What Is a Lightning Network In Bitcoin And How Does It Work?

According to its name, “lightning”, signifies a flash. With the lightning network, transactions are faster with low transaction fees and also more efficient. In addition, they are even more reliable than those done on the actual blockchain network. The lightning network is a second-layer technology assigned to bitcoin. It uses a micropayment cryptocurrency feature where it uses micropayment routes to rank its blockchain’s capability. This is one of the features that increase its speed and efficiency.

The main blockchain is usually referred to as on-chain. So, when the transaction is taken off the on-chain to the off-chain by the lightning network, it simplifies the blockchain to micro units, thereby causing a reduction in the normal transaction fee.

It’s not only used for trading purposes; it can also be used for cryptocurrency swaps. There are a lot of benefits attached to lightning networks in Bitcoin.

Benefits Of A Lightning Network

● It creates a private means of transaction away from the normal blockchain.

● It also provides granularity during transactions i.e, payments of minute value can be paid via the network.

● It provides a faster route for the completion of transactions.

● It is a facilitator of atomic swap where the exchange of coins takes place without a middle man.

● There are no limitations to transaction throughput- the capacity of each note influences the number of transactions that can occur.

History Of The Lightning Network In Bitcoin

In 2015, Joseph Poon and Tadge Dryja envisioned and wrote the Lightning Network’s, White Paper. A year later in May 2016, the world witnessed its testnet. January 2017, was the year of the first implementation of the lightning network. At this stage, it was in its Alpha stage. From then up until December 2017, no transactions were made via the network. All these changed when Alex Bosworth paid for his phone bill via the Lightning Network.

That was not all the transactions made during its alpha development stage. The first man, Lazlo Hanyezcto, used Bitcoin for a real word transaction by paying 10,000 BTC for two pizzas in 2013. He repeated this transaction by using Lightning to make payments for two pizzas.

How Does The Lightning Network In Bitcoin Work?

The Lightning Network is a network operated off-chain. Its main purpose is for users to conduct bitcoin transfers off-chain to reduce on-chain network congestion by diverting the on-chain transaction.

Firstly, the network operates a channel. In this channel, the two parties involved in this transaction, i.e. the peer-to-peer transactions, can submit their BTC funds. During the transaction, they can send BTC to one another without any need for broadcast to the open records of the Bitcoin blockchain.

If any party feels there is a need to return to the Bitcoin blockchain, either party can close the Lightning channel and return to the on-chain network. The transaction continues from where it was according to the channel’s transfer history. This transfer history in totality translates as a single transaction on the Bitcoin blockchain.

When using the Lightning Network for transactions, the only broadcast to the Bitcoin network is the opening and closing of channels. It is responsible for the speed, resulting in lower network fees, and reduction of the usage of blocks which makes it lighter.

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What Is The Transaction Fee Involved In A Lightning Network?

The transaction fees are still active in the lightning network. They are bitcoin transaction fees paid to open and close channels. This transaction fee is for the combination of routing charges and routing payment information between lightning nodes.

According to the research by two scientists from two universities in Hungary and the Institute for Computer Science and Control, they concluded that either the traffic or transaction fees must increase. This increment should be by orders of magnitude to make payment routing economically viable.

Limitations Of The Lightning Network In Bitcoin

Bitcoin’s Transaction Fee Problem

Although the Lightning Network provides a solution to Bitcoin’s transaction fee, it doesn’t mean it is absent. It is only Bitcoin’s congested network that is usually the cause of its exuberant transaction fee.

Opening and Closing Channel Costs

There are two parts to the costs of using the bitcoin lightning network. The first part consists of a bitcoin equivalence transaction fee for setting up the lightning network between parties. Before the lightning network allows payments between two parties, they must make an opening deposit via on-chain. After the first payment, they can carry out any transaction of their choice. But as soon as they are done, there is a need for a closing transaction. It will create a record for the settled amount on the blockchain

Cyber attack susceptibility

Using Bitcoin’s lightning, there is a requirement to keep the nodes online at all times to send and receive payments. Hackers can gain access to the private keys when the users are trying to log in, especially if it is from an unsecured or public network.

Offline Transaction Risk

Offline transactions are risky. They are prone to fraudulent activities, for example, one of the parties involved can escape with the funds while the other person is not available. Also, an excessive absence of one of the persons involved in the transaction can lead to the expiring of the transaction. This act is tagged Fraudulent Channel Close.

Bitcoin’s Price Fluctuation

The volatility of Bitcoin affects the effectiveness of the Lightning Network. It can affect the transaction fee and cause instability.

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The Lightning Network in Bitcoin is gaining so many audiences among users, traders, and investors of Bitcoin. Ever since El Salvador implemented the bitcoin legal laws supporting the free usage of bitcoin in both the real and virtual world, the Lightning network has experienced a drastic increment in its activities.