Lightning network explained – is it Bitcoin 2.0?
The Lightning Network promises free transactions on the Bitcoin network that can be confirmed instantly. This is exactly what is needed for Bitcoin to gain mass-adoption and move away from fear of major congestion (transaction cost exceeded more than $100 USD the network peak in January 2018).
It’s hard to understand because it breaks what we normally understand of the Bitcoin network. Bitcoin network is limited to 10-minute blocks – that is transactions take up to 10 minutes to confirm, and a high fee is required to guarantee a confirmation on the next block.
Regular Bitcoin Transactions
When we send Bitcoin and broadcast a transaction we need to wait for confirmations that only come every 10 minutes. The block groups all the transactions that are announced and puts it into a ledger called the blockchain. You get one confirmation for each block that forms after the transaction, so if you want to wait for 3 confirmations, you must wait for 30 minutes. In contrast, the Lightning Network promises instant transactions.
How the Lightning Network Works
The Lightning Network works by creating payment channels off the blockchain. This means that you don’t need to wait for the 10 minutes to confirm each block. However you do have to deposit a certain number of bitcoins so now you’re proving ownership of these bitcoins. You’re effectively handing over these bitcoins to the network a little bit like that and it works with multi-signature wallets. There are failsafe protocols in place, so if something happens and the transaction fall through, you are still protected.
The concept works kind of like a tab at a bar. You can maybe put down a few thousand dollars and create a tab and every time you buy a drink, instead of paying directly with visa or cash every time, you can use your tab. This cuts down a lot on the fees with using visa for each transaction and this likewise can be applied to bitcoin and the blockchain transaction fees.
Current State of the Lightning Network
Lightning Network right now it mostly commands prompt based so it’s like we’re still quite far from a good wallet and good user-friendly graphical interface. Right now it’s mostly kind of the text command based and there have been tests of the Lightning Network over international regions. We’re at a stage where we know that the concept works but we’re still developing the software and making sure that it works very well and securely. Recent hacks of the Party Wallet has shown us that software stability and robustness is absolutely vital. As a result, development on lightning has been quite slow because it’s highly complicated and any bug in the code would maybe be quite catastrophic. On top of that, a good user-friendly interface is also vital.