What is Lightning Network?
Lightning Network was created to solve the problems caused by commissions and time-consuming value transfer on Blockchain.
During the transfer of value, there are sometimes problems with the transactions due to the commissions paid. The system, stepping in at this point, serves as a payment channel.
How Lightning Network Works
The Lightning Network is an off-chain transfer network built on the Bitcoin Blockchain. The system operates at the peer-to-peer (P2P) level and its availability is based on the creation of bidirectional payment channels where users can exchange cryptocurrency without problems.
After the parties decide to open a payment channel, they can transfer money between their wallets. Although the process of establishing a new payment channel requires a chain transaction, all transactions within the channel are out of chain and do not require global consensus. Therefore, these transactions can be carried out quickly with a smart contract with much lower fees and much higher TPS rates.
To open a payment channel, the two parties involved in the network must install a multisig wallet and place money in it. Funds stored in multisig wallets can be accessed only if both parties have private keys (two or more, depending on the situation). This means that one party cannot open the wallet without the other’s permission.
Even if the two parties do not have a direct payment channel, they can still send and receive Bitcoin through interconnected payment channels. This means that as long as there is a network with sufficient balance between them, Murat can send money to his friend without having to create a direct channel with him.
So, if Ali has an open payment channel with Omar and Omar has a channel with Veli, he can make the payment through Ali. There may be too many Lightning Network nodes in the payment routing, but smart contracts will look for the shortest way by itself.
Advantages of Lightning Network
The Lightning Network project works to find an out-of-chain solution to the problem of scalability.
If successful, Bitcoin can reduce the density of the Blockchain.
By using two-way payment channels, Lightning Network provides instant transactions.
Allowing Lightning Network to transfer small values can be advantageous for micro payments. Moreover, in the M2M (Machine-to-Machine) economy, where electronic transactions are carried out without the need for human intervention, automated micro payments can be applied.
Lightning Network and Its Limits
Unlike in-chain transactions, Lightning Network does not accept payments if the recipient is offline.
Network participants may need to regularly monitor payment channels to secure their funds (such risks can be overcome by outsourced monitoring services).
The Lightning Network is not yet eligible for large payments. If the network is counted with a large number of multisig wallets (basically shared wallets), it is likely that they have sufficient balance to act as intermediaries for large payments.
Turning a payment channel on and off usually involves manual and chained transactions that require higher transaction fees.
There is no official launch date as the Lightning Network is continuously updating and developing.
The combination of nodes and payment channels makes the Lightning Network convenient to solve the problem of scalability. The beta version has undergone many tests and its effectiveness has not yet been proven. The Lightning Network has the potential to further improve the ecosystem of Bitcoin and other benchmark currencies.
Investment information, comments and recommendations contained herein are not included in the scope of investment advisory. Therefore, making an investment decision based solely on the information and comments contained herein may not produce results that are in line with your expectations.