The Lightning Network
The Lightning Network is designed to make bitcoin transactions as fast and cheap as possible. It’s part of a newer class of crypto technologies known as “layer 2” blockchains — which you can think of as being a little like HOV lanes on highways. By offloading some transaction “traffic” to the Lightning Network’s “layer 2” blockchain, the core Bitcoin blockchain (“layer 1”) can move faster.
Interesting facts
- Jack Dorsey announced in June 2021 that he would integrate the Lightning network into Twitter and its decentralized counterpart BlueSky. He demoed LDK in December to support quick Bitcoin payments.
- In March 2018, Lightning Labs, a blockchain engineering lab, got $2.5 million in funding from investors. Jack Dorsey was also among the first to invest in the Lightning network
- El Salvador is the first country to use the Lightning network for BTC payments in 2021
How does Lightning Network work?
Lightning Network or LN allows all participants to eposit some balance to a common wallet (contract) which is then instantly sent to another participant on the same contract when the payment is done.
The Lightning Network uses smart contract functionality in the blockchain to allow for instant payments between a network of participants. The success relies upon the underlying technology, blockchain, by using its scripted smart-contract language to create a network of participants able to transact at high speeds.
We’re going to use a real-world example to help explain how the Lightning Network works. Let’s say Jack and Ron want to engage in a business relationship where they will need to send one another money back and forth with minimal fees. To do this, they set up a digital wallet that they can both access with their own unique keys, then deposit money into those wallets (let’s say they both deposit 5 bitcoin into their wallets). Once that network is created and money is deposited, Jack and Ron can perform unlimited transactions between each other. When Jack sends Ron 1 bitcoin, Ron now has 6 bitcoin in his wallet and Jack has 4. If Ron sends 2 bitcoin back to Jack, Ron now has 4 bitcoin in his wallet and Jack has 6. These transactions are immediate and can continue for as long as their business relationship persists. Because these transactions were done on the Lightning Network, they aren’t actually recorded onto the blockchain until the channel is closed. So, the Lightning Network kind of served as a buffer zone for their back-and-forth transactions until the final transaction was recorded onto the blockchain.
Advantages
- It is instant and does not require any fee for the transaction.
- It is secured and one can use it for micropayments.
- The record is off-chain due to which there is less traffic.
- If one person wants to back out from the transaction, he just can take the deposit and leave which results in the closing of the payment channel.
- Due to the payment channel the person gets all the advantages of Bitcoin, all the facilities of Bitcoin and does not feel any problem.
As there are advantages of payment channels that are lightning network but there are some disadvantages too and the main disadvantage is that the lightning network is being used by the drug dealers because of its one property of saving the record of chain and not letting the person know who was the sender and who was the receiver and for what purpose the payment was done.
Conclusion
Lightning fixes multiple problems that exchange’s are facing today. It lowers transaction fees for itself and its users, it provides a way better user experience, and offers new opportunities for generating revenue.
In the abstract, Lightning is a great improvement for the entire blockchain ecosystem. Transacting onchain is slow and cumbersome, while transacting with Lightning is quick and easy. This UX improvement will unlock new applications for cryptocurrency that grows the entire market.
Exchanges play the most important role in the cryptocurrency economy today. Most economic activity involves moving cryptocurrency through exchanges. This means exchanges are in a unique position to influence adoption of new technologies like Lightning. We ask that you adopt this technology not only to make your business more profitable, but to further the adoption of bitcoin.
