It’s no secret that Bitcoin, the world’s top cryptocurrency, has scalability issues, with its blockchain only capable of processing between 5 and 7 transactions per second (TPS) due to its 1MB block size limit. 

When the first digital currencies were created in the late 2000s, the blockchain technology that powered those early cryptos was not intended for widespread adoption. Today, flagship cryptos like Bitcoin and Ethereum, each with millions of users, are plagued by scalability issues.

That’s where Lightning Network in bitcoin kicks in.

What is Lightning Network?

Bitcoin was never intended to be scalable. It was designed to be a decentralized payment system that users could use anonymously and from anywhere.

However, one of its drawbacks was its popularity: transactions became much slower and more expensive than intended. As a result, developers created cryptocurrency layers.

The Bitcoin Lightning Network is a layer-2 scaling solution that enables off-chain transactions, which occur outside of the Bitcoin network. The Lightning Network allows two parties to open payment channels that can be used for instantaneous transactions at low fees – both of which are impossible on the Bitcoin mainnet.

It eliminates the need for every transaction to take place on the Bitcoin ‘base layer,’ while ensuring that the value being transacted complies with the Bitcoin network’s rules. It is decentralized, with no centralized databases, and every part of the Lightning Network begins and ends on the Bitcoin blockchain. Users can leave ‘layer 2’ and return to the base layer whenever they want.

Understanding the Lightning Network.

The Lightning Network was proposed in 2016 by Joseph Poon and Thaddeus Dryja and has been developing since then. It was created to address Bitcoin’s slow transaction time and throughput.

In more detail, here is what Lighting Network has to offer: 

Quick Transactions:

Because the transaction occurs on the Lightning Network rather than the Bitcoin blockchain, or off-chain in short, it does not require block confirmation. As a result, all transactions can take place almost instantly.

Low fees:

Another advantage of doing transactions off-chain is that they do not have to compete with other transactions for success, which keeps the fees very low.

Scalability:

More transactions are possible if the block size is not limited. The Lightning Network’s transaction processing capacity is nearly limitless.

Reduce your energy consumption:

The amount of energy required to compute this information is enormous, making Bitcoin blockchain maintenance prohibitively expensive.

What is the History of Lightning Network?

Bitcoin changed the way the world pays by giving you the ability to control your money without the involvement of governments or banks. However, its transaction processing limits have long been criticized.

The Bitcoin Lightning Network alleviates this problem by allowing users to conduct hundreds of thousands of low-cost transactions per second. 

Here’s a quick look at the history of Lighting Network.

On 2015:

Two researchers, Thaddeus Dryja and Joseph Poon proposed the Lightning Network in a paper titled “The Bitcoin Lightning Network” in 2015.

Their writings were based on previous discussions of payment channels by Satoshi Nakamoto, Bitcoin’s anonymous creator. The abstract of the paper describes an off-chain protocol comprised of payment channels.

The Lightning Network’s off-chain payment channels were designed to address Bitcoin’s lack of scalability by allowing multiple, smaller transactions to exist without congesting the network.

On 2016:

Dryja and Poon along with a few other contributors founded Lightning Labs, a company dedicated to the development of the Lightning Network. Despite changing team members, Lightning Labs worked to make the protocol compatible with the core Bitcoin network.

On 2018:

Lightning Labs has finally released a beta version of its Lightning Network implementation for use on the Bitcoin mainnet. At this point, public figures such as Twitter founder Jack Dorsey began to become involved with the project.

Dorsey, for example, paid a group of developers in Bitcoin to focus solely on Lightning Network development. In the future, he hopes to integrate the Lightning Network into Twitter.

How does the Lightning Network work?

Once two parties establish a payment channel, which is a type of smart contract, they can send and receive an unlimited amount of Bitcoin. These transactions take place instantly and at a low cost.

Some BTC must be locked into the network for the user to open the channel.

If they want, they can add to this amount later. The channels are only updated on the mainnet when they open or close, significantly increasing transaction times.

It’s also worth noting that you can transact with another party with whom you don’t have a direct channel by utilizing the network to find the shortest route to them.

What is it that holds the network together?

It’s all about the nodes.

These are formed by combining payment channels, which then aid in transaction routing. These payment lanes formed on layer 2 complement one another. When two transacting users complete their transaction and close their channel, the data is sent to the Bitcoin layer-1 network for inclusion in the next block.

All of the smaller transactions that would have slowed down the network are bundled into digestible forms in this manner.

What are the cons of Lightning Network?

While the Lightning Network is a powerful solution to Bitcoin’s primary issues, it is not without flaws.

  • The most significant disadvantage of the Lightning Network for Bitcoin users is the lack of support for offline transactions. 
  • Because the system is designed to handle most small to medium-sized transactions, it cannot handle large payments.
  • Another critical issue is centralization. Some crypto experts believe that this type of network may encourage payment hub centralization, a process similar to miner centralization.
  • Because the Lightning Network establishes fast peer-to-peer channels for Bitcoin transactions, a buyer relies heavily on their seller to be prompt in transferring funds.
  • Lower Bitcoin transaction fees can be seen as a negative for the Bitcoin network. Once all Bitcoins have been mined, transaction fees will be the only financial rewards available to Bitcoin blockchain miners. Bitcoin’s long-term viability may be jeopardized if these fees are not collected.
  • Lightning-powered apps are not for the faint of heart. Finally, because it is a relatively new project and the network has not been tested in all day-to-day conditions, it remains to be seen how well it will perform in the future.

Can I Invest In the Lightning Network?

While the Lightning Network cannot be directly invested in, private investors can invest in Lightning Labs, the company developing the network.

The Lightning Network speeds up and reduces the cost of Bitcoin transactions. If you believe Bitcoin will grow in the future, you may be wondering how you can profit from this network.

Buying and holding Bitcoin is one way to invest in the Lightning Network. The more people who buy and hold bitcoin, the greater the demand for the Lightning Network. 

Who Runs the Lightning Network?

Elizabeth Stark is a blockchain entrepreneur, educator, and computer science lecturer at Yale University. She founded Lightning Labs in 2016, a developer of the Lightning Network, a layer-two solution that aims to address scalability issues on the Bitcoin network.

In March 2018, the public beta version of the Lightning Network was released, outlining the first step in putting together an ecosystem for fast transactions across the blockchain.

Conclusion: The future of Lightning Network.

The Lightning Network has the potential to be Bitcoin’s next big revolution, as evidenced by its explosive growth in 2022.

Lightning payment users increased from 100,000 in the summer of 2021 to more than 80 million in March 2022.

Furthermore, Lightning Labs intends to expand Lightning’s capabilities by allowing users to trade other types of tokens. One protocol, in particular, would allow users to trade stablecoins on Bitcoin and Lightning rather than just BTC.

If Bitcoin is to succeed as a digital currency, it must improve as a “means of exchange.” The Lightning network, in our opinion, is the best solution that has been proposed thus far.

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