By Larry Wright
Transfer between individuals that are not on the Bitcoin blockchain or who are “off-chain” may be completed via the use of the Lightning Network, which is part of the Bitcoin network (LN). As a consequence of the Lightning Network, bitcoin has gained widespread recognition as a game-changer in the cryptocurrency’s development. Designed to accelerate transaction processing while lowering the costs associated with Bitcoin’s blockchain. The lightning network idea was developed by two programmers, Thaddeus Dryja and Joseph Poon, in 2015.
Although the Lightning Network has grown and evolved since its start, there are still hurdles to face in its development. This is because Bitcoin’s price volatility has not yet established itself as a widely accepted payment mechanism for consumers and businesses alike. As a result, owing to the nature of the Lightning Network’s construction, there are extra expenses associated with accessing it. Certain technical advances that have occurred recently may influence and enhance the Lightning Network in the future.
However, despite its best efforts, the Lightning Network has encountered problems in resolving the problem, which has resulted in the introduction of new obstacles such as cheap routing costs and malicious assaults. A minor price, for example, maybe necessary to be charged to begin and terminate a payment channel. Additional fees are added on top of these small transaction fees to cover the costs of routing data to and from the nodes that verify transactions, which are not covered by the transaction fees.
About Lightning Network
The Bitcoin Lightning Network, which is essentially an off-chain solution, is a second layer that sits on top of the current blockchain. There are nodes and software on this network that continuously connect with the blockchain via channels, similar to mini-ledgers.
Removing transactions off the main chain makes it possible to decongest the Bitcoin blockchain and lower transaction fees. Consider it to be your own private Bitcoin transaction highway, with both you and your counterparty maintaining separate private ledgers to keep track of the many transactions.
The use of innovative features such as Hash Timelock Contracts (HTLCs), which allow for the imposition of limits, has been implemented to prevent fraudsters from interfering with the transactions on your private ledger.
The Lightning Network may be likened to the process of adding someone to your phone’s “favorites” list, which goes as follows: when you collaborate with them, you can expect everything to be completed fast and inexpensively.
Purpose of Lightning Network
Bitcoin’s mystery inventor, Satoshi Nakamoto, claimed that the cryptocurrency would become a popular method for people to pay for goods and services online. He used the phrase “peer-to-peer electronic cash” to describe cryptocurrency.
Nonetheless, as the value of Bitcoin has increased, the structure of the building has evolved. Now, we like to think about Bitcoin as a kind of “digital gold” – a sort of wealth accumulation that is both long-term and inflation-resistant.
What exactly is the problem here? It is possible that the Bitcoin network’s design, at least in part, is responsible for this phenomenon. When no third party is involved, such as a credit card company or a payment processor, two strangers may transfer and receive money from practically anywhere in the world without fear of being scammed.
This is accomplished via the use of decentralized networks of computers located worldwide, which must all agree on the current state of Bitcoin’s digital ledger for it to be successful. Nakamoto came up with a time-consuming solution to this problem: he mined for information.
The construction of the Lightning Network was motivated in part by the desire to make Bitcoin more similar to the digital money that its inventor, Satoshi Nakamoto, had imagined. The “off-chain” processing of transactions is substantially faster and more cost-effective than the processing of transactions on the Bitcoin core network, with costs that are typically fractions of a cent in most cases. Transactions on the main blockchain use far more energy than transactions on the lightning network, which is good.
As a result, the Lightning Network (layer 2) can handle millions of transactions per second. Still, the Bitcoin blockchain (layer 1) can only process around ten transactions per second.
This is something that the current blockchain needs, just as the Lightning Network makes transactions faster and less expensive. A channel may be used to perform thousands of transactions simultaneously after it has been created. The main chain will be notified when your channel has been successfully finished.
After the Lightning Network has been fully constructed and adopted, it will be feasible to make greater use of the main chain. Lightning is an excellent solution for micropayments due to its speed and cheap transaction costs. Lightning is a solution to the issue of having to pay a fee that is more expensive than the actual transaction. You may send as little as one satoshi through the Lightning Network instead of the main chain, where the minimum transaction size is around 0.00000546 BTC. You will not be charged any fees for sending this little amount of money.
