The Lightning Network was launched in July 2015 as a framework for scaling blockchain technology, specifically the Bitcoin network. The first beta was published almost three years later, in March 2018, and the network went live. We can already claim that the Lightning network is in its early stages and has a lot of room for growth. But what is this Lightning network, exactly?
Read more: What is Blockchain and how does it work
The Lightning Network, or «LN,» is one of the most intriguing innovations in the bitcoin and blockchain worlds today because it revolutionizes how value is conveyed. The free and open network not only benefits Bitcoin, but it also benefits other blockchain applications in principle. LN uses existing blockchain systems as a «second layer» technology to improve existing attributes (such as transaction speed) or even introduce new functionalities (such as anonymity or micropayments).
What is the purpose of Lightning Network?
Because the bitcoin blockchain is effectively a worldwide database in which each participant’s transaction must be confirmed and then maintained in perpetuity, scaling this project for transaction speed is a near-impossible task. This does not make the Bitcoin network a viable alternative to modern payment systems like VISA, Mastercard, or PayPal. Satsohi Nakamoto, on the other hand, did not make this claim in his invention.
Bitcoin was designed to be a secure, free, non-manipulable, and censorship-resistant alternative to existing monetary systems around the world. Bitcoin provides the framework for a globally active and secure monetary network in an increasingly digitized and globalized world. Two network properties must be highlighted in order to attain this laudable goal.
To be really free, Bitcoin must be as decentralized and secure as possible, and it must be able to survive attempts at censorship or manipulation by powerful nation states in an emergency.
The amount of transactions executed on the network has grown in tandem with the growing interest in Bitcoin. Because each transaction necessitates blockchain space, and block sizes are restricted, not all transactions always proceed to the next block. Furthermore, the Bitcoin system is set up in such a way that a new block is only found once every 10 minutes on average.
As a result, a queue of redundant transactions is created in the so-called Mempool, which miners process according to the concept «the more fees are paid, the faster the transaction will be included in the next block.» As a result, when the number of intended transactions exceeds the capacity of the blocks, the cost of being able to save a transaction to the blockchain in a fair length of time will skyrocket. Unless you’re willing to pay exorbitant transaction costs, a transaction may take hours or even days to be confirmed through the network.
Now, of course, it would be obvious either to shorten the time between two blocks or to increase the maximum block size in order to be able to process more transactions accordingly. However, this approach would not be a good solution for many reasons and would cause many problems elsewhere. For example, the cost of running a so-called full node (ie a computer that stores the entire blockchain and validates transactions) will increase dramatically.
The larger the block size, the higher the bandwidth, processing, and memory requirements for each individual full node. Increasing the transaction capacity in this way would result in the undesirable effect of centralizing the system, as only a few entities can manage it. Antonopoulos, Pickhart, and Osuntokun state in Mastering the Lightning Network that about 8 GB per block is needed to match a transaction volume of say, VISA (40,000 transactions per second).
This would mean that around a terabyte of new data would have to be stored each day, which only large companies can certainly do, and would de facto prevent full nodes from being launched for individuals. In this context, the so-called «trilemma» is often mentioned in the crypto communities.
This describes the fact that a distributed database can only maximize two of the three properties of security, decentralization, or scalability. It is considered impossible that blockchain can be decentralized and secure while being extremely scalable.
It was evident from the start of the bitcoin network that a decentralized and secure data structure like the bitcoin blockchain could not scale in terms of transaction processing. One of the original Bitcoin pioneers and the recipient of the first Bitcoin transaction, Hal Finney, remarked in 2010:
«Bitcoin can’t scale to the point where every financial transaction in the world is broadcast to everyone and recorded in the blockchain.»
There should be a simpler and more efficient second tier of payment systems.
Even back then, he was talking about second-tier payment systems, or second-layer technology like the Lightning Network. The trilemma trade-offs can be spread in a variety of ways within this wider network. The Lightning Network focuses on scalability and decentralization as its main features. It can still be incredibly secure if it relies solely on the Bitcoin blockchain as a foundation layer. So, while the Lightning Network does not solve the trilemma, it does so elegantly in conjunction with the Bitcoin network.
What is Lightning Network potential?
Payments made in real time
As previously said, there are numerous benefits to using Lightning Network. To begin with, it allows users to perform transactions in real time and for nearly no cost. Unlike the Bitcoin network, LN does not have a 10-minute average wait time for the next set of transactions to be completed. Payments over LN are lightning-fast and practically immediate, as the network’s name suggests.
Because web miners are not required to pay, transactions can be completed for pennies on the dollar, or even for free. The typical charge for a medium-sized payment on the Lightning Network in the first quarter of 2021 is roughly 4 to 5 satoshi, which is less than one euro cent.
While Satoshi is the lowest marketable unit on the Bitcoin network, LN also accepts millisatoshi (mSat) payments, which provides a significant benefit and greater flexibility in some microtransaction scenarios. We’ll go through it in more detail under «What else can I do using LN?»
Another advantage of the Lightning Network is that it provides substantially more privacy than the Bitcoin network’s underlying layer («core layer»). The Lightning Network stands out for its lack of transparency and anonymity, despite the fact that the individual entities are at best pseudonyms and blockchain transactions can be tracked back to the so-called genesis block. Nobody on the network knows who is sending how much to whom or to whom they are sending it.