Introduced in 2009, Bitcoin was the first digital currency to take the market by storm. Within the past year however, fans have discovered its limitations. In particular, the complex mathematical computation required to validate transactions have helped to slow transaction confirmations down. And as the number of users has grown, the network has become slower and more expensive.
In order to rectify this situation, SegWit was introduced last year. A soft fork change, SegWit has allowed Bitcoin to double its transactions-per-second. However, the mining fee for a transaction has increased dramatically as well (as high as $30 recently), mostly because of users’ apparent indifference in adopting SegWit. And because miners prefer transactions that offer high mining fees, the waiting time has also increased. To address this problem, Bitcoin developers have implemented the Lightning Network,
What is the Lightning Network?
Intended as a decentralized system for instant, high-volume micro-payments, the Lightning Network removes the risk of delegating custody of funds to trusted third parties. It thus relieves the main Bitcoin network from constantly having to process new blocks for small transactions. In essence, it’s a sub-network that carves out “payment channels” so that any two parties can conduct “micro-transactions”.
In reality, the Lightning Network only notifies the Bitcoin blockchain about the payment channel’s creation and opening balance initially. It then records all small transactions internally, sending a final message to the Bitcoin blockchain only after the channel’s balance is finalized and the channel closed. Hence, the Lightning Network trades-off a blockchain-level security for greater speed.
How might this work in real life? When person A connects to the Lightning Network in order to transact with person B, the Network automatically sets up a payment channel. Once either A or B deposits Bitcoin within this channel, an encoded contract is created for the fund and shared between the two parties. This contract is also broadcast over the Lightning Network in order to secure it within the blockchain.(and as added security, the funds are frozen in a secure, multi-signature common address). By creating such a channel, both A & B can perform as many transactions as they desire. And unlike the Bitcoin blockchain, the Lightning Network is able to transcend the limits of unidirectional transactions once both parties agree.
Lightning Network transactions are recorded in a micro-ledger and shared only between A and B. They’re also instant since they’re not required to be sent to the blockchain for mining. The channel remains open for a random amount of time, based on the time delay after a transaction. Once closed, the Lightning Network sends the micro-ledger’s final balance report to be added to the Bitcoin blockchain.. Thus, the Bitcoin blockchain only has the opening and final closing balance report.
In essence, the Lightning Network seeks to remove most in-between transactions off the blockchain by providing it with only initial and final balance reports. Such a move has the potential to increase the blockchain’s effective speed manifold. But developers at The Lightning Network must overcome several hurdles first. After all, the alpha version was only just released on January 10, 2018. It’s still in its infancy and has yet to be fully vetted through public testing.
As presently configured, the Lightning Network’s channel is designed to fully utilize SegWit. Though it’s possible to operate without it, SegWit offers the Lightning Network an array of essential benefits. In addition to speeding up transactions. SegWit grants transactions greater security by eliminating transaction malleability (via removing the signature data from the transaction ID). SegWit also provides the Lightning Network with a larger block size limit, a multi-signature feature and script upgrade capability. In essence, SegWit’s adoption by the Lightning Network is paramount for it to reach its full potential. So far however, only about one-fifth of users have adopted SegWit.
At present, users are reluctant to conduct micro-transactions given the high fee rate for computing a transaction block. The Lightning Network can theoretically enable such transactions to occur for less than a dollar. However, achieving such savings requires that both the Lightning Network and Segwit need to be fully adopted. Moreover, setting up such transactions remains a very slow process. Enabling users to quickly and easily configure such transactions to take place may eventually solve both problems.
Developers are currently exploring whether to add new features and how public testing might proceed. Once it becomes fully operational, expect this technological achievement to have a tremendous impact upon the cryptocurrency market.