What is Lightning Network?
The Lightning Network is a Bitcoin *Layer 2 protocol that scales blockchains and enables trustless instant payments. This is achieved by keeping most transactions off-chain and leveraging the security of the underlying blockchain as a settlement layer.
This is accomplished through “payment channels”, where two parties deposit funds to pay each other. This process is instant and saves users from having to wait for block confirmations before they can finalize transactions for goods or services.
Enabling Bitcoin transactions to settle instantly allows $BTC to be used as a scalable medium of exchange. By moving payments off-chain, the cost of opening and closing channels enables micropayments and small-value transactions that transaction fees would otherwise be too expensive to justify.
The Lightning Network enables scalable blockchains through a high volume of instant transactions without the need for any third-party involvement.
How does Lightning Network Work?
Lightning Network works by placing funds into a two-party, multi-signature Bitcoin address called a “channel”. This channel is then represented as an entry on the bitcoin public ledger. In order to spend funds from the channel, both parties must agree on the new balance. This balance is stored as the most recent transaction signed by both parties who’re spending from the channel address.
To make a payment, both parties sign a new transaction spending from the channel address. This looks and operates just like any standard Bitcoin wallet transaction. Both parties have the option to unilaterally close the channel at any time, ending their relationship.
Since all parties have multiple multi-signature channels open with many different users on this network. Anyone can send a payment to any other party across Lightning Network. Everyone can create their own Lightning Network channel to process payments and accept instant payment for goods, services, and global money remittances.
Real-World Application
Think of Lightning as the rails for a global payment system. Localized national fiat currencies around the world can be received even if Cryptocurrencies like Bitcoin were sent. Meaning it’s not just about the ability to send and receive Bitcoin, it’s about the ability to send any currency you choose and have it received as any currency the receiver chooses.
This effectively removes the need for 3rd party money remittances services like Swift Network, which encompass almost all international money transfers. It also removes the need to use an outdated payment network like Visa and Mastercard. These old systems charge their users a premium that can range from 3% in Credit Card transactions to more than 50% with Western Union and other international service providers.
These old providers have up to four separate fees for transferring money between loved ones. With everyone being able to open a simple app like Strike or Bluewallet, there’s no reason for anyone to ever pay a portion of their transaction in fees to a 3rd party.
A Truly Unique Network
The Lightning Network can be built to accommodate any network, not just Bitcoin. Lightning Network is simply the first successful implementation of a multi-party Smart Contract using Bitcoin’s coding language.
An important factor when considering Layer 2 technology built using Bitcoin, is it must maintain everything that makes Bitcoin inherently secure. By doing so it ensures that any protocols being built to accompany the Bitcoin Network maintain its decentralized nature. With other Layer 2 protocols in development for Bitcoin, focused on controlling a user’s funds, Elizabeth Stark, Olaoluwa Osuntokun, and their team at Lightning Labs have designed the Lightning Network to mimic all the sovereign properties of Bitcoin.
The Lightning Network enables what was previously not possible with trusted financial systems always vulnerable to monopolies. Without the need for custodial trust and ownership, participation in the growing Bitcoin Network can continue to be dynamic and open for all.
Many companies and exchanges are joining the Lightning Network so be on the lookout for more incredible advancements in the technology.
