Lightning Network: The solution to faster, cheaper Bitcoin transactions
Bitcoin transactions in 2017 shot upwards of $30, which seemed quite a steep price to pay for transacting. Bitcoin being the most prominent among all other cryptocurrency sees a huge volume of transactions daily, but this volume led to slower transaction speed and high transactional fees. Users have reported that the average time to confirm a Bitcoin transaction was 78 minutes in December and even went up to 1188 minutes too. Because of this slow speed and high fees, it led to several splits in the original blockchain which is known as “hard fork,” leading to the creation of Bitcoin Cash in August and another digital asset called Bitcoin Gold in October. If this continued the future of Bitcoin as a day-to-day currency in 2018 didn’t look very good. But thanks to the Bitcoin Lightning Network which will provide a new scaling solution for Bitcoin’s issues with high transactional times and fees.
The Bitcoin Lightning network is a “second layer” payment procedure which has a system of smart contracts built on top of Bitcoin’s Blockchain, this enables people to transact using Bitcoins faster with reduced transaction fees. The Lightning Network will move the routine payments outside of the Blockchain, and keeping them off the main network will clear the most significant obstacle to Bitcoin’s continued growth.
These quicker and cheaper transactions between two parties are achieved by:
- The network sets up a multi-signaturewallet which holds some amount of Bitcoin that is provided by at least one of both transacting parties.
- The wallet address along with a balance sheet (smart contract) is then saved to the public Bitcoin blockchain which verifies the ownership of the Bitcoin among the transacting parties (how much of it belongs to whom).
- The two transacting parties can then transact an unlimited number of times without ever touching the information stored on the blockchain, once this payment channel is set up.
- For each transaction, both the parties involved must sign an updated balance sheet which serves as proof by revealing how much of the Bitcoin stored in the wallet belongs to whom among these two parties.
- Both parties keep a copy of the updated balance sheet and it is not uploaded to the blockchain.
- In case of a dispute or closure of the payment channel, the most recent mutually signed balance sheet is used by both parties to pay out their share of the Bitcoin in the multi-sig wallet.
While all this information might seem a tedious procedure; in fact, all of the above will happen automatically in the background and the end-user hardly needs to put in any additional effort to conduct payments through the Lightning Network. And moreover, both parties can bypass the high-priced and time consuming interactions with Bitcoin’s blockchain by tracking the payments between each other on their own.
Having said all this, when compared to conventional payments on the Bitcoin Blockchain, payments made on the Lightning network have several major advantages.
- Conventional Bitcoin transactions are very slow to clear, the transaction time depends on how congested the network is and how conservative recipients are about making sure the network has confirmed a transaction and so it may take a few minutes or several hours to conduct the transaction but Lightning payments on the other hand, will be very fast and payments will be cleared in seconds and settled instantly.
- On the Lightning network you can make smaller payments because of the reduced transaction fees which are proportionate to the payment amount.
- Enhanced privacy: Payments made through the Lightning Network offer more privacy than conventional Bitcoin payments. The public blockchain will not have details of every transaction and if the transaction is stored, it’s only after the payment channel is eventually closed and the remaining Bitcoins is paid out to both parties.
- A major drawback on the Lightning network is peer failures, in case of an unresponsive peer, a payment channel cannot be closed for hours and users might have to resort to an alternate route to resend the funds.
- Lack of offline payments: If the person you want to send funds to is offline, then you cannot pay them unless they come online.
- Unsuitable for making large payments: Though large transfers might be possible through various payment channels, if the funds in the peers’ multi-sig wallets is insufficient you cannot transfer large funds.
- No decentralization: Similar to Miner centralization on the Bitcoin network, the Lightning Network also might support centralization in payment hubs.
- Transaction speed issues: While Lightning transactions are supposed to be faster than the Bitcoin network, it’s not guaranteed that payment will clear that quickly. Transactions on the Lightning Network make use of time locks which are usually measured in days, in case the other party misbehaves, this will give an innocent party time to respond. So if unfortunately a user ends up interacting with an unreliable or malicious node on the Lightning network, their Bitcoins might end up being frozen for several days—and might even have to pay unexpected transaction fees to the Bitcoin network if a commitment transaction has to be broadcast to the blockchain.
On the mature Lightning network, you can rest assured that these bad outcomes will mostly be rare occurrences. Lightning intermediaries are in demand and it will become a very competitive business, and customers will share information about the nodes that keep up high up-times and close open channels gracefully. But if a node often disappears abruptly from the network, not many customers will want to transact on it.
In the long run, Bitcoin users will look to adopt Lightning mostly because of the lower transaction fees. Over the last few years, the transaction fees on the Bitcoin network are sky-high because of the congestion in the network.
The payment channel in the Lightning network generates two on-chain Bitcoin transactions: one at the beginning to open the channel and another one at the end, to close it. An unlimited number of payments can flow over a payment channel in between the opening and closing of the channel because they can occur weeks or even months apart, leading to a significantly smaller per-payment cost of opening a payment channel.
Single-hop payments over an open payment channel might be free while multi-hop payments might be charged because intermediaries will want to be compensated for allowing third parties the use of their channel capacity. While we aren’t yet sure how much these fees will be, it’s still expected to be much cheaper than on-chain transactions.
The market competition can be expected to keep the fees low, but even if it does rise to a few pennies per transaction, people with just a few Bitcoins can jump into the market and propose to shuttle other people’s Bitcoins from one end of the Internet to the other; all they’ll need to do is open some payment channels and make a neat profit from it.
Better privacy than Bitcoin
A lot of people mistakenly assume that the Bitcoin payment network is an anonymous one because the Bitcoin addresses aren’t tied to real-world identities directly; but people can infer plenty of information about transactions by just analysing the blockchain data.
The Lightning Network on the other hand is different, only the transacting parties on either end of the payment channel will have access to see the payments. Anyone who examines the blockchain might just be able to determine the dates for when the two people opened and closed that particular payment channel, and the net change in both their Bitcoin holdings. Information regarding the number of payments made over that channel or individual payments will not revealed by the Blockchain.
Moreover, the Lightning network limits the amount of information that intermediaries can gather about the payments they help to complete by using onion routing. But all this doesn’t mean that everyone will stay uninformed about all the transactions. For example: Governments can piece together information about who paid whom and intelligence agencies also can track payments by analyzing the timing of Lightning traffic and using their extensive surveillance infrastructure to gather more information about the payments.
The Lightning network will prove to be more useful as more people start adopting it. In case of the network having many redundant connections, people can dynamically re-balance their funds between different payment channels leading to payment channels being closed a rare event, thus reducing congestion on the blockchain.
It’s might be a few years for before this vision is fully realized, and it could go wrong in lot’s of horrible ways, but right now the Lightning network seems to be picking up speed as more and more users are turning to Lightning this year. It seems like Lightning Network might be future for better Bitcoin transactions, we just have to wait and watch.
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