The Lightning Network is an off-chain network, offering numerous benefits

to Bitcoin. The Lightning Network will debut in 2018. Yet, it has

been in development since 2016. First, we will explain what the Lightning Network is. Then, we will explain the benefits of the Lightning Network. Last, we will

cover the counter arguemnts and attack risks.

What is an off-chain transaction?

An off-chain transaction is any bitcoin transaction which does not use

the Bitcoin Network, and thus pays no Bitcoin transaction fees to

miners. Buying and selling on exchanges, for example, occurs off

chain. However, withdrawing from on exchange to a bitcoin address

occurs “on-chain.”

All transactions that occur on the Lightning Network will be “off-chain” transactions.

How does the Lightning Network, work?

Lightning has three ingredients:

Payment channels

Hashed-time-locked-contracts (smart contracts)

The Lightning protocol

We enter the Lightning Network by opening a payment channel. This

entry requires an on-chain Bitcoin transaction. Payment channels have

existed since the beginning of Bitcoin.

Payment channels allow two parties to send bitcoin back and forth. The

only limit is the amount of bitcoin in the payment channel.

Think of a payment channel like Paypal. Once you deposit money into

Paypal, you can send that money to anyone else who uses Paypal. But

you can only send up to the amount you deposited in Paypal.

To enter or exit Paypal, you must do a bank transaction. Similarly, to

open or close a payment channel, you must do a Bitcoin transaction.

Hashed time locked contracts (HTLC) are simple smart contracts. They

basically say “payee will immediately get paid (some amount of)

bitcoin, if payee can produce a secret code. If you cannot produce the

secret code within (some number of) blocks, then payor can revoke

payor’s offer and have their bitcoins refunded.”

The Lightning Network uses a series of HTLC’s with the same secret

hash. This process can be repeated as many times as necessary.

Here is a step-by-step of how the HTLC works with four parties: A

(customer) B, C, and D (merchant)

D Merchant creates a secret string (Key) D hashes the Key, using a hash function such as SHA-256 D shares that Hash with everyone: A, B and C

This Hash is the lock, the Key is the code to unlock the HTLC’s (steps 5-7)

A creates a HTLC with B, with a lock time of 3 days.

B creates a HTLC with C, with a lock time of 2 days.

C creates a HTLC with D, with a lock time of 1 day.

D discloses Key to C, within 1 day, and D gets paid by C.

C discloses Key to B, within 2 days, and C gets paid by B.

B discloses Key to A within 3 days, and B gets paid by A.

If everyone cooperates, all of these transactions occur outside of the

Bitcoin Blockchain. No one needs to publish the transactions, unless

other parties are not cooperating. Ideally, users’ software will keep

track of each step automatically. For example, the software should

keep track of every step above, without the user being aware of every

step.

Everyone gets paid in a mechanical manner. The Lightning Network is

almost atomic in nature, meaning that either everyone gets paid, or

nobody gets paid.

Is Lightning a token or ICO?

No, the Lightning Network uses real bitcoins and smart contracts to allow

participants to aggregate many transactions into one, final,

settlement transaction. Lightning is a “layer two” protocol which

operates on top of the Bitcoin Network.

Example: A and B have lunch together often. A and B take turns paying

for lunch with fiat (dollars). Whoever pays for lunch is refunded by

the other in bitcoins. After a few weeks, each friend has paid

eachother many Bits. Lightning allows both friends to pay eachother,

without paying transaction fees every week. Instead, A and B only pay

transaction fees at their first and last lunch.

An ordinary bitcoin transaction is broadcasted to all bitcoin full

nodes in the world. The Bitcoin Miners take these transactions, and

compile them into blocks. That bitcoin transaction will now live on

the Bitcoin Blockchain, forever.

Lightning transactions, on the other hand, are not broadcasted to

every node. Although Lightning uses real bitcoins, transactions are

withheld from the Bitcoin Network.

Instead, Lightning Nodes keep

transactions secret, except in three circumstances:

Entering the Lightning Network

Exiting the Lightning Network

Settling a dispute on the Bitcoin Blockchain

Is the Lightning Network Anonymous?

The Lightning Network will problably have top-notch privacy features.

