Last year, everyone who is interested in the Bitcoin and cryptocurrency topics, regularly hears about Lightning Network — but not everyone knows what it is. Do you personally need Lightning Network, what advantages does it provide, how to use it and should you use it at all?
Let’s immediately determine: Lightning Network is a good and useful solution, although not everyone needs it today. LN was conceived as an off-chain protocol (off-chain is a circuit outside the main bitcoin blockchain) to offload the main Bitcoin network and reduce the cost of transactions. Moreover, the speed of these transactions should be almost instantaneous — that’s why there is the word “lightning” in the name of this network: it is fast as lightning.
The idea was elegant in its simplicity, and the most amazing thing is that it was realized just like that: very simple, understandable and cheap.
We will show everything in layperson terms:
- user opens the channel inside Lightning Network to another user;
- he transfers the agreed amount of funds there;
- he transfers a certain amount of funds when and how much is required;
- he pays for the transfer of funds very little or nothing at all (!);
- he can also receive funds from other users within Lightning Network;
- the channel can be closed at any time if you no longer plan to carry out transactions using it;
- the channel can be kept open as much as necessary, it costs nothing;
- you can even earn small fees for transactions of other users (more details are below);
- after the channel is closed, the final transaction is recorded in the bitcoin blockchain, while all the “internal” transfers of Lightning Network are not recorded in any way. This, in some way, increases the privacy of transactions.
But, as usual, there are a few nuances.
Firstly, you need a wallet with support for Lightning Network – so far not all Bitcoin wallets have got this opportunity. Below, there are a few applications with their brief description.
Secondly, this wallet should have the means to open one or several channels – accordingly, it needs to be replenished.
Thirdly, the capacity of LN network is limited by the funds introduced into it – at the time of writing this publication, it is about 450 BTC for the entire network (this is quite enough for the mass of microtransactions for which LN was created).
Gradually, this capacity is growing, and most likely will continue to grow with the increase in the number of its users. In addition, you are also limited by the capacity of the open channel: if there is only 1 BTC in it, you will not be able to send more until you “replenish” the channel with your own funds. Another limitation is the capacity of the proxy nodes when transmitting between multiple users.
But you do not have to open dozens of channels for each counterparty: you can transfer funds not only directly to the user or service with which you have channels open, but also to any other user/service that is “connected by channels” to any desired counterparty within Lightning Network. Thus, you can save money on the transfer of funds in the usual way – via bitcoin blockchain, but you probably have to pay a little more commissions inside the Lightning network – for “passing” your transaction through one or several intermediaries (in the end, it will still be much cheaper than paying out Lightning Network).
It is enough for almost any user to have only a few open channels in order to interact with the entire LN network or most of it – and the network itself will find the shortest route between the sender and the receiver. The wider the reception of the Lightning Network will be, the easier it will be for users to send and receive funds without opening new channels. For reference: most recently, in November 2018, the number of nodes in the network reached 4,000, and the number of active channels — 12,000 (an increase was about 40% over the last month).
Fourthly, in essence, within LN, users send each other not Bitcoins, but debt receipts, which are then mutually accounted across the whole network. This is what allows both to speed up and to cheapen transactions within Lightning Network.
Another nuance is security. Since LN transactions go beyond the BTC blockchain, they are not confirmed by miners. Instead, their history is stored by nodes — the main nodes of LN. Therefore, most likely, Lightning Network will remain the way to send micropayments, while large transfers will still be carried out in the main Bitcoin network.
Proven advantages of Lightning Network: Lightning Network works fine with atomic swaps that are likely to become massively in demand in the future: exchanging one coin for another without the mediation of exchanges and other third-party services is a good foundation for the future. Test swaps have already been carried out; everything went well, with a positive end result.
Also, Lightning Network is already working or is planned to use in blockchains of Bitcoin forks, such as Lightcoin, Stellar and Ripple. At the same time, other projects — Ethereum, Zcash and NEO –- are planned to implement their versions of similar protocols for the same purpose: to speed up and reduce the cost of transactions.