Bitcoin Lightning Network News

Need for Bitcoin Lightning

In order to enable fast transactions and a possible solution to the scalability issues, Bitcoin Lightning Network is a second layer payment protocol that operates on top of the blockchain. This peer-to-peer system handles micropayments and atomic swaps, without delegating custody of funds or recording every individual transaction to the blockchain. Currently, every transaction is recorded, those with the highest transaction fees receiving top priority in the queue. As digital currency becomes more widely adopted, the network must handle more transactions more efficiently, and the Bitcoin Lightning Network (LN) is a potential solution.

Bitcoin Lightning Explained

Simply speaking, the Bitcoin Lightning Network allows the opening of a “payment channel” between two users that is recorded on the Blockchain. The two users can transact any number of times through the payment channel, which can stay open for hours, days, weeks or decades – without ever hitting the Blockchain again until the users want to close the channel.

A network of payment channels rarely required to transact on the Blockchain will allow transactions at the speed of lightning. Think of a payment channel like it is a safety deposit box where equal amounts of Bitcoin are deposited by two users and locked. This deposit is recorded on the Blockchain as an “opening transaction” which creates the payment channel between those two users. Neither user can spend funds deposited without the other user. For example, if Joff and James each deposit 10 BTC and Joff wants to send 2 BTC to James, he would transfer a promise of ownership for 2 BTC held on deposit to James. This “promise transfer” unlocks the “deposit box” and James is able to claim 12 BTC, Joff can claim 8 BTC.

Now imagine that the following day, James wants to send 1 BTC to Joff – the same transfer of a promise of ownership is sent to Joff. The result is Joff can now claim 9 BTC and James 11 BTC. But the two users do not open the box to make the claims because they want to continue transacting between themselves in this manner for some period of time. The payment channel is merely a pool of funds and the transfer of ownership of those funds as agreed upon by both contributing users. If either user wants to close the channel, they can and the final tally of who owns what is recorded on the Blockchain at that point. Just that one transaction is recorded, not the numerous transfers between them over the time the payment channel remained open.

Bitcoin Lightning Potential

While this very simple explanation demonstrates how payment channels work, the true potential becomes evident when two or more payment channels work together in a network. The network moves the value from the ownership of Bitcoins to the promise of ownership of the Bitcoins.

Using our example, suppose Joff and James have an open payment channel, and James and Pamela have an open payment channel. No open payment channel between Joff and Pamela. If Joff wants to transfer 2 BTC to Pamela, he can use the payment channel between James and Pamela by asking James to transfer a promise of 2 BTC to Pamela on their open channel. Joff then reimburses James with 2 BTC on their open channel. All of which happens again, at the speed of lightning without clogging up the Blockchain bandwidth or incurring hefty transaction fees. All good for the future of Bitcoin!

How It Works

With a payment channel, users can conduct unlimited transactions which are not recorded publicly on the Bitcoin blockchain. Only after all conducted transactions are completed, and a payment channel closed, are final transactions recorded on the blockchain. Multiple channels can be used to transfer to other users, with the network finding the shortest path. While the Bitcoin Lightning Network has the potential to make small transactions possible without putting a strain on the blockchain, it is not perfect. Once developers make the system user-friendly, address privacy-related and centralization issues, it could prove to be the solution needed to promote widescale adoption. While promising, there are a lot of moving parts that must be considered before this solution is implemented.

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