It will be much more anonymous than ordinary

Bitcoin transactions.

Some businesses will run cheap Lightning Nodes to collect and sell

data. Lightning users can either use these low-cost lightning nodes,

or, use higher-cost, more privacy oriented payment channels.

The 7 Benefits of the Bitcoin Lightning Network:

1. Lightning Network Users will earn Interest for Lending Bitcoins

The Lightning Network will also pay users for providing liquidity for the Network.

It will be like a bank account which pays interest on deposited

funds.

You can make money by running a Lightning Node!

We will not know how much interest the Lightning Network will pay

until it is up and running. Some people predict that profits will be

high while the Lightning Network is in its infancy. As the technology

is battle-tested and accepted by the community, interest rates may

fall.

Note, the profits of Lightning Node operators equals the transaction

fees for using the Lightning Network.

To use the Lightning Network, you must take out a

series of micro-loans from each “hop” (intermediate peers whom the

payments travels through). The more connections and liquidity in the

Lightning Network, the fewer hops required.

The cost of a Lightning transaction is a function of a few variables:

Amount transacted (demand)

Liquidity in the Network (supply)

Number of hops required (network effects)

On-chain transaction fees (competition)

2. The Lightning Network will be easy to use

To use the Lightning Network, simply download a Lightning wallet. As

of January 2018, most Lightning activity occurs on Testnet (a copy of

the Bitcoin Network which is used to test new developments and code).

As time progresses, more and more wallets will integrate Lightning.

Even wallets that you currently use should eventually implement

Lightning.

“Zap” is the name of a Lightning wallet which is almost ready for Mainnet use.

3. The Lightning Network will create nearly free Bitcoin Transactions

A Lightning Transaction will always be significantly cheaper than a

Bitcoin Transaction. Some Lightning Transactions will even have

negative fees, paying you to use Lightning!

Lightning transaction fees are not paid to Bitcoin Miners. Instead,

Lightning transaction fees are paid to other users in the Lightning Network

who stake money. They will charge a small fee for micro-loans of

bitcoin for a very short time frame (typically a few days).

Lightning fees are set by the users of the network. The software will

automatically find the cheapest route through the Lightning Network.

If no route exists, the software will create a route by opening a new

channel (which does require Bitcoin Transaction fees).

The more bitcoins in the Lightning Network, the lower fees will fall.

Exchanges like Coinbase will likely be Lightning Node operators. Since

many exchanges are likely to enter the Lightning Network, most users

will be accessible through centralized intermediaries.

Sophisticated software will allow users to select custom routes

through the Lightning Network. This will allow users to choose more private routes, perhaps at a slightly higher cost.

In fact, the biggest costs of the Lightning Network are the Bitcoin

transaction fees to enter and exit the Network. As more users and

bitcoins enter the network, less people will need to leave the

Network.

4. The Lightning Network will allow Micro-payments

Currently, the smallest fraction of a bitcoin is called a Satoshi

(0.00000001 BTC). The Lightning Network enables payments and fees of

even smaller than a Satoshi, enabling micro-payments.

Micropayments will allow users to pay for videos per second, to pay

for news per article, and to pay for work per minute.

The Lightning Network will allow people to transact pennies at a time.

People in the poorest countries will be able to afford transactions in

bitcoin.

5. The Lightning Network will allow for millions of transactions per second

There is a tradeoff between decentralization and throughput (the

number of transactions we can process on the blockchain).

Typically, blockchains are very bad at “scaling”. What is scaling? Scaling simply means “handling the growth in the number of users and transactions.” There has been a multi-year

“scaling debate” in Bitcoin, as to the best methods of scaling. But

many people agree, Lightning currently offers one of the best scaling

solutions.

Secondary networks like the Lightning Network allow users to enjoy the security of the decentralized blockchain, without increasing the size of the blockchain unnecessarily.

Like Bitcoin, there is no Lightning company. Although there are about

a dozen full time programmers working on the Lightning Network, the

programmers are simply writing software which allows peer-to-peer

transactions.

Lightning transactions do not require a trusted, centralized party.

Instead, if someone tries to steal from the Lightning Network, then

they are punished by forefiting some bitcoin.

