The Lightning Network is a payment protocol that is used to provide off-chain solutions to deal with the problem of scalability on the BTC main net. At some point, the issue of scalability had gotten so out of hand that transaction costs had reached as high as $30. While it has been implemented in the BTC blockchain, the concept can be used on other crypto coins as well.
The network helps to alleviate congestion in the BTC network, which is only able to process seven transactions a second. It ensures that as the number of users grows, it does not slow down BTC transaction speeds, which could impede mass adoption.
How it Works
The LN is made up of an off-chain transaction network built on top of the BTC blockchain. To use the network, two parties have to agree to create a payment channel. They can then send funds between each other without using. As a result, the global consensus mechanism is not needed. The result is much lower fees and high TPS rates.
To create a payment channel, parties involved in the transactions must create a multi-sig wallet and place some funds in it. The multi-sig wallet is only accessible when both parties provide their private keys. As long as the payment channel remains open, parties involved can conduct as many transactions as possible.
Once the two parties are done with a channel, they can close it and the final information is sent to the main net. With the help of the LN smart contract, each party receives the correct amount of crypto.
You do not need to set up a channel between two parties to transfer funds. Instead, payments can be sent through channels of people that you have connected with. The smart contracts are designed to find the shortest route and thus the fastest speed and lowest fee per transactions.
Benefits of LN
- It provides a solution for the scalability problem facing BTC. This will help to reduce the traffic numbers on the BTC blockchain.
- Transactions are nearly instant, compared to the main chain.
- It makes micropayment possible on BTC. This could be a useful solution for machine-to-machine transactions where transactions occur between devices without requiring human intervention.
Limitations of LN
- Payments can only be made when both parties are online.
- Opening or closing a payment channel involves going on-chain, which can with high transaction fees.
It Could Make Daily Use of BTC Possible
An exciting aspect of LN is that it could one day offer a solution to the lingering problems of how to pay for coffee using BTC. With LN, you could make payments for snacks and other items with lower fees and fast speeds.
However, it is worth noting that LN is not as secure as BTC. While it is based on top of BTC is does not have the security backing of BTC itself. The result is that it is only suitable for small BTC transactions, with larger transfers still limited to the main chain.