Short Description: Lightning Network is designed is solve the scalability deficiencies inherent in the Bitcoin blockchain. Here are the reasons why it is viewed as ingenious.
Currency of the New Age – as Bitcoin is popularly called, ought to be the most secure, cheapest and fastest means of transaction but its recent form depicts the opposite. This however threatens the scalability of the coin.
Is there a way to fix this? Stick around and you’ll find answers.
One of the many Blockchain technology benefits is the avalanche of digital currencies with Bitcoin being the most popular and utilized coin thus far. The Bitcoin has excelled overtime but has been plagued by scalability issues.
Currently, the Bitcoin Blockchain handles less than 7tps when compared to its competitions; the likes of Mastercard and Visa process thousands and tens of thousands more in a second. In recent months, transactions fees have soared. It has been sort of extortionate, reaching about $35 in the first month of 2018 as indicated by Bitcoin exchange volume charts.
Confirmation of transactions now take longer than normal. Imagine buying a Sausage from KFC with BTC and having to wait for as much as an hour for clearance. Such problems will surely entice no one towards the mainstream adoption of BTC.
Researchers in the cryptosphere have proposed various solutions to improving Bitcoin’s scalability but a lasting consensus has not been reached just yet. However, there is one would be solution in the test phase – it is referred to as Bitcoin Lightning Network.
Let’s dig dipper into the BTC Lightning Network.
This system is a second layer payment channel built on top of the BTC blockchain and designed specifically for the facilitation of micropayments.
This network utilizes a series of routed transactions; seeking the best means to get funds from one end to another without compromising the decentralized nature of the blockchain. This idea was conceptualized in 2015 by Joseph Poon and his partner Thaddeus Dryja.
These young developers made significant adjustments to Satoshi’s initial design and they both came up with a network of super-fast decentralized transactions. Simply said, the BTC Lightning Network will ensure that transactions are conducted more quickly with negligible fees without having to keep record of each and every transaction on the blockchain.
Instead of keeping individual transaction records, Lighting Network fuses a second layer to the BTC Blockchain. The Layer 2 facilitates the creation of payment channels between parties involved in a transaction.
How would this payment channels benefit anyone?
First, these channels can be in existence for a long time and second, transactions conducted on the channels are almost instant and with minimal or negligible fees. Plus, no one gets defrauded.
This will be better explained using an illustration.
George and Sheila are co-workers, or perhaps relatives, and it is necessary that one party send funds to the other regularly. Of course, they need this transaction to be fast-paced and with little fees.
What must be done?
George and Sheila will have to create a payment channel on the BTC Lightning Network often referred to as an off-chain channel. On this channel, both parties will go on to create a muti-signature wallet that will be accessible to them using a set of private keys. George will deposit a volume of BTC into the secure wallet and Sheila will follow suit.
Having done this, both parties can now go on to perform unlimited redistribution of initially deposited funds in the secure multi-signature wallet. Say for instance Sheila needs to send George 0.88BTC. All she needs do is transfer the right of ownership of the sum to him and both parties will use their private keys to acknowledge the transaction and update their balance sheets.
Note that both parties must deposit an amount greater than the amount to be transacted. Suppose they transacted 100 times, information about their opening and closing balance is only forwarded to the BTC blockchain when their payment channel is closed. In other words, both parties keep their transaction records all along until a closing transaction occurs.
Now here’s the catch; all these transactions are conducted outside the primary blockchain and they are stored as a single transaction.
If you ask me, I’d say YES. Here is why.
The Lightning Network boast a one of its kind fraud/theft protection mechanism. Say for instance George and his friend deposited 1 BTC each. The two of them stake a bet of 0.5 BTC each. In the end Sheila wins the bet. George tries to be malicious by pulling out his deposits without paying Sheila’s 0.5 BTC.
The theft protection mechanism serves a harsh penalty by automatically forwarding all the deposit made by the duo to Sheila within a time frame. This fraud protection mechanism is referred to as Hash TimeLock Contract (HTLC) which happens to be a type of Smart Contract.
Such mechanism is put in place to enhance trust in the system and to discourage potential cheaters. It doesn’t always have be you transacting with friends and family, it could also be a total stranger.
What could be more secure and Ingenious?
Having establish the basis for payment channels, you are probably wondering if every single transaction requires depositing funds with each participant.
That will cost more and rather seems unrealistic.
The Bitcoin Lightning Network grant users the privilege to jump through series of connected payment channels. Payment channels can connect to each other indirectly with the aid of intermediaries.
Simply said, If George wants to credit Victor who happens to have an open channel with Sheila, all he needs do is ask Sheila to pay Victor on his behalf. George then pays Sheila through their own channel as soon as she provides proof. All these transactions are fast-paced of course.
The channel routing effect makes this system even more powerful and globally scalable. If you need to transact with another party, all you need do is route a path to that one person via other participant who are already connected on the network. It matters less even if that channel jumps through several intermediaries.
Bitcoin Lightning opens doors to a whole new variety of payment models. Imagine that anyone could receive Bitcoin instantly with negligible or almost zero fees.
Imagine what a payment system that facilitates such transaction could do. You no longer must wait for so long at grocery stores to get your payment confirmed. Everything is smooth and swift.
This system is still in the testing phase and it is yet to receive full scale implementation. Upon implementation, Bitcoin will finally take its place as an alternative to cash and credit cards, or other P2P transaction channels.
This is a guest post made by Stevan Mcgrath, is a Bitcoin and cryptocurrency enthusiast, passionate about the potential these tools and blockchain technology bring to the world and writes consistently for various crypto related blogs. He has been following development of blockchain for several years. To know his work and more details you can follow him on Twitter, Linkedin, Facebook.
Image Source: Cointelegraph
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