What is The Lightning Network, and How Does it Work?

Unarguably, the Blockchain is filled with a lot of transformative potential, but scalability has been a major issue. As more users transact, the network tends to slow down, leading to congestion and excessive fees. These concerns were the motivation for the creation of the Lightning Network.

In February 2015, Joseph Poon and Thaddeus Dryja collaborated to address one of the bitcoin ecosystem's most critical issues: the spike in transaction fees. This collaboration was followed by the release of a detailed Whitepaper about the Lightning Network in 2016. This publication attracted several developers to contribute to the work.

A few years after the publication of the whitepaper, an organization–Lightning Labs, created a version of the Lightning Network code and published it for developers to test. Fortunately, it has been a successful project such that it is widely recognized as a whole ecosystem with a bunch of products. In this article, we will explore what the Lightning network is, how it works, and the benefits it offers.

What is the Lightning Network?

The Lightning Network is a second-layer solution designed to address the scalability and efficiency issues of the bitcoin blockchain. It aims to enable faster and cheaper transactions by conducting most of the transactions off-chain, while still utilizing the security and decentralization of the underlying blockchain.

In essence, the Lightning Network operates using a network of payment channels, which are essentially private. The participants can transact with each other off-chain as many times as they want, without each transaction being recorded on the main blockchain. Only the opening and closing of the payment channel are recorded on the blockchain.

How Does the Lightning Network Work?

The Lightning Network is primarily based on Satoshi Nakamoto's concept of payment channels[p2p]. The system allows two participants to open a peer-to-peer payment channel. 

Before we dive into how Lightning works, let’s do a quick explanation of what opening and closing a payment channel means in simple terms;

Opening a Payment Channel

Imagine you have a friend, and you both want to exchange some virtual items. Now, Instead of recording every single exchange on paper, which could take a lot of time and effort.  you decide to create a special shared wallet. This wallet lets you and your friend exchange these virtual items without involving anyone else.

So, you both put some real money into this shared wallet as a sort of starting point. Now, you can freely swap your virtual items (back and forth as many times as you want), and the shared wallet keeps track of who owns what.

Closing a Payment Channel

Closing the wallet means you're finalizing the exchange you made. You both check the last state of the wallet. Then, you update the real owner of those virtual items according to the final state. This way, you both get back the correct amount of money that corresponds to the value of the virtual items you ended up with.

In the context of bitcoin and the Lightning Network, Instead of virtual items, you're exchanging digital currency, and instead of a random shared wallet, you have a special kind of digital wallet [Multi-signature wallet]. 

Therefore, opening a channel means putting some money into that wallet so you can send funds back and forth without waiting for a long time. Closing the channel means settling the final amounts after your transactions, just like getting back your money after the virtual item exchange with your friend.

Now that you understand what opening and closing a payment channel is, here's a simplified explanation of how the Lightning Network works;

Opening a Channel: Two participants, let's call them Shan and Kwame, decide to open a payment channel. They create a multi-signature wallet on the blockchain and fund it with a certain amount of bitcoin. This amount determines the maximum value that can be transacted within the channel.

Off-Chain Transactions: Now that the channel is open, Shan and Kwame can send bitcoin to each other instantly and without transaction fees as long as the total value of their transactions doesn't exceed the initial channel balance. These transactions are private and don't require confirmation on the main blockchain.

Updating the Channel Balance: Let's say Shan and Kwame want to update their channel balance. If Shan wants to send Kwame more bitcoin, they create a new transaction that reflects the new balance distribution. This transaction is signed by both Shan and Kwame. However, they don't broadcast this transaction to the main blockchain just yet.

Closing the Channel: At any point, either Shan or Kwame can decide to close the channel. The most recent channel state (the most recent balance distribution) is then broadcasted to the bitcoin blockchain, and the final balances are settled according to this state.

Lightning Network in the Real World

The Lightning Network isn't just theoretical – it's making waves in real-world applications. Bitcoin-native platforms like Bitnob support lightning transactions, making it easy for individuals to send and receive money through the lightning network, such that users don’t need to have prior knowledge of each other. 

For example, Shan and Kwame might just have a freelancer and a client relationship, and Kwame offers to pay Shan in bitcoin. 

Shan, on the other hand, can easily generate a lightning invoice on Bitnob to receive money from Kwame at the speed of light. If she doesn’t want to go through the invoice route, she can share her lightning address– a unique identifier through which people can send you bitcoin via the lightning network. 

The Lightning network is not just efficient, it is also an interesting solution. Some platforms have integrated the lightning network for ease of use. For instance, Bitrefill. On Bitrefill, you can buy gift cards from popular stores for yourself, or as a gift. At the point of payment, you will copy or scan the lightning invoice using the scanner provided on Bitnob,  then it will prompt you to instantly make payment in satoshis from the Bitnob app. 

Moreover, the lightning network is not limited to buying gift items or paying for coffee. Other platforms have the lightning network integrated to facilitate remittance to Africa. These platforms include Strike, CoinCorner, Neutronpay, Cashapp, etc. 

Benefits of The Lightning Network 

The Lightning Network offers several benefits that address some of the limitations of traditional payment options, especially when it comes to scalability and transaction efficiency. Here are some of the key benefits of the Lightning Network:

Faster Transactions

Since transactions occur off-chain, they can be almost instantaneous compared to the confirmation times on the bitcoin blockchain.

Lower Fees

With transactions happening off-chain, the fees associated with on-chain transactions are significantly reduced.

Scalability

The Lightning Network reduces the load on the main blockchain, allowing for a higher volume of transactions to be processed.

Privacy

Transactions within payment channels are private and aren't immediately visible on the blockchain, enhancing user privacy.

The Lightning Network is for Everyone

The Lightning Network's growth is impressive and its journey is far from over, with increasing capacity and a growing number of use cases. The great part is, it was developed to be inclusive of anyone in the world, who is open to innovations and willing to make transactions through it. Through the Lightning Network, people abroad can send money to their loved ones at home, businesses can scale globally, and the adoption of bitcoin grows even more.

Ready to jump on the Lightning Network? You can make it a less complicated adventure by using the Lightning feature on Bitnob–a user-friendly platform that allows users to experience Lightning Network to its full potential. You can travel with your Bitnob app to countries that accept bitcoin as a form of payment– El-Salvador and Boracay, Philippines for example. To cater to some important needs without carrying cash. Sounds like something you can’t wait to try? Download Bitnob to get started.