With all of the attention fixed on the price of Bitcoin lately, many people forget that there is still lots of behind the scenes work being done.

One of the most exciting developments in Bitcoin, and cryptocurrency in general, is payment channels, often referred to as the “Lightning Network”.

Many of us probably remember the infamous hard fork last fall that resulted in Bitcoin forking into Bitcoin and Bitcoin Cash. That fork was a result of a disagreement about how we should scale the bitcoin network to handle a worldwide volume of payments. The Bitcoin folks wanted to keep the number of transactions per block low, to enable anyone to run a “full node”. This results in more decentralization at the expense of higher transaction costs. The Bitcoin Cash folks, instead, advocated for larger blocks with lower transaction fees at the expense of some centralization.

Developers contributing to Bitcoin then put forward a proposal for a second layer network to sit on top of the bitcoin network, which would enable the exchange of cryptocurrency between two parties without having to write the transaction into a block. This network is called the ⚡ Lightning Network.

How does it work?

Two parties create a payment channel by sending a transaction to the network where a certain amount of money is reserved on both sides for payments between the parties. As soon as the channel is created, these two parties can exchange transactions without sending a transaction to the network.

Instead, the two parties simply pass a temporary transaction back and forth, updating the transaction every time the balance in the channel changes. When one of the parties closes the channel, only one transaction gets written to the blockchain. At every point in time, both parties are guaranteed to at least get the last value of the channel that they both agreed on.

And since these channel transactions don’t hit the blockchain, they aren’t subject to transaction fees from the miners- just tiny fees for any intermediate parties they use to route transactions.

In effect, we have instant, practically free, unlimited transactions.

For a deeper dive into this technology and how it is also used to swap coins across chains check out bcoin’s Cross-Chain Atomic Swaps guide.

What’s happening with Lightning Network now?

Several teams of developers have been working on implementations of the standard Lightning Network design, among them are the C-lightning project and the LND project. They are at various stages of progress, but the important thing to know is that all Lightning Network implementations are still in beta. And because things are still in beta, there is a hard limit to how much money you can put into a payment channel because they don’t want people to lose money.

LND released a major version 0.5 in early November, and C-lightning released a 0.6 version in June.

Though, despite these limitations, the proliferation of Lightning Network nodes has skyrocketed recently, to over 15,000 open channels holding more than $2 million worth of bitcoin. Companies like Casa have made it super easy to join the network by selling Lightning nodes that come pre-loaded with a recent copy of the blockchain for an ideal user experience.

The number of Lightning Network channels is steeply increasing

When will the Lightning Network reach wide adoption?

While the concept is fairly simple, the implementation of the Lightning Network is complex. All of the infrastructure has to be built from scratch. Not only do we have to make the peer to peer transactions to work, but all of the components — wallets and nodes — have to be integrated. And there are big challenges.

One of the biggest challenges is figuring out how to route payments across a network where connections, balances and channel capacity are constantly changing. If Bob wants to send money to Alice, the network has to calculate a pathway through intermediate nodes, managing capacity and any transaction fees charged along the way.

Right now, Lightning nodes have to run “full nodes”, or wallets that download the full blockchain, often hundreds of gigabytes. They also have to stay online 24 hours a day to prevent theft of funds that are in a channel. This is all very inconvenient.

Just being rolled out are solutions to these inconveniences. For example, LND has just integrated a “light client” called Neutrino which allows someone to use the Lightning Network without dedicating a whole hard drive to store the blockchain.

Watchtowers add security to the Lightning Network

Also being introduced soon is the concept of “watchtowers”. Watchtowers are services that sit and observe the blockchain for someone attempting to cheat a payment channel. In return for a tiny fee, watchtowers stay online so you don’t have to.

And these are only a couple of the many improvements coming up!

In fact, Lightning Network engineers recently met for a conference to decide what the feature set for the next release might be (Lightning 1.1). Here are some things they came up with, summarized by the Bitcoin Optech newsletter:

Multi-path payments — Being able to break up one channel payment into several and route them different ways

— Being able to break up one channel payment into several and route them different ways Dual funded channels — Enabling channels to work in both directions instead of just one

— Enabling channels to work in both directions instead of just one Splicing — Adding new channels in parallel to increase the capacity of a channel.

— Adding new channels in parallel to increase the capacity of a channel. Wumbo — Removing the capacity limit on channels

— Removing the capacity limit on channels Hidden destinations — Being able to publicly route a payment to a private channel.

As we work our way through the end of the Bitcoin price cycle, the groundwork is being laid for massive improvements in utility. As the implementations reach version 1.0, there are parallel efforts to partner with standards organizations to make Lightning a ubiquitous feature on the web. For example, the W3C is working on a browser payment standard for the Lightning Network.

Much hard work is yet to be done, but the future is bright. ⚡

If you’re a merchant in crypto and interested in outlining a specification toward LN adoption, please reach out to [email protected].