What is the Bitcoin Lightning Network?

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There’s no doubt Bitcoin has revolutionized the idea of currency, taking it away from the hands of governments and giving the power back to people. Powered by distributed ledger technology, aka blockchain, Bitcoin kickstarted a series of innovations in the field of cryptocurrency, web 3.0, and decentralized networks.

However, despite unprecedented decentralization and security, the Bitcoin network has one significant flow – transaction speed. If you’ve ever transferred Bitcoin from one exchange to another or to your wallet, then you must have lived those long minutes of anxiety and stress while you wait for the transaction confirmation and funds to appear on the other end.

As Albert Einstein once said, “When you sit with a nice girl for two hours, you think it’s only a minute. But when you sit on a hot stove for a minute, you think it’s two hours. Time is relative.” In those minutes when you’re waiting for the transaction to complete, I like to believe that Albert Einstein must be smiling from his grave looking at your misery.

To bring you out of that misery and solve the scalability problem of the Bitcoin network – we need the Lightning Network.

What is the Lightning Network?

First proposed by Joseph Poon and Thaddeus Dryja in 2015, the Lightning Network is a second-layer scalability solution for the Bitcoin network. Thus enabling users to make real-time Bitcoin transactions with nominal transaction fees. So what does it mean?

Well, if you imagine the Bitcoin network as a big highway that is currently congested and has a high toll fee associated with it. The Lightning Network is a side path where traffic can freely move without any toll fee and bridge back to the main highway whenever they want. In fintech jargon, this is called off-chain payment settlement.

Therefore, the Lightning Network facilitates the ease of making micropayments in Bitcoin while keeping the ethos of decentralization and doing away from the central institutions. But how does Lightning Network work? Let’s figure it out.

How Does the Lightning Network Work?

So here it goes – the Lightning Network leverages something called payment channels to facilitate off-chain microtransactions with minimal fees. Thus allowing users to make as many transactions as they want through these payment channels. So what are these payment channels?

Let’s understand the concept of payment channels through an example. Let’s say Prachi buys her Chai every day from Krishna’s cafe. So using the Lightning Network, she opens a payment channel with Krishna and deposits $50 worth of Bitcoin in it. Now with a direct channel to Krishna, Prachi can send microtransactions ($0.5 per Chai) whenever she buys a cup of Chai. 

In case, if there’s a lockdown in place and Prachi wishes to close the payment channel with Krishna, she can do so easily with a tap. It’s also worth noting that the Lightning Network requires only the opening and closing transactions to be settled on the mainchain, thus saving the transaction fees and ensuring real-time transactions.

Now, the question arises, do you need to open a separate payment channel for everyone you trade with? Well, not necessarily. That’s where the network effect comes in.

The Lightning Network achieves this via Network channels that allow payment channels to connect indirectly via intermediaries. So, if Prachi wishes to transact with a grocery store that already has a payment channel with Krishna, she can transact without opening a separate channel. Thus the Lightning Network allows transactions to be routed through multiple nodes in a decentralized fashion.

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