and seamless transaction processing. Everything happened in an instant, no third party, safe and secure.
When the blockchain got longer and the number of users increased, the time needed to process transactions increased too, and, well its not exactly the smoothest process in the world anymore, is it? The point of Bitcoin was enabling people to conduct transactions easily and privately, but some view Bitcoin more of a commodity now than a currency. Cest la vie, things change.
This problem, this evolution of purpose, is exactly what brought about projects like the Lightning Network. While the last few years have seen a huge influx of ICOs and new coins that includes parody projects and projects of a more dubious nature as well, increased regulation and the recent market correction will be sure to make the world of crypto a harsher climate for projects that cant pull their own weight. Bitcoins meteoric rise in value helped put cryptocurrency on the map, but without a practical application that competes with other currencies, the future of Bitcoin is unclear.
Whats needed are is projects and technologies that provide real solutions to real problems, which is exactly what LN proposes to do. Its a system that aims to fast-track the confirmations of transactions and, according to supporters, could bring Bitcoin back from the brink of commodity and allow it to retake its place as the number one cryptocurrency as well.
Sounds interesting. What is the Lightning Network, exactly?
Lightning is a decentralized network using smart contract functionality in the blockchain to enable instant payments across a network of participants
Thats taken directly from the LN website, which goes on to describe the plan to allow scalability and microtransactions as well as faster processing time, all of which are hugely important steps to take if Bitcoin is to compete with fiat.
With the Lightning Network, participants in the Bitcoin blockchain form a payment channel. Through the payment channel, the Bitcoin blockchain is free from the entire process of recording and verifying transactions- thats handled by the lightning network, but leaving the final timestamping, which is later relayed to the blockchain and then added to the blocks.
So the system allows processing to take place outside the blockchain, and only updates the ledger with the final results of the transaction instead of bogging things down with each step of the process.
Image via codesuppository.blogspot.ie
Got it. Why do we need that again?
At the moment, it can take up to an hour before (supposedly) confirmed transactions are made irreversible, and the fees for microtransactions means that sending small sums of a few cents or even a few dollars arent viable options at all. This kind of purchasing is very common in gaming, use of phone apps, online banking, and many other areas, presenting a huge problem for Bitcoin to overcome.
Maybe thats exactly where the Lightning Network will come in but if theyre going to do something, theyd better do it soon. Bitcoin can currently handle less than ten transactions per second at 1MB block size. Compared to Visa, which can handle thousands of transactions per second, this is very poor performance. Is it valuable? Yes. Does it work as a form of digital payment for everyday life? Lets just say that things could be a lot better.
The poor scalability of Bitcoin is creating a system where transaction costs might be more than the actual transaction. This is why the Lightning Network is needed, to verify, record, and timestamp transactions through off-chain means. Its needed to:
- Increase transaction processing time
- Reduce transaction processing burden on the blockchain
- Drastically reduce the cost of transactions
Ok. It’s all a bit abstract, isn’t it? Let’s take a look at an example.
Let’s say Bob (who else did you think it was going to be?) wants to use Bitcoin to buy something. For big purchases, it’s no problem – there are fees, and it’s slow, but it’s usable. Smaller purchases though – it just doesn’t work at the moment.
Bob wants to pay for his Netflix subscription with BTC, but the fees could end up being almost as expensive as the subscription itself! The cost is 0.001 BTC and it’s a regular transaction, so instead, Bob sets up a payment channel.
This is basically an agreement between both parties (Bob and Netflix). Both parties deposit some BTC in a multi-signature address. The money is held off-chain – think of it like a safety deposit box. The initial transaction takes place on the blockchain, so Bob is going to put a few months worth of money in there to make the fee worthwhile.
So – Bob deposits 0.005 BTC, and Netflix 0.002 to cover a potential refund for Bob. A balance sheet describes how the money will be spent, and every time it’s altered, both parties sign off with private keys.
Now the money is held in the address. Instead of using the blockchain each time he wants to spend some BTC, Bob can now use the Lightning Network to just transfer funds to Netflix. They can’t spend it yet until they close the channel, but the money’s there and it belongs to them now. What’s more, they can make limitless transactions between them off-chain, without slowing anything down.
If Bob or Netflix want the money from the multi-signature address (the “safety deposit box” containing the funds and balance sheet), they close the channel. Either party can do this, even if the other doesn’t want to, so the funds can’t be unfairly withheld.
Great! So instead of tens, hundreds, thousands, or even hundreds of thousands of small transactions taking up space on the blockchain, a payment channel only uses the blockchain twice. Once when it’s opened, and once when it’s closed. Fast and simple.
What if Bob’s friend Alice wants to use Netflix too? She has to create a payment channel with them, right? Well, if she already has a payment channel with Bob, no, she doesn’t. This is where the “network” part really comes into play.
If Bob has a channel to Netflix, and Alice has a channel to Bob, Alice has a channel to Netflix too. Her money makes its way through Bob, and it’s all automated. If it gets off the ground, the technology could bring Bitcoin’s scalability issues to an end once and for all.
Origins and current state
The co-creators of the Lightning Network are Joseph Poon and Thaddeus Dryja, who released the networks whitepaper in 2015. In 2017 the project reached public alpha stage, which brings us to today, when the network is still a work in progress
Just like the Bitcoin code, the LN is open source. Anyone who wants to be part of the LN can download and use the code. Since the inception of the idea, developers and Bitcoin users have been the launch of the network. While its going to take time to be fully implemented, the team expects to see it in full operation in 2018.
By December 2017, the number of the lightning network nodes that were in existence had already reached 110, with about 250 open channels on the Bitcoin blockchain. Since this is a system with potential for exponential growth, the release should be sometime soon.
So its all good?
Well have to wait and see. One potential problem is adoption – many people in the cryptoshpere arent too keen on the idea of welcoming an off-chain system. While Segwit did manage to scale things up a bit, its an idea that not everyone is on board with. While the blockchain is slow and ungainly, once the transactions are through theyre through, making it a secure system.
Getting enough people to try a new system to is the main issue faced here, but it sounds promising enough that its sure to get its chance to shine. When its implemented, it may well make some real progress in finally scaling the Bitcoin blockchain in a major way and increasing the user base of the first mainstream cryptocurrency as well. You know if it works, that is.
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