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Definition of the Lightning Network The Lightning Network is a second layer technology provided for micropayments in Bitcoin and introduced by Satoshi Nakamoto. This network improves to make small transactions faster and more efficiently. Transactions in this network have the lowest fees and are easier to verify.
In the Lightning network, transactions are removed from the main Bitcoin blockchain and are done off-chain. This network is designed to reduce costs and increase transaction speed in off-chain transactions. The need for the Lightning network was the main purpose of Bitcoin to be used as a means of payment in everyday transactions. But with the constant increase in the price of this currency and considering the network fee, as well as the increase in the market size and the number of users, it became almost impossible to convert Bitcoin into a suitable currency for daily transactions.
For example, suppose two people named Mehsa and John have many financial transactions with each other and it is necessary to make these transactions between them quickly. So, they create a channel for themselves on the lightning network. This example can also be true for you and your local supermarket.
First, Mehsa and John need to create a multi-signature wallet where they both have access to the private key. Then both deposit a certain amount of bitcoins (say 3 bitcoins) into this wallet.
From this moment, Mahsa and John can trade in an unlimited way. These transactions are basically only recorded in their shared wallet and not reported to the main Bitcoin blockchain. For example, if John wants to send 1 Bitcoin to Mahsa, he must give Mahsa the right to own this amount. Both then verify the new account balance using their private keys.
The fact of distribution occurs when the channel is closed. When the channel is closed, Bitcoin algorithms base the last signature of both parties on the account balance of the two people. If Mahsa and John close the lightning channel after this transaction, Mahsa’s property will be 4 bitcoins and John’s property will be 2 bitcoins.
Lightning-based projects, if successful, could solve Bitcoin’s scalability issues and significantly reduce blockchain traffic. This action will significantly increase the speed of transactions. In fact, Lightning is one of the main advantages of using Bitcoin.
One of the interesting features of the Lightning network is the exchange between different blockchains and the conversion of cryptocurrencies without the need for digital exchanges. Cross-chain atomic exchange can enable the exchange of cryptocurrencies without the need for a centralized authority such as an exchange, reducing the issues associated with cryptocurrency trading. The first cryptocurrency exchange test between the Bitcoin and Litecoin blockchains has already been successfully completed.
One of the weaknesses of the Lightning network is that transactions are carried out opaquely and outside the main blockchain. In this case, the security of transactions is reduced. Because of this, the Lightning Network will probably only be used for small transactions, and larger transactions that require more security will still be done on the main blockchain.
The biggest problem of the Lightning network is the exit of transactions from the decentralized state. If the lightning network becomes widespread and transactions are carried out through channels, practically part of the transactions will be centralized; Therefore, if a trading channel is broken or hacked for any reason, it can affect the entire network.
The last problem with the Lightning Network is that it is not economically viable for the Bitcoin blockchain and miners. The solution to this issue is to increase the costs of this network in favor of the nodes that maintain the channels. Additionally, opening and closing payment channels is an on-chain transaction and requires high manual fees.
The Lightning Network acts like a shortcut along the main blockchain highway. Still, this technology is only being investigated in a limited way by a few projects such as BlockStream and Lightning Lab. There is still a long way to go until the final consensus of Bitcoin users on using this technology and solving its problems.
