In this post, we’ll explain all you need to know about the Lightning Network, defining exactly what it is, how it works, the benefits and more.
What Is The Lightning Network?
The Lightning Network (LN) is a second-layer peer-to-peer monetary protocol built on top of the Bitcoin blockchain that allows two parties to send and receive payments.
A Layer 2 Solution
The LN is part of a class of technologies known as layer 2 networks. These layer 2 networks are built on top of layer 1 (base layer) networks.
As an analogy, think of the Bitcoin Network (layer 1) as an iPhone and the Lightning Network (layer 2) as applications on the iPhone. The iPhone comes first and applications are then built on top of it.
How The Lightning Network Works
The Lightning Network uses smart contracts to establish off-blockchain transactions.
It works by opening up a payment channel between two parties, where only the first and last transactions are posted on the Bitcoin blockchain. Both parties can then transfer funds between themselves endlessly without informing the main blockchain. Once the two parties decide to do so, all of the transactions that occurred inside are consolidated. Their final balances are then broadcasted to the main blockchain ledger.
As an analogy, The Bitcoin LN is like a prepaid debit card. You load it with funds (Bitcoin). You make transactions swiftly and with negligible fees. Finally, you reconcile the remaining balance with the main Bitcoin network, as you would your card balance.
Furthermore, because only the opening and closing of payment channels are recorded on the core blockchain, LN transactions can be more private than those made on the main blockchain. This is because layer 1 transactions all appear on a public and transparent ledger.
The Benefits Of The Lightning Network
There are three primary benefits that the Lightning Network provides:
- It’s Faster
The LN is capable of handling 1,000,000 transactions per second. The main Bitcoin blockchain can handle around 7 transactions per second.
- It’s Cheaper
The LN transaction fees are exponentially cheaper than those on the Bitcoin Network which can sometimes be greater than whatever you’re paying for.
- It’s Scalable
The LN creates a private two-way channel between users. This enables transactions to take place outside of the main blockchain without delegating the custody of funds.
Summary (TL;DR)
The Lightning Network is a peer-to-peer layer 2 payment network that is built on top of the Bitcoin blockchain. It allows users to process transactions off the main Bitcoin blockchain while still benefiting from its security and decentralization.
The LN works by opening payment channels between pairs of users who must commit a certain amount of Bitcoin to it. They can then make as many transactions between them as they want, off-chain. Only when the payment channel is closed does the final balance get settled on the Bitcoin blockchain.
The combination of payments made through the main Bitcoin Network and through the LN result in a superior payment experience that is fast, low cost and scalable.
