Initially, Bitcoin was not designed to be a more developed network. It was intended to be a decentralized payment system where users could keep their identity anonymous and access it from anywhere. However, as Bitcoin’s popularity grew, there were adverse effects, such as a slower transaction system and higher fees. That’s why developers built a second layer for this coin where the main blockchain system is on the primary layer.
The Lightning Network, first proposed by Joseph Poon and Thaddeus Dryja in 2016, is the second layer of the Bitcoin network. It uses micropayments to augment the Bitcoin blockchain’s ability to perform transactions more efficiently.
What is the Lightning Network?
The Lightning Network is the second layer of Bitcoin used to conduct off-chain transactions or transactions made between the blockchain and other parties that are not part of the main blockchain network. This second layer contains several payment channels from other parties and also Bitcoin users who make these transactions. The Lightning Network is a channel for two-party transactions where each party can send or receive payments from the other. This second layer allows the usability of the blockchain to grow by managing transactions outside the blockchain while continuing to benefit from Bitcoin’s decentralized and secure first layer.
Scalability is a significant factor in the development of a cryptocurrency.A blockchain network will be able to manage millions to billions of transactions every second if properly developed. In this context, the Lightning Network charges low fees for off-chain transactions by enabling micropayments such as coffee purchases using crypto assets, speeding up the transaction process, and reducing the energy expenditure used in the Bitcoin system. Even though it already exists, the Lighting Network still struggles to solve issues and can generate other problems, such as security vulnerabilities from cyber attacks.
What are Examples of the Lightning Network Use?
Here are some examples of Lightning Network usage that have been applied in the real world:
Twitter allows its users to send and receive Bitcoin through the Lightning Network in the form of a payment application called Strike. As many as 360 million active users on Twitter can send Bitcoin to other Twitter accounts instantly and for free.
El Salvador became the first country to legalize Bitcoin. Its government created a government-based digital wallet called Chivo, founded on the Lightning Network and designed to do easy cross-border transactions. As of October 2022, Chivo has become one of the most downloaded apps in El Salvador.
The peer-to-peer Bitcoin exchange network, Paxful, processes millions of dollars worth of transactions noting that it has 1.5 million active users in Africa. Paxful recently announced the use of the Lightning Network in its transaction process. This integration allows for fast transactions at low cost for its millions of users.
Why is the Lightning Network Needed?
When Satoshi Nakamoto first explained the concept of Bitcoin in his 2008 whitepaper, he used the term peer-to-peer electronic cash. He suggested that one day, cryptocurrencies would become a popular and common way for people to pay for goods and services. But as Bitcoin’s value has grown, that narrative has shifted as more people have come to think of the asset as digital gold or an inflation hedge.
Why does this happen? Part of the reason is the way the Bitcoin network is designed. Bitcoin allows two people to transact securely anywhere without using credit cards or banks. This is possible by using a decentralized network combining computer systems worldwide. The solution is to work through a mining process that validates every transaction, which is very time-consuming.
The Lightning Network was first created to partly help Bitcoin function as digital cash, used for everyday transactions as Nakamoto envisioned. The network would process off-chain transactions faster and cheaper than the basic Bitcoin transaction validation system that uses mining. While the basic Bitcoin system typically performs ten transactions per second, the Lightning Network could theoretically perform millions of transactions in a single second.
The Future of the Lightning Network
An advantage of the Lightning Network is the growing adoption of the system. According to DappRadar, Bitcoin locked in the Lightning Network is worth US$110 million. This amount is used by its owners to pay for goods and services. Some applications are essential for the use of the network, such as wallets that are compatible with the Lightning Network system. Since the Lightning Network is a separate protocol from Bitcoin’s main net, it requires a different type of wallet for users to establish payment channels. Traders cannot utilize the Lightning Network without a suitable wallet. If the adoption of the Lightning Network continues to grow, the industry can expect more wallet developers to integrate support for this network. Specialized users can also become nodes, speeding up transaction times within the Lightning Network.
It is also worth noting that development on Lightning has expanded to serve as a second-layer solution in various projects. Cryptocurrency exchanges are also starting to support this protocol, thus bringing the network to as many traders as possible. Exchanges integrating the Lightning Network allow traders to withdraw smaller amounts of Bitcoin cheaply and instantly (even when the Bitcoin network is congested). Without the Lightning Network, users may have higher transaction fees and experience long waiting times due to Bitcoin’s early technology.
Watchtowers, third-party protection services consisting of various specialized nodes, have also been introduced to the Lightning Network. Some nodes go offline occasionally, leaving their payment channels open for fraudulent offline transactions. Instead of leaving their channels unattended, participants can pay a small fee to a watchtower and provide markers associated with channel transactions. A watchtower uses the markers to identify the user’s channel, among others and monitor it.
If the watchtower senses any malicious activity that could harm the system, such as a counterparty trying to close a payment channel, it automatically freezes the funds and returns them to the offline user. The watchtower will also penalize the malicious party by withdrawing their funds from the channel.