6. The Lightning Network will create Smaller Bitcoin Blocks

Lightning Network will help keep bitcoin blocks small, allowing more

users to run a full node, self-authenticate bitcoin transactions,

enforce Bitcoin’s rules, and keep Bitcoin’s Network decentralized.

7. The Lightning Network will allow for More Bitcoin Full Nodes

First generation Lightning Nodes are full nodes. In other words, more

people will be running full nodes as a result of the Lightning

Network. This is healthy for the Bitcoin Network.

Is the Lightning Network safe?

As with any experimental technology, only time will reveal all

vulnerabilities. At the moment, the Lightning Network is theoretically

safe to use. Here are some potential risks, attack vectors, and things

to look out for.

The Lightning White Paper sets out a solid, theoretical framework.

Sometimes, however, there are bugs in the code.

Download the software from a reputable source

Thus, make sure to only run software which is approved by the

community. Be sure to download only verified copies of the code.

For example, only download from official websites. If you have the

technical ability, check the download’s checksum, or verify that the

software was signed with an authentic PGP signature.

Allow new software a few months to be tested by other people. A

popular wallet, Electrum, was recently discovered to contain a

security vulnerability that threatened users for years without notice.

After news breaks, you need to learn of the vulnerability, because

many hackers will learn about the vulnerability quickly and attempt to

exploit it.

Get involved in the Community

Subscribe to good bitcoin news channels. www.Reddit.com/r/bitcoin,

Twitter, and the World Crypto Network on Youtube are all good sources

of bitcoin news.

Sign up for the mailing list to recieve critical notices from the

software publisher.

Maintain your Internet Connection

Hash time locked contracts are time sensitive. Check you internet

connection daily, to make sure that your software is able to do its

job properly.

If your computer goes offline, you software may not be able to

properly process transactions and catch cheaters.

A sophisticated attacker may periodically ping your IP Address. An

attacker may wait until they find that your computer is offline. The

Lightning Network offers a grace period for users to catch cheaters.

If the grace period is 1,000 blocks, then you should check your

internet connection at least every 1,000 blocks.

If you need to, publish a Breach Remedy transaction (this transaction

punishes cheaters by forefiture of all bitcoins in the payment

channel)

Keep small sums of Cash in your Bitcoin Payment Channels

Do not keep substantial sums of bitcoin in payment channels, unless

you know and trust the other person.

Since the Lightning Network takes all bitcoins in the payment channel

as a fine to deter cheating, you better keep small amounts in payment

channels just in case your software tries to publish an old

transaction.

In other words, keep many small payment channels, because the

Lightning Network might interpet a mistake or bug as an attempt to

steal bitcoins.

If so, you will lose all funds in that payment channel. If you know

the person, they may be kind and return your bitcoin. But if you do

not know the person, it is unlikely that they will return your

bitcoins, assuming they even know who to return them to!

Keep enough Bitcoin to Pay for on Chain Transactions

Always make sure that you have enough bitcoin to pay for on-chain

transaction fees, however high they may be. I’m unsure how Lightning

will allocate on-chain transaction fees. But on-chain fees are

unpredictable. Always keep more than enough to publish time-sensitve

transactions in the next block.

Bitocin developers generally attempt to build systems that can

withstand malicious, rich attackers.

In the Lightning Network, a wealthy attacker may send large payments

through the Lightning Network in an attempt to force channel closures,

and a mass exodus which results in full blocks and massive transaction

fees.

Attackers might also attempt to drain Lightning Nodes of funds, if

they are able to force Lightning Nodes to expend Bitcoin transaction

fees.

These are largely theoretical problems. It will be interesting to see

how the Network bodes!

In Conclusion

The Lightning Network will eventually become a well-connected market

with deep liquidity and great privacy. In the beginning, it will feel

like we are “locking up” bitcoins in the Lightning Network. In the

next few years, it will feel like we are “freeing up” bitcoins in the

Lightning Network.

This new innovation will also accomplish one of its most important goals. It will lower transaction fees and allow for more transaction to be processed. This will effectively allow the Bitcoin Network to grow the way it was intended to.

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