Bitcoin’s Lightning Network has been touted as a game changer because it uses native smart-contract scripts that give users of the world’s No. 1 cryptocurrency the ability to make instant payments at less than a cent each.
Bitcoin operates on blockchain technology, a shared database using a distributed ledger that allows participants to see all the transactions that have been recorded. Using a distributed data network helps to prevent disputes regarding transactions.
Lightning Network, conceived by developers Thaddeus Dryja and Joseph Poon back in 2015, is a second layer added to the Bitcoin network that enables transactions to be done fast between parties off the blockchain – called off-chain transactions.
The Lightning Network essentially enables Bitcoin’s blockchain to allow micropayments between users. This speeds up transaction processing times and decreases the associated costs of Bitcoin’s blockchain.
Despite its growth and development since its inception, Bitcoin has some challenges including price fluctuations, the inherent cost of using Lightning Network, and susceptibility to fraud or malicious attacks.
The Lightning Network is a constantly changing concept that has the potential to significantly alter Bitcoin’s blockchain. However, the network is not the answer to all Bitcoin’s problems.
Here are five things you need to know about Lightning Network and its use.
Lightning Network transactions are instantaneous because they do not need to be validated by all blockchain participants. The layers of trust are simplified in favor of transaction times and do not require any fees.
Security is enforced by blockchain smart contracts without creating on-blockchain transactions for individual payments. The money is sent across the network and back in a fraction of a second, making it a much cheaper and faster payment method than on-blockchain transactions, while still ultimately retaining the security and trust of base layer Bitcoin.
Lightning Network has grown at an incredible rate in the last few years, helped by the growing ecosystem and open-source nature of the technology. Many developers are able to build and add value to the payment systems network, bringing new innovations on top of Bitcoin’s base layer. Bitcoin’s Lightning channel has grown both in the bear market and the recent bull market that saw the coin’s value hit a record high.
Lightning has been integrated into the systems of at least seven major crypto exchanges and trading desks, including OKEx, Okcoin, Bitfinex, and River Financial, with the Kraken exchange’s integration planned for this year. The Lightning Network essentially consists of bi-directional payment channels, creating a peer-to-peer network.
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Bi-directional payment channels increase privacy by allowing users to open a bi-directional payment channel and transact over this channel through a private medium. Only once the users are finished will they broadcast the final state of the channel to the blockchain. While this public transaction reveals how much they send to each other, there is no way to tell whether it was through 10 transactions or 50 small transactions. This ambiguity is a boon for privacy.
The Lightning Network has surpassed 25,000 active nodes (a user on the network) for the first time, an indication that the network is growing stronger with more users and more channels. A node is essentially a “user” on the network who sets up a computer to interact with other nodes. In just the past 30 days, the number of active nodes has risen by 8 percent to 25,010. The technology’s core team has added new use cases and is looking at adding new capabilities. As a result, considerable advancements are expected to strengthen the network in 2021 and beyond.
In order to reduce congestion on the Bitcoin blockchain, the Lightning Network allows users to route their transactions through off-chain channels. All of the transactions that pass through a channel are rewritten into a single transaction and settled on the Bitcoin network, allowing for millions of transactions to be made through off-chain channels. These channels run between the various nodes that have chosen to connect this way.
Not every node, however, operates a channel. Currently, the number of nodes with channels is 14,419, or about 58 percent of all nodes. The remaining 42 percent are waiting to be used, giving the Lightning Network even more potential.
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