Introducing the Lightning Network

Thanks to the recent introduction of the Lightning Network, bitcoin along with a host of several other alt-coins may now find themselves one step closer in their evolution towards becoming legitimate digital currencies, and part of a true and uninterrupted digital global payments network.

The Lightning Network, first proposed in a 2015 white paper by Thaddeus Dryja and Joseph Poon, is so exciting for crypto enthusiasts because not only does it go a long way in addressing the issue of bitcoin’s scalability problem, but it also offers Bitcoin HODLERS with a faster, cheaper and more seamless means for conducting online payments using their digital wallets.

In this post we’ll discuss some of the challenges that remain standing in the way of bitcoin one day achieving mass scale adoption, how technologies like the Lightning Network are seeking to overcome these obstacles, and what it all means for the promise of cryptocurrency technology one day becoming part of a legitimate, borderless, digital asset class.

How the Lightning Network Improves on Blockchain Technology

Just the same as is the case with the Bitcoin blockchain, the Lightning Network has been designed to operate as a decentralized payments system, allowing its users to send or transfer money with other users on the network, without the need to involve any third-party intermediaries, agents or custodians.

But while Bitcoin’s verification protocol uses a combination of public-key cryptography, peer-to-peer networking and proof-of-work to process and confirm and record the payments that are taking place on the blockchain, the Lightning Network instead employs a significantly less ‘involved’ approach.

This distinction is an important one because while the design that has been used to construct the blockchain ledger has proven to be extremely valuable in helping Bitcoin to become arguably the world’s most reliable and secure crypto payment network, it’s also a design that carries with it some important limitations as it relates to the technology’s potential to achieving scale at the highest degree.

At the heart of the issue is the nature of Bitcoin’s “gossip protocol” requiring that each transaction and transmitted communication taking place on the blockchain needs to then be broadcast and shared with every other active user on the network.

But while giving each user the ability to be able to monitor and verify the activity of every other user on the blockchain without question has helped by adding to the integrity, transparency and accountability of the blockchain ledger system, as the volume of activity taking place on the blockchain continues to approach scale, the larger issue becomes one of being able to manage the demands being placed on the network and those actively supporting it.

Addressing Bitcoin’s Scalability Problem

For those envisioning the day when cryptocurrencies will eventually compete on equal footing with the established payment networks of today, they may first want to consider the extent of activity that is already taking place on those networks at present.

Consultancy firm McKinsey & Company reported last October that world-wide payments-related revenues topped $1.9 trillion in 2017 following on the heels of a 11% year-over-year increase and are now expected to surpass the $2 trillion milestone two years earlier than originally projected.

Global payments operator VISA meanwhile claims that its payments network at present is handling hundreds of millions of global transactions daily with a reported peak capacity of 65,000 transaction messages per second.

To put those figures in some perspective, the Bitcoin network right now is only capable of transmitting up to seven transactions per second, with a one-megabyte block limit.

Assuming an average of 300 bytes per bitcoin transaction and unlimited block sizes, each bitcoin block would require up to 8 gigabytes of memory, every ten minutes, should the volume of transactions on the main network approach those volumes currently being managed by VISA, one of many global payments operators.

Meaning that over the course of a full year, those supporting the Bitcoin network would be responsible for providing over 400 terabytes of memory annually, not to mention any additional demands on bandwidth availability.

Clearly, this presents problems in that it very quickly becomes inconvenient if not uneconomical for the average DIY – crypto enthusiast to continue to support the blockchain if such a scenario were to exist.

The problem therein is that without the presence of a sufficient number of users willing and/or able to support the blockchain, the most likely natural response will be for profit-maximizing commercial interests to fill the void that gets left behind, a scenario that would threaten to re-introduce the agent-principal problem that blockchain technology originally sought to eliminate in the first place.

The Lightning Network then, attempts to address the issue of this scalability problem adding a second layer of payment protocols to sit on top of the existing blockchain network.

How it works

Rather than broadcasting every single transaction on the existing blockchain, the Lightning Network allows counterparties to trustless-ly transact with one another on the Lightning Network using “smart contracts” that take place “off-chain”.

If two parties agree to transact with one another on the Lightning Network, the funds of both parties are initially placed into a “multi-signature wallet” which gets recorded as a single entry on the bitcoin blockchain.

However from that point on, even though they are dealing in legitimate bitcoin transactions, the two counterparties are free to transact with one another an unlimited number of times without ever having to go back and make any broadcasts to the bitcoin blockchain.

