What is the bitcoin lightning network?

Back in January of this year the Bitcoin network was overloaded constantly resulting in a skyrocketing fee price of more than 30 dollar per transaction. But don’t worry there is a solution in the make! For the most of you who are reading this article “the lightning network” is a common term. But how does this lightning network operate? what is the lightning network doing?

What is the lightning network doing?

The Lightning Network is a proposed framework based over Bitcoin that would let individuals promptly send/receive payments and reduces the transaction fees by keeping them off the main network. It helps Bitcoin be more useful as a day to day currency.

How does the lightning network work?

The lightning network is a system that operates above the main bitcoin network that allows fast and cheap payments directly between two user / parties. To achieve this steps the following steps are taken by the lightning network:

  • multi-signature wallet which holds some amount of bitcoin (provided by at least one of both parties) is set up
  • The wallet address is then saved to the public Bitcoin blockchain including a balance sheet (smart contract) that proves how much of this bitcoin deposits belongs to whom
  • After this payment channel is set up once, it is possible for these two parties to conduct an unlimited amount of transactions without ever touching the information stored on the blockchain
  • With each transaction, both parties sign an updated balance sheet in order to always reflect how much of the bitcoin stored in the multi-sig wallet belongs to whom
  • The updated balance sheet is not uploaded to the blockchain but rather both parties keep a copy of it
  • Whenever there is a dispute or the payment channel is closed, both parties can use the most recent mutually signed balance sheet to pay out their share of the multi-sig wallet

This sound very complicated right? Wrong! in fact the end-user doesn’t hardly have to do anything to achieve all the steps above! All of the steps mentioned above will happen automatically in the background.

The Lightning Network’s use of payment channels effectively allows users to transact with each other directly rather than broadcasting their business to the entire world (aka public blockchain). By tracking their payments between each other on their own, the two parties are able to avoid expensive and time-consuming interactions with the blockchain. If there is some sort of dispute regarding balances on the Lightning Network, the most recent balance sheet provided by either of the two parties will decide how the funds in the multi-sig wallet are split up.

To better understand how the Lightning Network works, we recommend watching this short video:

What are the benefits of the lightning network?

The biggest benefit in my eyes is that tiny payments are possible. Because of the fees are proportional to the payment amount, it is possible to pay a fraction of a cent. Accounting is even done in a thousandths of a satoshi. A second big advantage is that a payment is are done instantly within a fraction of a second a payment is done. The instant transactions are a big benefit for daily use. The third benefit is that privacy is increasing because of not all transactions are stored on the public blockchain, only once when the payment chanel is eventually closed and the balance is paid out to both parties

CTC Conclusion on the lightning network

We have the opinion the lightning network is a must for bitcoin to be mass adopted and used in daily life. In the old situation with fees over 30 dollar its impossible to buy small daily things like a coffee. The lightning network will change this kind of things and will contribute to mass adoption of cryptocurrencies wich “we” early adaptors only can applaud.

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