Lightning Network: Next-Generation Bitcoin Architecture


The Lightning Network is an off-chain, second-layer solution that runs on top of the blockchain to address Bitcoin’s scalability and transaction speed issues.

Summary

Decentralization, security, and irreversibility are just a few of the benefits of blockchain networks. However, the decentralized network takes time to establish consensus on new transactions and add them to the blockchain, which means transaction rates may be slower than ideal.

Blockchain technology must be both scalable and speedy in order to get widespread adoption in the real world. The Bitcoin Lightning Network is a second-layer payment system that runs on top of a blockchain and is one of the most promising answers to the blockchain industry’s scalability and transaction speed issues.

Contents

The Scalability Problem and Bitcoin

Bitcoin is the most popular cryptocurrency in the world. It does, however, have some shortcomings as the first of its sort. Bitcoin is a sluggish cryptocurrency, generating new blocks for the blockchain only once every 10 minutes and with a maximum block size of 1MB.

It also only processes seven transactions per second. That figure needs to rise if widespread adoption is to be achieved. Visa processes 24,000 transactions per second, to put things in perspective.

Around the year 2015, Bitcoin began to face what became known as its scalability challenge, for which a number of alternative solutions were presented.

Some people, for example, wanted to increase the block size to increase the number of transactions that could be stored in a single block. This strategy led to the 2017 Bitcoin Cash hard fork, which effectively split the Bitcoin community and its underlying technology into two ecosystems.

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SegWit and Second-Layer Solutions

In 2017, a new approach known as a segregated witness was adopted (SegWit).

It works by obliterating signature information from Bitcoin transactions. In any blockchain transaction, a Bitcoin block comprises transaction data and digital signature data indicating the origin and destination of BTC, but SegWit separates the witness (digital signature) from the transaction data.

It essentially rearranges the data in each block more effectively, allowing Bitcoin blocks to be doubled in size (approximately 2MB per block). Although, as of 2020, it has a low adoption rate (at only about 36 percent of the Bitcoin network).

In addition to doubling block size, SegWit is critical in enabling second-layer scaling solutions like the Lightning Network.

With second-layer building enabled, alternative scalability options focus on off-chain approaches to increase scalability while maintaining the structure of the original Bitcoin protocol.

Rather than altering Bitcoin’s blockchain’s essential operation, these solutions leave the original blockchain alone and build a second layer on top to improve its efficiency. The Lightning Network is one of the most promising solutions to Bitcoin’s scalability issue.

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How the Bitcoin Lightning Network Functions

The Lightning Network is a scaling solution that works on top of the blockchain and is known as an off-chain or second-layer solution. It establishes a secure two-way channel between users, allowing various transactions to take place outside of the main blockchain without the need to delegate fund custody.

These transactions are then recorded on the main blockchain as a single transaction with finality. The Lightning Network has the potential to handle millions of transactions per second in principle.

The Bitcoin Lightning Network is intended for short transactions with low transaction fees. Modest transactions, even micropayments, can be sent instantly for very small fees if any at all.

Consider this scenario: you and a friend alternate buying each other coffee every day for a week; rather than paying each other back after each purchase, you could just settle the bill at the end of the week.

The Lightning Network’s two-way payments channel works similarly and is protected by smart contracts. If any participant terminates the channel at any moment, the ultimate balance is settled on the original blockchain layer.

Because micropayments between two users are not publicly broadcast to the entire network, the Lightning Network adds an extra layer of secrecy to blockchain transactions.

The Lightning Network is an optional feature, and individual Bitcoin network nodes can decide whether or not to use it. Larger transactions that require extra protection can still take place on the blockchain’s original layer.

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Future of the Bitcoin Lightning Network

The Lightning Network is currently being developed by three key teams: Blockstream, Lightning Labs, and ACINQ. Lightning Labs CEO Elizabeth Stark launched a Lightning Network daemon beta for developers in March of 2018. Since then, the Lightning Network has been in continuous development in preparation for its eventual live launch.

Developers can now start designing apps that connect with the Lightning Network thanks to the publication of application standards.

If the Bitcoin Lightning Network succeeds in overcoming Bitcoin’s scalability problem, it might pave the path for other cryptocurrencies to follow suit in an effort to increase their own throughput. And, if numerous cryptocurrencies utilize Lightning Network, the potential for the continued development of interoperable blockchains will be considerably greater.

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