Lightning Network Explained
The
Bitcoin Lightning Network is an autonomous solution that’s signaled as the key
to all problems keeping Bitcoin from mainstream implementation. It claims to
solve the bleak scaling problem, make instant transactions, keep transaction
fees minuscule, and take your transactions off the blockchain.
In
this article, we’ll discover what the Bitcoin Lightning Network really is, how
it can make the guarantees it provides, and its current state. Bitcoin has a
scaling problem. Bitcoin is
designed to store all transactions in a data structure called a block. A
block contains information about the previous block, miscellaneous data about
mining rewards, and most of the block is just transaction data. Blocks are also
fixed at a maximum of 1 MB in size. This last bit is where the trouble is.
Because
blocks are 1 MB in size, and a block is created every 10 minutes, assuming the
transactions are not SegWit
(coming up later) the network can process a maximum of between 3.3 and 7
transactions per second. For a currency designed for mass use by billions of
humans and their machines, 7 transactions a second just isn’t up to par. Visa,
on the other hand, claims to be able to process 24,000
transactions per second.
As
the number of transactions starts to increase, your individual transaction
competes with every other for inclusion inside a limited block space, and so,
the likelihood of having yours included in the block starts to decrease. Since
miners can arbitrarily decide which transactions to include in a block, on
these occasions, the only way to incentivize the miners to include your
transaction is by increasing your transaction fee. However, this starts to make
transactions prohibitively expensive—such as this 192
byte transaction for $92.98 where the transaction fee was $14.86.
The
Bitcoin Lightning Network
The
Lightning Network is a second-layer network that transmits signed, but un-broadcast,
transactions among peers and relies on the Bitcoin blockchain only for final
settlement of funds. This means that transactions aren’t limited to the block
size at all, confirmation times are irrelevant, and the Bitcoin blockchain
doesn’t need to store every transaction that ever happens.
Who
developed the Bitcoin
Lightning Network? It was first described in a white paper authored by
Joseph Poon and Thaddeus Dryja but has since evolved into a community effort
with third-party individuals and even companies contributing to specifications
and implementations.
A
Lightning node runs much like and unlike a Bitcoin node in that it operates in
a networked fashion, validates transactions, and communicates with other nodes,
but it does things that Bitcoin nodes historically do not: it holds funds, act
as an automated financial intermediary, actively monitors Lightning “channels”
for malicious behaviour and reacts defensively (this is explained in detail later),
etc.
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