What Is the Lightning Network? A Beginner's Guide
October 30, 2023
Public blockchains struggle with scalability. Layered scaling solutions are needed to make blockchains more performant. Currently, the most prominent Bitcoin Layer-2 scaling solution is the Lightning Network.
Read on to learn about the Lightning Network and how it is helping Bitcoin scale.
What is the Bitcoin Lightning Network?
The Lightning Network (LN) is a layer-2 scaling solution that scales the Bitcoin network by enabling faster transactions at a much lower cost compared to Bitcoin on-chain transactions.
The Lightning Network is a channel-based scaling solution that uses Bitcoin’s blockchain as its base layer. Lightning Network users can open up channels with one another to facilitate payments. To transfer Satoshis through the Lightning Network, users can run their own routing nodes or lock their Bitcoin in payment channels run by others. Once locked, satoshis can be transferred back and forth.
Because not every Lightning Network payment has to be settled on the Bitcoin blockchain (only the channel opening and closing transactions), they allow near-instant settlement at a low cost.
In theory, the Lightning Network has the ability to settle millions of transactions per second, leaving competitors like Visa or MasterCard miles behind.
The Lightning Network was born out of necessity. It isn’t economical to use on-chain Bitcoin transactions for small amounts. A single Bitcoin block can only host a limited amount of transactions once demand is high. As a result, Bitcoin’s mempool would fill up too quickly, which would result in higher transaction costs for everyone in the ecosystem. Instead, a solution where all of these payments would settle off-chain was needed.
The Bitcoin sent through the Lightning Network doesn’t differ from those sent on-chain. There is no need for a pegging mechanism, as it is used in the Liquid Network, or a stabilization mechanism similar to other scaling solutions. Users in the Lightning Network send and engage with Bitcoin only.
How Does the Lightning Network Work?
Like the Internet, built on the TCP/IP stack, the Lightning Network uses the Bitcoin blockchain as its foundation and runs as a channel-based scaling solution.
A user must lock Bitcoin in channels to engage with the Lightning Network by sending a commitment transaction, a regular on-chain Bitcoin transaction that opens the Lightning channel. The same applies once a user wants to close the channel again. The sender creates a single input representing the channel point or the transaction ID of the channel.
The final channel creation step is using Hashed Timelock Contracts (HTLCs). These are smart contracts with timeframes or deadlines and the backbone of the Lightning Network. They create the connections between Lightning channels and ensure no one breaks the rules.
These HTCLs are hashed contracts in a two-out-of-two multisig. This means that for someone to be able to send a payment through the network, they have to engage with other peers and lock in their Bitcoin through an HTLC. Because the Lighting Network utilizes onion routing technology, payments are engaging with multiple HTLCs simultaneously.
Each time funds are routed through different nodes and peers in the network, the software ensures that all contacts are valid, instantly checking and validating HTLCs. Once the network has found a safe way of settling the transaction, the payment goes through.
How users pay each other in the Lightning Network differs from transactions on-chain. There are ways to have a public address, either with a QR code or an email-like address provided by the LNPay infrastructure. However, most Lightning wallets these days offer the ability to request a payment via Lightning invoice.
A receiver can request the amount at the invoice’s creation and add that information to the displayed QR code or LN invoice. The sender then scans that and adds the data into the HTLC.
While there are still improvements to be made, various Lightning service providers and wallets offer to run the infrastructure on behalf of users. Also, they help users route their payments through the provider’s node. This way, users only need to lock in the amount of Bitcoin they want to use and the service provider offers the remainder of the channel liquidity.
Advantages & Disadvantages of the Lightning Network
The Lightning Network solves several issues in the Bitcoin ecosystem, but it also comes with drawbacks. Let’s look at the advantages and disadvantages of LN next.
Advantages
- Micropayments: Thanks to Bitcoin’s divisibility of 100,000,000 Satoshis per Bitcoin, users are able to spend BTC in everyday situations like paying for coffee.
- Remittances: International payments and remittances with low costs compared to current solutions. The Lightning Network settles instantly and can be spent instantly.
- Lower fees on the Bitcoin blockchain: The use of Lightning reduces stuck transactions in the mempool and can help lower on-chain fees. This is especially useful if there is high demand on the main network.
- Programmability: Thanks to HTLCs in Lightning, developers can customize the use case of Lightning to their every need. We already see this with the implementation of Taproot Assets, which enable fiat over Lightning at a lower cost and instant settlement.
Disadvantages
- Channel liquidity: Users have to either rely on Lightning Service Providers (LSP) for liquidity or lock their own Bitcoin in channels to be able to use Lightning.
- Centralization: The more users use LSPs, the more centralized the adoption of Lightning becomes. More trust in third parties means less decentralization and a potential attack vector for the network.
- Technically challenging: While there is a wide variety of different Lightning implementations, most of them are still too technical or hard to understand for everyday users.
- Usability: Lightning’s usability is still very complex and will need better UI/UX interfaces to use services. They would need to be as simple as modern banking apps or services where people simply tap and pay.
How Does the Lightning Network Help Scale Bitcoin
The Lightning Network is poised to scale Bitcoin and bring it to the masses because it makes Bitcoin lightning-fast and fit for small everyday transactions.
Thanks to Lighting, the days when you had to wait ten minutes for a transaction to be confirmed are long gone. Users can now create an LN invoice on the fly, send it over to the payee, and have it paid within seconds.
While the Lightning Network can be implemented into modern web technology, which will be a driving force for more adoption, the main focus currently is on the mobile experience. After all, mobile phone adoption is still growing at a rapid pace, and we should use this to our advantage.
This opens the door for financial inclusion in less connected areas in the world, where mobile adoption is increasing while the adoption of banking is actually not taking off. There are many countries and regions where people don’t have a bank account but own a mobile phone. Instead of relying on cash, these citizens could use the Lightning Network on their phones to carry their money wherever they go and transact with one another in an instant.
FAQs
Is there a coin for the Lightning Network?
No. There is no additional token or coin for the Lightning Network. Users use Bitcoin and typically engage with smaller units called Satoshis. There are 100,000,000 Satoshis in 1 Bitcoin.
How much do Lightning Network transactions cost?
While there is no definite answer, the transaction costs vary based on network traffic and the routing costs of the nodes themselves. Having said that, most people typically pay a few cents per transaction.
How fast is the Bitcoin Lightning Network?
In theory, the Lightning Network has the capability to send 1,000,000 transactions per second (TPS) and settle all of them instantly. By comparison, Bitcoin can process about 7 TPS, while Visa can process tens of thousands.
Is the Lightning Network as secure as Bitcoin?
Because the Lightning Network uses the Bitcoin blockchain as the base layer, it’s safe to say that it uses Bitcoin’s security. However, there are some aspects to scaling the network that deliberately choose to sacrifice some of Bitcoin’s decentralized nature and, thus, some of its security.
Who controls the Lightning Network?
There is no single entity that controls the Lightning Network. While there might be companies and different implementations to get started, they all allow builders to plug into the Lightning Network and create their implementation. Just like Bitcoin, there are numerous open-source offerings for developers to get started.
How many Bitcoin are locked on the Lightning Network?
At the time of writing, there are about 4,574 BTC in the Lightning Network with 17,311 nodes and 69,387 public channels.