If you’re a cryptocurrency and blockchain advocate chances are that you have heard about the Lightning Network by now. If not, we’re here to help educate you.

What is The Lightning Network?

In a nutshell, the Lightning Network is a revolutionary protocol which speeds up and scales blockchains. In layman’s terms, it is a second-layer payment network which sits atop a blockchain. As most of us know, cryptocurrencies are unable to achieve high amounts of transactions per second. This means mainstream adoption of this emerging asset class are impossible if decentralization is to remain.

Elizabeth Stark, the co-founder of Lightning Labs, explains:

“Lightning Network is a protocol for scaling and speeding up blockchains. It was designed to solve some of the technical limitations of the Bitcoin blockchain, but could be implemented on top of any blockchain.”

Currently, Bitcoin only allows the network to process up to seven transactions per second while traditional fiat institutions such as Visa can process up to 50,000 per second. That being said, Bitcoin and other blockchains are highly secure, but they do not have the potential to scale in order to accommodate a global transaction network.

The Lightning Network aims to provide a solution for micropayment functionality by allowing a cryptocurrency to scale without losing decentralization.

How Does The Lightning Network Work?

As explained by Elizabeth Stark:

“Lightning Network is based on a technology called payment channels. A two-party payment channel is created when both parties create a 2-out-of-2 multi-signature transaction on the blockchain, with at least one party committing funds to the 2-of-2 ledger entry. Each person has one private key, and transactions spending from the ledger entry can now be made only if both keys sign. This initial transaction to open a channel takes 10 minutes (or whatever the normal block time is), but afterwards, the participants can transact with each other instantly using the funds allocated in the channel. These instantaneous transactions are made by passing signed transactions back and forth, spending from the 2-of-2 ledger entry.”

Once again in layman’s terms, the Lightning Network uses a network of payment channels which are powered by smart contracts. Two parties are able to create a payment channel via a multi-signature transaction upon the blockchain.

This means, at least one of the two parties needs to commit funds to the transaction. As soon as the channel is open and the payment channel is established on the LN, participants can then transfer crypto between each other, instantly with meager fees.

Every transaction creates updates on temporary balance sheets which are signed by each party’s private key. These balance sheets are broadcastable as Bitcoin transactions and can be broadcast at any time provided that one or both parties seek to close the channel. These Lightning Network payments occur in a peer-to-peer fashion with no intermediaries.

Of course, the Lightning Network tech can be expanded to other forms of cryptocurrencies in the future.

Further explanation by Stark reads:

“Lightning takes the technology behind payment channels and creates a network of these channels, using “smart contracts” to ensure that the network can function in a decentralized capacity without counter-party risk. As an example, Alice may open a channel with Bob, who in turn has a channel with Carol, who has one open with Dave. If Alice wants to transact with Dave, she can send funds via Bob and Carol, and Dave will ultimately receive them. But, because of multi-signature and smart contracts inherent in the design of Lightning, Alice doesn’t need to trust Bob and Carol as an intermediary — the protocol uses cryptography to ensure that the funds will either reach Dave through Bob and Carol or else be automatically refunded to Alice.”

Ultimately, the network of channels is imperative for the success and scalability of the Lightning Network. Once a certain number of nodes are implemented on the LN and begin participating in channels, then the resulting network effects would see an increase in transaction speed and a reduction in transaction costs.

Why Is The Lightning Network Important?

Since the inception of Bitcoin and other cryptocurrencies, modifying the implementation of digital assets in order to process more significant numbers of transactions per second has been a topic of discussion for everyone from crypto enthusiasts to developers alike.

Currently, the Lightning Network is one of the world’s leading solutions to the scalability of Bitcoin and other crypto assets. This is mainly since it doesn’t require a change to the underlying protocol.

Conclusion:

Scalability has been a fundamental issue faced by all blockchain networks since their inception. As Bitcoin faces competition from Ethereum, EOS, Qtum and many other networks, the Lightning Network is Bitcoin’s answer to scalability by offering a solution to the processing of more substantial amounts of transactions per second thus reducing the workload for the Bitcoin blockchain. The Lightning Network could very well expand to other blockchains and provide an answer to scalability issues for all cryptocurrencies and ultimately lead to mainstream adoption of digital assets and blockchain technologies on the whole.