If either party elects to remove, or spend their portion of the funds being held within the channel, both parties to the channel are required to sign off on the transaction, just in the same way as both bank-account holders would be required to sign off in either one wanted to withdraw funds from a jointly-held account.

Meanwhile either parties has the freedom to unilaterally leave or close the channel at any time without the consent of the channel’s counterparty.

And in the event of any disputed transactions, both parties are able to easily recover their share of the channel’s wallet by referencing the most recent previously agreed-to balance.

In either the event of a dispute or a closing withdrawal, the balance from the most recently agreed to entry from the shared wallet address is then remitted to each of the respective parties with a second, and final closing entry broadcast to the main bitcoin blockchain.

Because the Lightning Network limits the number of transactions that are required to be recorded on the blockchain – only the opening and closing entries – and additionally affords users the ability to freely transact with each other in an unconstrained manner it quickly becomes easy to see how adding the second layer on top of the existing bitcoin blockchain offers such revolutionary potential to reduce congestion from the main network.

And by offloading a portion of the total activity that would otherwise take place on the bitcoin blockchain, this should not only help to keep the size of Bitcoin blocks smaller for longer, but should also help to keep the blockchain accessible for everyday users.

Doing so should not only help to keep barriers to Bitcoin (and the affordability of the technology) low but it also should limits the risk of – owing to a combination of technical and economic constraints – having to delegate authority of the network over to profit-maximizing, commercial interests.

Benefits to Crypto Markets

However beyond just helping to address some of the capacity constraints critical to the long-term potential of bitcoin’s scalability, the Lightning Network also brings with it several other interesting opportunities for crypto HODLERS.

Namely these include the instantaneous nature with which users are able to transact on the Lightning Network, the vastly lower transaction costs associated with each transaction, as well as the introduction of micropayment structures and together the opening of new markets for bitcoin and other alt-coins through the confluence of these synergistic advantages.

Let’s start with the speed advantages of using the Lightning Network.

At present, payments on the bitcoin network are aggregated into blocks each spaced ten minutes apart.

Generally speaking, a Bitcoin transaction won’t uniformly be regarded as being legitimate or secure until after one hour, or six blocks, have elapsed.

While this time-lag makes it virtually impossible to incorporate bitcoin payments into a retail or point of sale environment, because payments on the Lightning Network are “atomic”, not requiring the confirmation of any third-parties, it means they are able to be completed virtually instantaneously.

Not only does the elimination of a third-party intermediary to verify transactions result in a vast improvement to the current time-lag taking place on the existing bitcoin network, but it also eliminates the need to pay any fees to said third-parties, as well.

Both the improvement in processing time and the elimination of burdensome agent fees help to make bitcoin and the Lightning Network a much more viable option for point of sale purchases, yet its the addition of the Lightning Network’s ability to incorporate micropayments into the technology which only contributes to this allure.

Micropayments have previously been a part of the bitcoin lore but up to now have been uneconomical because of the aforementioned “high touch” nature of the bitcoin “gossip protocol”.

Because those responsible for overseeing each blockchain entry need to compensated for their efforts, it meant that each bitcoin transaction would have to be at least large enough to cover the cost of those associated agent fees while also being large enough to keep the transaction economical for both the sending and receiving sides of the transaction.

Yet the “trust-less” nature of the Lightning Network’s multi-sig wallets greatly reduces the extent of oversight that is required, which helps to generate significant cost savings that can in turn be passed along to the network’s users.

The potential applications for micropayments are far reaching and largely undeveloped, yet suggest a very promising future for the technology.

Some of the earliest suggested applications that could benefit from micropayment agreements have included pay as you go services such as “buy the minute” metered parking, per byte internet bandwidth, pay per use digital streaming content, as well as the possibly of using sub-penny payment incentives to encourage responses to online marketers and social media influencers.

The best way to familiarize yourself with the Bitcoin lightning network is to try it out. You’ll need to buy bitcoin in Canada, then get yourself a wallet that supports lightning payments.

The Bottom Line

There’s no question that the Lightning Network offers several very important improvements to the present state of the cryptocurrency eco-system.

Payments made through the Lightning Network can not only be faster, cheaper and more flexible than those that currently taking place on the main bitcoin network, but the advent of a second layer to sit on top of the existing blockchain can also goes a long way in improving the potential for bitcoin’s long-term scalability.

While some have suggested that the Lightning Network may not actually end up being the “Final Solution” to address bitcoin’s scalability problem, at the very least the Lightning Network should help to vastly improve the current user experience while making significant contributions to the advancement of bitcoins potential capacity as the technology continues to deal with a rapidly growing user base.