Issues Related to Lightning Network
If lightning networks are deployed in a hub-and-spoke configuration, they will aid in the continuation of the current structure. Banking and other financial institutions are the principal go-betweens in the current system, and they handle the majority of all transactions.
Thunderbolt nodes can develop into network equivalents of hubs or core nodes in well-known organizations that have more open ties with other firms. When one of these hubs fails, the whole network may be put at risk of failure.
A critical issue is, as previously said, the requirement of raising prices to keep the network running to maintain its viability. There are implications here not just for the nodes of the Lightning Network but also for the possibility of higher Bitcoin fees being relayed to the network due to the implementation of this feature.
Blitz networks are often considered to be vulnerable to hacking and thievery because to the fact that, they must be constantly connected to the internet. Because it is not authorized across the network, there is no option for coin storage at a cold storage facility.
Payment Process and Lightning Network
An invoice is issued from one party to another, and each party is responsible for paying half of the invoice. This information is often included on invoices and may be found in the following formats:
- In the process of creating a new account
- A unique identification identifies the node to which the payment is transferred.
- The account’s lifespan is measured in days.
- The incident is described in detail.
Preserve your Bitcoin address right now. ” If the receiver refuses to accept the coins, they will be returned to the sender at this address.
If the invoice specifies the precise amount to be paid, the buyer will pay the invoice for the exact amount specified in the invoice if the invoice specifies the exact amount to be paid. If the invoice does not specify the transaction amount, the buyer may transfer any number of coins to the recipient. It is also possible for the recipient to choose the invoice’s validity period, which may range from a few minutes to many days.
Lightning Network’s Characteristics
The amount of the commission is tiny. Transactions on the Lightning Network are much less costly than transactions on the Bitcoin network. Because of the low fee, transactions of thousands of dollars are conceivable. Transactions are performed in a short period. As a result of the Lightning Network’s lack of reliance on the blockchain, transactions are almost instantaneous.
Scalability. According to Christian Decker, the creator of the Lightning network, each Lightning channel can handle up to 500 transactions per second. The bigger the number of channels, the greater the available bandwidth.
Advantages of Bitcoin Lightning Network
The Lightning Network makes it possible to transmit and receive payments of any size, even the smallest ones. No matter how little, payouts will be handled as soon as they become available. This will help Bitcoin become even more popular and widely accepted as a form of payment, hence making it even more accessible to more people. Due to such types of features, Bitcoin is being accepted by top business organization around the world. Famous tech companies have announced to accept Bitcoin (BTC) as payment. Similarly, some governments are considering accepting the world top virtual currency as legal tender. For example, El Salvador is leading the crypto world as it accepted Bitcoin as legal tender.
Another big benefit of the Lightning Network is that it helps businesses save money on expenditures. Although this is a good development, it may have some negative effects on the long-term viability of the Bitcoin currency. There are still mining rewards available, but they will be phased out shortly and replaced with fees, which will be the sole incentive for Bitcoin miners in the future. One may argue that the Bitcoin network’s fees from its users ensure the network’s long-term existence.
The second major benefit of the Lightning Network is that it contributes to the general anonymity of Bitcoin. Transactions are only retained on the blockchain once payment channels have been closed and both parties have received their respective balances, thanks to the anonymity and encryption of the blockchain.
Disadvantages of Bitcoin Lightning Network
There are certain disadvantages to utilizing the Lightning Network, as with any other technology, and this is no exception.
Because of the system’s design, it cannot handle large amounts of money. The concentration of power is another key source of worry. Those knowledgeable in cryptocurrencies believe that networks such as these might favor payment hub concentration, which would be similar to miner centralization in nature.
The Lightning Network does not accept payments made over the phone or the mail. Peer connections find themselves in a similar situation. Users may have to wait for many hours before accessing their money again if one of their peers fails to react.
