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What is the Lightning Network?
Blockchains are greatly limited in efficiency by their encoded block size limit of just 1megabyte. Consequently, regular bitcoin transactions are excruciatingly slow. Also, transaction charges on blockchain can be ridiculously exorbitant. In essence, if you wanted to send a friend some bitcoins, it`ll take some hours to get delivered, and you`d pay significant transaction fees. With such a reputation, how can Blockchain technology rule the world? Lightning network is here to solve these problems. But before we meet the remedy, let`s understand the problem.
Why are blockchains slow?
A “block” is a record of transactions on the bitcoin network that needs to be added to the blockchain, which itself is a register of all transactions on the network since inception. For a blockchain transaction to be completed, some processing needs to be done to make sure all involved parties agree on the particulars of the transaction. This process takes about 10 minutes for each block. A transaction, for example, contains information about the sender, the receiver, the amount sent, and the transaction fee.
What is a transaction fee?
It is a token you pay to make miners include your transaction in a block as soon as possible. Well, it is supposed to be a token, but you might very easily find yourself paying significant amounts as transaction fees if you want your transaction attended to immediately. There is no set cost. However, the bigger your “tip”, the faster your transaction will be attended to.
How miners process transactions
At every point in time, bitcoin miners and the transaction processing computers have a myriad of transactions to process and add to the current block. To aid their decision, they attend first to transactions with bigger transaction fees – the most rewarding transactions. This implies that if there are enough transactions with bigger fees than yours waiting to be processed, your transaction may remain in the queue for a while.
What is the Lightning Network?
Lightning network is a proposed fix for the speed and exorbitance problems in blockchain technology. It overrides the need to record all transactions on the blockchain, thereby improving speed and efficiency. With the Lightning network, users A and B who transact frequently between themselves can seamlessly bypass registering all their transactions on the blockchain and bring them off the chain.
How does the Lightning Network work?
In the simplest of terms, here`s how the lightning network works:
- A payment channel will be created between frequently transacting users A and B, and its opening will be tape-recorded on the blockchain.
- The final status of transactions happening via this channel will be composed on the blockchain.
- Using this system, a network of payment channels can be created such that it will be seldom necessary to transact on the blockchain.
- Since interaction with the blockchain would be minimal, transactions will occur at lightning speed.
What are payment channels?
A payment channel is akin to a safe-deposit box in which two individual deposit equal amounts of money and each put a lock on it. This action of pooling equal funds in a box is tape-recorded on the blockchain in form of an “Opening Transaction”. Thereafter, a payment channel is created between the two participants. The money in the box is then used to transact between the duo. In essence, a payment channel is basically pooling money together and then shifting possession of the pooled cash between participants in an agreed-upon manner.
How payment channels work
Closing a channel implies opening the safe-deposit box and taking out all the money. This opening of the package takes place on the blockchain and the final relative ownership of the pooled funds is tape-recorded permanently.
You have been given a glimpse into how payment channels work. However, this does not come close to describing their true potential. The real capacity of payment channels can be experienced when two or more payment channels merge to create a network – the Lightning Network!