Recently, if you’ll pardon the bad pun, a growing number of cryptocurrency enthusiasts have been getting charged up about the Lightning Network. The network, which is growing steadily in capacity, has been hailed as a solution to the scalability concerns that constantly plague Bitcoin and other cryptocurrencies. How does the lightning network function? And what does it do to solve the scalability issue? Read on.
Off the Chains!
Cryptocurrency transactions, of course, are accounted for on the blockchain. Using proof of work, or other standards, each transaction’s data is recorded, providing the currency with its electronic ledger. As a cryptocurrency continues to increase in popularity, the volume of transactions places a strain on the capacity of the blockchain to keep up. In order to decrease this strain on the blockchain, the Lightning Network takes place on top of, or outside of it.
Two parties that anticipate transacting frequently set up a multi-signature wallet on the Lightning Network, and contribute to it financially. As transactions flow back and forth, both parties sign off on them, using their private key, effectively updating the balance sheet inside the channel, without bothering the blockchain itself. Only when the wallet is closed will the information be obtained by the blockchain, with the most recent version of the mutually agreed upon balance sheet providing the blockchain with its accounting instructions.
A Trip to the Ballpark: A Lightning Network Analogy
Consider the following non-crypto analogy, for its illustrative purposes.
Suppose two friends, John and Andy, attend a sporting event together, and agree to split the costs of the outing. John buys two tickets for $100, so Andy presents him with $50, the cost of one ticket. The two take a cab to the stadium, and Andy pays the fare of $20, and John, in turn pays Andy $10. Upon entering the stadium, Andy buys concessions for $30, and collects $15 from John. Eventually, the interactions between John and Andy become cumbersome. They’ll spend more time reaching for their wallets than watching the game!
A more efficient system would be for John and Andy to record all expenses as they occur, and tabulate them at the conclusion of the outing. Perhaps John contributed $200 in total, and Andy $150. Andy, therefore, would owe John $25 (half of the difference). This one interaction would replace the constant exchange of money between the two friends.
The joint wallet on the Lightning Network follows the same general principle. As transactions occur between the participants, both parties would sign off, and they would be recorded within the Lightning Network. Eventually the participants would end the arrangement, and only at that point would the most recent accounting be sent to the blockchain, saving the blockchain from tabulating each transaction individually.
Types of Cryptocurrency Transactions: Fits and Misfits of the Lightning Network
Because of the reduced amount of computations involved, the Lightning Network offers significantly lower transaction fees than those attached to blockchain transfers, providing it with a significant advantage. In the future, as cryptocurrencies continue to become more widely used for day-to-day transactions, bypassing the blockchain for minor exchanges creates a feasible solution to the scalability issues incumbent upon the blockchain.
On the other hand, because the Lightning Network takes place outside the blockchain, there have been concerns about marginal sacrifices in security. For this reason, the Lightning Network is not currently considered the best option for major transactions between long-term investors.
The Lightning Network is also able to facilitate transfers of tokens between different blockchains. These ‘atomic swaps’ help to eliminate pricy and potentially risky centralized cryptocurrency exchanges from the equation.
Where Did the Lightning Network Come From, and Who’s Carrying the Ball?
The genesis of the Lightning Network was a white paper authored by Joseph Poon and Thaddeus Dryja in 2015. Currently, the Lightning Network is being developed mainly by Blockstream, Lightning Labs and ACINQ. Although the technology was initially designed to facilitate Bitcoin transactions, it has since been modified for a host of other cryptocurrencies, including Ripple, Stellar, Zcash, Litecoin, and Ether.
As modifications continue, buy-in is steadily growing. Recently the capacity of the Lightning Network has exceeded 500 BTC ($2M). As Bitcoin, and other cryptocurrencies, continue to crawl back from the roller coaster ride that was 2018, the increased capacity and adaptation of the Lightning Network is seen as a strong fundamental sign that cryptocurrencies are poised to keep rising to dominance as both a strong investment, and functional means of conducting financial transactions. By facilitating efficient trading, the Lightning Network will allow Bitcoin and others to compete with financial juggernauts like Visa, causing many to anticipate future bull-runs on leading cryptocurrencies.