Bitcoin’s Lightning Network and How It Works
One of the limitations of blockchain is scalability. Concurrently, Lightning Network is one of the measures of solving it. For cryptos like Bitcoin and Ethereum, scalability has bedeviled the transaction process. When compared to traditional transaction systems like VISA, PayPal, and MasterCard, cryptos are still far behind. To put things in perspective, VISA executes about 24,000 transactions per second (TPS) while Bitcoin does a paltry 7 TPS.
With Lightning Network, Bitcoin seeks to scale its transaction per second to challenge the likes of VISA, PayPal, etc.
What Is Lightning Network?
It is a novel blockchain network that focuses on adding an extra layer to the Bitcoin’s blockchain network. This network enables users to create payment channels between two parties on the extra layer on Bitcoin’s network. These layers can exist for the period they are required. Since the layers are established between two people, the transaction will almost happen in an instant. One interesting thing about Lightning Network is that it involves low fees, and in some cases, the charges will be non-existent.
The concept was first described in 2015 by Joseph Poon and Thadeus Dryja. Lightning Labs, ACINQ, and Blockstream teamed up to develop the Lightning Network. Other members of the Bitcoin community also contributed to the work.
How It Works
Its working principle is quiet and easy to understand. For example, you are working with your sibling and need to send money to each other rather often, quickly, and with low fees. Therefore, both of you agree to set up a channel on the Bitcoin Lightning Network.
You both have to create a multi-signature wallet. The multi-signature wallet grants both of you access to your respective private keys. Once you have done that, both of you will have to deposit a stipulated amount of BTC each into the wallet. It can be 3BTC each or any amount you agreed upon. At this point, you and your sibling can conduct unlimited transactions. If your sibling wants to transfer 1BTC to you, he will have to transfer that amount’s ownership right to you. Once the transaction is over, both of you can use your private keys to sign an updated sheet.
The network provides you with the shortest route to execute a transaction. Therefore, it increases the number of transactions per second.
The prospect and potential of the Lightning Network are huge, and its manifestation will be a huge step to tackling blockchain scalability.
Okereke has a passion for researching blockchain and cryptocurrency. He enjoys creating long form educational content to inform others on the opportunities in this space.