Lightning Network

The Lightning Network (LN) is a possible solution to the (bitcoin) scaling problem. It works by limiting on-chain transactions and settling most transactions off-chain through payment channels. To dive deeper into Lightning, visit the official website.

Basic principle

  • The Blockhain will continue to function unaltered (same blocksize, PoW mining, etc.)
  • But instead of every transaction being stored, payment channels are used, which can be regarded as direct p2p connections between nodes (users) on the network.
The Lightning NetworkThe Lightning Network
The Lightning Network

Payment channel

Payment ChannelPayment Channel
Payment Channel

Inside a payment channel, the nodes that established the channel can freely exchange bitcoin as their starting balance permits. These transactions are referred to as off-chain transactions because, unlike regular transactions, they are not immediately recorded onto the blockchain. Only when such a channel is closed, will it lead to an actual final transaction, aggregating all transactions made. Off-chain transactions are secured by the nodes’ shared knowledge of a random number.

On-chain transaction

On-chain transaction & channelsOn-chain transaction & channels
On-chain transaction & channels
The resulting transaction is handled on-chain by the network as usual. Should one of the transactions in the channel be malformed or invalid, the whole transaction – and thus all transactions made in the channel – will fail.

All nodes can freely create channels between them. So in the example, A can transact directly with B and D, but also with C through B, and E through D. There is no time-limit for channels, so these can stay open indefinitely – or until funds are to be released, upon which (one of) the nodes close(s) the channel.

Speed

The Lightning network will, in theory, be able to handle millions to billions of transactions per second (TPS). This blows away legacy systems, such as VISA, by many orders of magnitude.
Lightning Network Speed ComparisonLightning Network Speed Comparison
Lightning Network Speed Comparison

Overview

The Lightning NetworkThe Lightning Network
The Lightning Network