On March 16th, Lightning Labs announced the first real-world implementation of the Lightning Network, putting Bitcoin in the race with Bitcoin Cash, Dash, Ethereum, Litecoin, Ripple, Stellar, Zcash, and others to become the cryptocurrency of choice for small everyday purchases. Developers and investors see the beta launch of the first thoroughly tested version of lightning network technology as the true beginning of the two-layer payments network, a crucial step towards building the healthy transactions-focused Bitcoin network of the future.
Bitcoin transaction fees are now at the somewhat ridiculous level of $30 each. The lightning network creates a layer on top of the Bitcoin blockchain intended to run fast and cheap bitcoin transactions, which then settle back to the Bitcoin blockchain. There are no miners on the lightning network, so transaction processing is free or very cheap.
The buyer and the seller set up a 'multisig wallet' requiring more than one signature to clear a transaction. The wallet holds some set amount of bitcoin with an address saved to the blockchain. The two parties now have a payment channel through which they can run an unlimited number of transactions off of the blockchain. Each transaction requires both parties to sign an updated balance sheet showing how much of the bitcoin stored in the wallet belongs to each. When the two parties are finished doing business, they close the channel and the resulting balance is registered on the blockchain. This all happens automatically in the background and is not anywhere near as cumbersome as it sounds.
The Lightning Network’s payment channels allow users to transact with each other directly rather than broadcasting their business to the entire public blockchain. By tracking their payments between each other on their own, the two parties avoid expensive and time-consuming interactions with the blockchain.
Lightning network users don't need to open new payment channel for every new party with which they want to transact. They are indirectly connected to other parties using multiple hops between other users on the network. Everyone is connected to everyone else through the network via only a few “nodes” on the network. By creating a network of two-party ledger entries, it is possible to find a path across the network similar to routing packets on the internet, where lightning network nodes function as the servers that process transactions in a decentralized manner.
Lightning network payment speed is measured in milliseconds to seconds, with billions of transactions per second possible across the whole network, blowing away Bitcoin's legacy payment system capacity by many orders of magnitude.
Bitcoin has continued to succeed in spite of high transaction fees because most people would simply prefer to use the more familiar bitcoin as money over an altcoin. The lightning network may help Bitcoin essentially kill off altcoins focused on cheap transactions. Though lightning network implementations are now being developed for a range of cryptocurrencies besides Bitcoin, the dominance of Bitcoin as a cryptocurrency may, in the end, be enough to give it the win as cryptocurrency of choice for small everyday purchases.
By: BGN Editorial Staff