User-friendliness is also an issue with the system as it is right now. As a result, Lightning apps are not very user-friendly for those new to them. And lastly, given that the project is still in its early stages, and the network has not been put through its paces in the real world, it is difficult to predict how it will perform in the long run.
The use of off-chain transactions is a fantastic concept, but the fact that they are not monitored via the main channel may result in privacy concerns.
Payment Channels for the Lightning Network
To this end, when beginning an off-chain payment channel, the participants deposit money into a multi-signature wallet address on the layer one blockchain, which acts as a kind of insurance against the possibility of fraud. The deposit amount must be equal to or higher than the transaction amount for the transaction to be valid.
A user may easily withdraw his or her money if he or she decides to discontinue the transaction at any time.
When dealing with an off-chain ledger, the transactions are signed, and the amount is moved to whoever is documented.
Following that, the signed ledger on the main blockchain may be closed, and the deposits will be refunded in line with the revised balances.
However many transactions took place off-chain, the blockchain will only show two of them: forming the payment channel and making a deposit, and another for completing the transaction.
An individual who attempts to withdraw his or her money after a transaction has been completed is breaking the law. This regulation has been put in place to discourage cheating.
Each new user with whom you desire to perform a transaction on the Lightning Network necessitates the deposit of funds into your Lightning Network account.
But this is not the case since the Lightning Network allows users to interact with one another through intermediary networks instead of direct connections.
Future of Bitcoin Lightning Network
The Lightning Network’s capacity to boost scalability while simultaneously cutting transaction costs is still a source of contention for the Bitcoin network. Team members from the core have, on the other hand, introduced new use cases and are investigating new features. By 2021 and beyond, it is anticipated that significant breakthroughs will be achieved in the network.
Payments may be made in larger amounts thanks to the Lightning Network. Clients will be able to utilize larger channels shortly due to Lightning’s elimination of the 0.1677 BTC limit on channel capacity, which will occur in 2020
At this early stage, cryptocurrency exchanges represent one of the most promising use cases that have emerged. Kraken said that it would begin delivering Lightning Network support December 2020 and that it would begin in 2021. The only transactions authorized when systems are upgraded withdrawals, while payment channels may be developed to allow Lightning transactions to be completed directly with the exchange.
Watchtower
Watchtowers are third-party programs that run on Lightning Network nodes to detect and prevent fraudulent transactions from occurring. Consider the following scenario: Sam and Judy are involved in a transaction, and one of them has a hidden agenda. They may take the money from the other player if they are quick enough. Consider the following scenario: Sam and Judy put down 10,000 bitcoins as an initial deposit, and then Sam purchased items from Judy for 3,000 bitcoins. If Judy does not safeguard her computer, she may become a victim of fraud. Because there are no transactions, Sam may broadcast the beginning state, which implies that they both get their original deposits back in their accounts. Sam would have gotten a free 3,000 BTC worth of products if the offer had been made.
When we try to terminate a channel using the initial state rather than the final state after all transactions have finished, we refer to this as “fraudulent channel close” An observer or third party may keep an eye on the transactions and aid in preventing fraudulent channel closures.
Conclusion
The Lightning Network has been hailed as one of the most important breakthroughs in Bitcoin’s history. This strategy seems to be the most effective way to cope with Bitcoin’s ravenous scaling and congestion problems. However, there are certain disadvantages to take into consideration.
Lightning Network is a concept that is always evolving for the Bitcoin blockchain. However, it is possible that the Bitcoin network will not solve all of Bitcoin’s challenges. When new changes and additions are brought to the bitcoin network, there is also the risk of new challenges in the bitcoin ecosystem. The advancement of cutting-edge technology via research and development will greatly influence the future.
Of course, the project’s progress will improve over the following several months. Suppose the Lightning Network can prove efficient over the next year. In that case, it has the potential to fundamentally alter the way consumers and big financial institutions across the world interact with Bitcoin and other cryptocurrencies.
While it is unknown if this mechanism can handle Bitcoin transactions, it will be interesting to see whether the Segregated Witness (SegWit) program places the same confidence level in this approach.