What is the Bitcoin Lightning Network?

Last Updated on August 20, 2022 by aicrypto

Bitcoins are still by far the most important cryptocurrency. However, the old master among the coins is not without problems: Long transaction times and high costs are a problem for users.

  • The Bitcoin Lightning Network is supposed to bring relief.

The world’s largest cryptocurrency

With a market capitalization of around 400 billion US dollars (as of August 2022), Bitcoin is still the world’s largest cryptocurrency.

In the well-known blockchain network, miners take over the processing of blocks and thus also of the transactions made according to the “proof of work” concept.

The Bitcoin Blockchain is too slow

What still worked well in the early days from 2009 onwards proved to be a bottleneck relatively quickly thanks to Bitcoin’s rapidly growing popularity.

The volume of transactions could hardly be processed in a manageable amount of time, as the blockchain only handles around 7 transactions per second.

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On particularly busy days, users even had to put up with waiting times of up to a day before their transaction was processed. In combination with constantly growing block premiums and high fees, this often led to disgruntled users.

Scalability of the Bitcoin network

Not surprisingly, the question of the scalability of the Bitcoin network was raised in order to ensure long-term acceptance as a digital currency.

To this end, a part of the community relied on an increase in the size of the blocks to increase the transaction capacity and eventually split off as Bitcoin Cash.

Lightning Network a second-layer protocol

The majority of developers favored the Lightning Network. This is a second-layer protocol that basically puts an abstraction layer on top of the blockchain.

This would theoretically even allow transactions between different blockchains, provided they support the Lightning Network.

In very simplified terms, the Lightning Network consists of bidirectional payment channels through which participants with multisignature wallets can settle their transactions with each other very quickly.

A very fast solution

This is usually done in less than a minute; under ideal conditions, even milliseconds are sufficient.

In contrast to the original principle of the Bitcoin network, each transaction does not have to be immediately deposited individually on the blockchain.

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The blockchain merely stores the outgoing and final account balances when a payment channel is opened and closed.

Individual payment transactions themselves are processed through the Lightning “off-chain” network and are not logged on the blockchain, ensuring higher privacy.

Participants can also unilaterally close the used channel again.

Advantages and disadvantages

  • The most important advantage of Bitcoin Lightning is the fast transaction processing at very low costs and thus a significantly higher suitability for everyday use compared to the regular Bitcoin blockchain.
  • In addition, micro payments starting from one Satoshi (0.0000001 BTC) are now feasible in a meaningful way. Previously, they were economically meaningless due to the transaction fees incurred, which were usually in the double-digit US dollar range.

An example of Lightning in practice is the country El Salvador: Bitcoin has been recognized by the government as an official means of payment here.

The basis for this is primarily the Strike app. It enables the fast and cheap transfer of even the smallest Bitcoin amounts – and is based on the Lightning Network.

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Despite these advantages, the Lightning Network is not yet in widespread use. The technology is constantly being developed further and should therefore not be regarded as final. Currently, for example, both parties must be online for a transaction to take place.

In addition, Bitcoin transaction fees are incurred for opening and closing a channel – via which a practically unlimited number of transactions is possible.

Nevertheless, the future of the Bitcoin Lightning Network is promising: for example, the social network Twitter is currently preparing to integrate the network in order to process tips and donations through it.

This could be a great step towards making the Lightning Network accessible to a large amount of users.