The Lightning Network is a set of blockchain-based smart contracts that enable instant, low fee transactions and fix inherent scalability issues of layer-one blockchains. The most notable example of Lightning is the Bitcoin Lightning Network.
Because it runs on top of the base protocol, Lightning is known as a "layer two network" or a "second-layer solution." It is designed to fix scalability issues inherent with most blockchains and runs on any cryptocurrency network that offers Lightning Network support. Lightning allows you to make quick and cheap transactions on a peer-to-peer payment channel separate from the original blockchain network.
What is the purpose of the Lightning Network?
The primary purpose of the Lightning Network is to make transactions faster, easier, and cheaper than if the transaction were to occur on the underlying blockchain network. Hence, the Lightning Network uses peer-to-peer "payment channels", instead of on-chain transactions.
The Bitcoin blockchain is only capable of approximately seven transactions per second on its base layer, which can cause network congestion, high fees, and payment delays. Some transactions can even take hours to process if the transaction is low priority. Lightning solves these problems by routing lower-value payments over the secondary Lightning Network rather than on the base layer.
How does the Lightning Network work?
To initiate a transaction on the Lightning Network, a channel is opened between two parties and funds are submitted. The channel requires a fee to create as this information is broadcast to the main blockchain. Once the channel has been created, both parties can freely exchange Bitcoin faster, cheaper, and easier with each other than if they did it on the main blockchain. There is no limit to the number of transactions these parties can create once the channel has been opened.
After both parties are done exchanging their Bitcoin, they can close the channel by broadcasting a "commitment transaction," a transaction that commits to a channel state that the channel participants have agreed upon. This requires a single on-chain fee as the information about the final balance of both parties is sent to the main blockchain after closing the Lightning Network channel.
An advantage of the Lightning Network is that even if you do not have a direct channel that links you with someone, you can send transactions through someone else that does. These are called multi-hop transactions, and you can hop through tens or even hundreds of other channels until your crypto arrives at its final destination. This makes the Lightning Network much more scaleable as not everyone needs to have a direct channel with everyone else.
Benefits of Lightning
The Lightning Network has many advantages over first layer blockchains.
The Lightning Network has no theoretical transaction limit as people can create as many payment channels as they like. Moreover, the network becomes faster as more and more people adopt it.
While the main blockchain may take hours to confirm your transaction, the Lightning Network can complete it as fast as the two parties can communicate with each other. It often takes mere milliseconds for a transaction to settle on the Lightning Network.
The base fee for a Lightning Network transaction is just one Satoshi which is one hundred millionths of one Bitcoin. At the time of writing, the base fee is just 0.0004001 USD.
Drawbacks of Lighting
Despite the many benefits, Lightning has some drawbacks that might make it inconvenient for some users. We'll be discussing some of those below.
Cannot be used offline
Both parties must be online for Lightning Network transactions to occur. This keeps the network safe in case of a malicious attack.
Opening & closing fees
The Lightning Network sends information to the main blockchain twice, once when you create a channel, and another when you close it. You need to pay a fee to the main Blockchain network for both of these operations.
Hubs are nodes with a very high number of open channels. Some people consider hubs to be centralization and consider the network not fully peer-to-peer as a result.
Although the Lightning Network is very secure, it is still not as secure as base layer transactions.
The Lightning Network allows blockchain networks such as Bitcoin to be scaled globally while being fast and secure. These abilities of the Lightning Network can facilitate more and more cryptocurrency adoption in the future. The Lightning Network is an excellent solution for blockchain networks facing scalability issues and high fees.