Lightning Network on Bitcoin Blockchain

What it is

The lightning network is a network that sits on top of the Bitcoin blockchain, creating a second layer that enables fast and cheap transactions. These transactions are done and settled off-chain (off the blockchain).

Bitcoin has been faced by scalability issues and there was need for a solution. The number of transactions per second was 7, which is a small number when compared to remittance companies such as Visa and Mastercard. In addition, the amount of fees charged to transact large amounts of money on Bitcoin was very high, which can limit the number of people willing to transact on the network. As such, a solution was needed.

The lightning network was proposed by Thaddeus Dryja and Joseph Poon in their 2015 white paper. Their idea explained of a network which sits on top of the bitcoin blockchain, settling the scalability and fees problems. This network comprises of user-generated channels used to send payments back and forth in a secure and trustless manner.

The lightning network requires two individuals who are ready to transact to set-up a MultiSig wallet. This wallet is used as storage for the BTC used to transact. A MultiSig wallet requires more than one signature to enact a transaction.

Lightning network does not have its own token or currency. As such, it uses Bitcoin when applied to the Bitcoin blockchain. The network sends payments using the transaction format of the underlying blockchain, in this case BTC. Transactions done using this network are not broadcasted on the chain hence reduces the amount of time and fees as well as increase privacy.

How it works

Two parties who want to transact with each other open a MultiSig wallet and BTC is deposited on the wallet by at least one of the parties. The address of this wallet is saved on the Bitcoin blockchain with a smart contract (balance sheet) indicating how much BTC is owned by whom among the involved parties. This action sets up a payment channel.

The two parties can then start transacting off the blockchain for unlimited number of times without changing the first signature information on the blockchain. After each transaction, they are required to make a signature which reflects the transaction amount and the amount of BTC owned by each. This signature on the smart contract is not added to the blockchain but is stored off-chain on the lightning network, by each person.

When the two people are finished with their transactions or want to close the channel, they submit the most recent signed balance sheet to the blockchain. Their last transaction details will be recorded on the blockchain. This data is confirmed by miners in the blockchain before it is assigned into a block.

It is not necessary for everyone to open a MultiSig wallet and use the lightning network. You can transfer BTC to someone who already has direct channel and they can transfer the BTC to the recipient through the lightning network. The lightning network automatically finds the shortest route to transfer BTC. Consequently reducing intermediaries, fees and time used for a transaction to go through.

Lightning network uses

The lightning network was originally developed for the Bitcoin blockchain. However, the technology is currently being developed for a range of other cryptocurrencies such as Litecoin. Additionally, this network can be used to route payments across two or more blockchains using cross-chain swaps.

The lightning network cannot be secure without the security provided by the blockchain. Therefore, smaller transactions will do better on this technology since they carry lower risk.

This is an example of a side-chain, which allow tokens and digital assets to be securely used in a separate blockchain and be moved back to the original blockchain when there is need. Others include the Raiden Network on Ethereum

May 2018 saw the release of v0.4.2-beta of Lightning Network Daemon implementation for Bitcoin’s mainnet. The specifications for the lightning network (BOLTs) are open specification and can be found on Github.

The first mainnet release of lightning network on Bitcoin blockchain was announced by Lightning Labs on March 16^th.

Benefits