Blockchain Scaling — Lightning Network

Blockchain Basics Series (5 part series — PART 4)

As volumes of transactions increase on Blockchains, the execution time slows down significantly resulting in a higher transaction fee. For instance, if somebody sends you some Bitcoins, it would take several minutes to receive them, and you will still be required to pay heavy transaction costs.

With such challenges, it begs the question: how will Blockchain revolutionize the world? Consequently, any great idea that can come to its rescue by solving this non-scalability is worth our attention. Lightning Network is one such revolutionary idea.

This write-up gives a brief overview of the Lightning Network. We shall explore what it is, how it functions, why it is crucial as well as its implications for the future of Blockchain and cryptocurrencies. So, let’s dive in and explore:

Lightning Network: What is it?

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The Lightning Network is simply a protocol that will help speed up and scale the performance of Blockchains. The design offers technical capabilities missing in the original Bitcoin Blockchain. Nonetheless, it can also be implemented in any other Blockchain.

To bring it to perspective, currently the Bitcoin Blockchain can only facilitate up to seven transactions per second. Now compare this to Visa which can process 2,000- 50,000 transactions per second.

As you can see, while the implementation of the Bitcoin Blockchain is very secure, it lacks the capacity to facilitate a universal transaction network. The Lightning network is poised to scale the Bitcoin Blockchain to process millions of transactions per second. Also, it will bring down the transaction costs (fraction of penny for every transaction).

How does the Lightning Protocol work?

The Lightning Network is supported by numerous smart contracts put together in a system built on the topmost tier of the Bitcoin Blockchain. The protocol allows very fast transactions speeds that are accompanied by very low transitioning fees.

To attain this, the following procedures are followed by the two parties undertaking a transaction:

• Set up a wallet with a multi-signature feature with some amount in BTC
• Upload the Wallet’s address into the public Bitcoin Blockchain. This is accompanied by a smart contract that clearly states what amount of BTC belongs to whom.
• Once the pay channel is instantiated, it opens up an avenue for the parties therein to undertake unlimited transactions amongst themselves. Another important thing you will need to note here is that the information in the wallet set is not updated onto the main Blockchain. The transactions occur off-chain.
• Upon completion of every transaction, a balance is signed up by both parties, and this is reflected on the balance sheet. So at any given time, the multi-signature wallet will show the balances owed to each party. A key point to note here again is that the balances owed to each party remain un- uploaded to the main Blockchain.
• In case of a dispute or should the payment channel be locked, the contractual obligations terminate there and the involved parties pay each other as per the balances reflected as a share in the Multi-signature wallet.

Did the process seem cumbersome? Well, it would be if executed manually. The good news is that smart contracts are executed automatically and almost effortlessly under the Lightning network protocol. So when the contract lapses, all the above procedure takes place within the background in an automated mode triggered by the smart contract.

The Lightning Network’s deploys pay channels that are very effective in enabling users to transact in direct mode with each other. This deviates from the usual module of the Blockchain where transactions are broadcasted through an entire network (public Blockchain).

Since two parties come together and transact with each other with trust, and track payments on their own, it eliminates the costly and time-consuming mining function. The Lighting Network protocol also offers a channel in dispute resolutions. If there is a dispute, the final balance sheet figure is shared among the two parties based on the smart contract underlying the Multi-signature wallet.

The Pros of the Lightning Network

• Very small or micro-payments are possible and payable in minute fractions. The proportions of payment are tiny fractions with no limitations upwards; it offers limitless transactions from very small to the very highest, well applicable in modern business.
• Instant settlement of payments where the BTC takes a fraction of a second from one point to the destination within the network.
• Buffered network privacy that arises from the fact that not all transactions are loaded onto the main Blockchain. That only happens when the pay channel is closing out and balances paid out to parties respectively.

The Cons of the Lighting Network

• Failure initiated by Peers: Just in case a party remains uncooperative, the transaction remains voided. The partner may have to wait beyond the usual timelines. Eventually, the payment is re-routed for settlement.
• No provision to facilitate Offline Payees: Network users have an avenue to make payouts to others outside the network.
• Un-ideal in cases of large payouts: The balance in the wallet may not be sufficient for settlement of large amounts of payments
• Centralization of Miners: Lightning Network in a way may foster centralization of pay points.

Lightning Network: Where are we now?

On March 15th, Lightning Network was released as a beta version in which the “Stark’s team” incorporated some safety measures by setting the highest amount that a user can send to around $1,400 for any channel.

However, some crypto enthusiasts feel that the technology was rolled out rather too fast without testing. That was according to a report by the CoinTelegraph.

Since this technology is in its early stages, we cannot predict with certainty whether the deployment of the Lightning Network will actually scale the Bitcoin Blockchain network or even tell how it might evolve over time.

Nevertheless, in case of successful implementation, users would be very eager to see the interesting promises actualize for the Bitcoin Blockchain. Users just can’t wait to enjoy faster transactions with near to zero costs. The aspect of enabling micro-payments would also foster massive adaptability and would boost the functionality of Bitcoin from the initial and current status of value preservation.

Blockchain Basics Series (5 part series — PART 1): What are Smart Contracts?Blockchain Basics Series (5 part series — PART 2): Blockchain Scaling — What is Raiden?Blockchain Basics Series (5 part series — PART 3): Blockchain Basics — What is EVM

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Blockchain Scaling — Lightning Network was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.