What is Bitcoin Lightning Network?

This article will explain the basics of the Bitcoin Lightning Network (LN) that facilitates fast, virtually free bitcoin payments without waiting for block confirmations.

What is Bitcoin Lightning Network?

Lightning Network (LN) is a software protocol that sit on top of the Bitcoin network and facilitate fast, virtually free payments without waiting for block confirmations and avoids mempool congestion.

Lightning was first introduced in 2015 and the white paper was released in January 2016 by cryptographers Joseph Poon and Thaddeus Dryja. Both distinguished in their fields, Poon is Professor of Physics at the University of Virginia and Dryja is a Professor of Ophthalmology at Harvard.

While it had a slow start, support for Lightning as a viable solution to Bitcoin's fees and slow processing time is increasing. Recently, Ray Youssef, CEO of Paxful, announced growing internal support for LN.

Ray Youssef, CEO of Paxful

Other investors, like Anthony "Pomp" Pompliano from Morgan Creek Digital, are also pushing for greater support of LN to scale Bitcoin.

"Pomp", founder of Morgan Creek Digital

Bitcoin Core is considered a Layer 1 solution, while Lightning is considered a Layer 2 solution. Some advocates for Lightning compare it to writing legally binding contracts between parties. These contracts are enforced by the U.S. Constitution, but it doesn't need a court decision on every single contract that's written. Courts provide enforceability, when necessary. Lightning works in the same way to make off-chain transactions and settle with the Bitcoin blockchain once the parties are ready to close.

BitMEX, in a 2019 report, concluded that "Lightning Network can easily scale to many multiples of Bitcoin’s current on-chain transaction volume without any economic fee issues, all based purely on hobbyist liquidity providers," said the report. They did caution, however, that crypto investors in this space are typically looking for a high-risk/high-return investments, which appears to be the opposite of the 1% yield per year for Lightning liquidity providers.

Capable of millions to billions of transactions per second, the Lightning Network capacity blows away legacy payment providers by many orders of magnitude, including Visa and other electronic payments networks that don't actually settle transactions the instant you buy something.

Source: Cointelegraph

Lightning Network is enforced by blockchain smart contracts that don't write individual transactions onto blockchain. It keeps a side tally of the credit or debt between users and settles on the blockchain at more efficient times. At the end, the transactions are closed using a real Bitcoin transaction.

By transacting and settling off-blockchain, Lightning Network still has all the benefits of bitcoin, but uses off-chain payment channels between parties to allow for exceptionally low fees, making it perfect for instant micropayments. It can even handle cross-chain atomic swaps on other decentralized blockchains without third-party custodians.

In November, Lightning Labs announced the release of Lightning Pool, which is "a non-custodial, peer-to-peer marketplace for Lightning node operators to buy and sell channels." Lightning Pool makes it easier to instantly accept Lightning payments and allows investors to earn small yields by lending bitcoin.

According to Lightning Network Statistics, the Lightning Network has 18,000 Lightning nodes and 38,000 channels. The total network capacity now sits at 1,088 BTC or around $52 million in liquidity. About 60 new Lightning nodes are added to the network each day, or about 1,800 per month.

OKEx, a Malta-based cryptocurrency exchange with $30 billion in assets, announced the integration of the Lightning Network this year.

For more information, check out this review on Decrypt, What is Lightning Network? Or download a Lightning wallet to get started.