Basics

What is the Lightning Network?

The Lightning Network (LN) is a digital framework that allows for the faster facilitation of transactions at low fee rates.

The name Bitcoin now seems to have seeped into the consciousness of the masses, especially as the premier cryptocurrency continues to scale up to new heights, seemingly every other day. In this regard, even when the idea for the cryptographically secure digital asset was first put forth by Satoshi Nakamoto back in 2008, people who understood its true implications wondered whether it would be able to scale as and when the demand arose.

Sure enough, Bitcoin has now grown by unfathomable proportions, however, its transaction capabilities have remained extremely limited, with the network still only capable of processing anywhere between 3.3 and 7 transactions per second (TPS). To put things into perspective, the Visa network is currently able to facilitate a staggering 24,000 transactions per second.

So then what exactly do we mean by scaling the Bitcoin network up? In its most basic sense, when we talk about scaling a network, we are referring to the implementation of a process via which the transactional capacity of a cryptocurrency can be enhanced without altering its core foundational framework. In this regard, the Lightning Network (LN) is an extension of the Bitcoin protocol that intends to help increase the number of transactions that the flagship crypto can handle. 

A closer look at the Lightning Network (LN)

In its most basic sense, the Lightning Network (LN) can be thought of as a digital network (ala a ‘layer 2’ solution) that can be placed atop an existing blockchain ecosystem so as to help it facilitate quicker and more efficient peer-to-peer (P2P) transactions, without each of the individual transactions having to be recorded on the parent blockchain.

Also, it is important to mention that the LN is not exclusive to just Bitcoin and that the technology is currently being adapted/deployed in relation to a whole host of digital assets including Litecoin, Stellar, and Ripple. However, for simplicity’s sake, in this article, we will talk about LN only in relation to Bitcoin.

Lastly, on a more technical note, the Lightning Network is completely separate from the blockchain that it is placed atop since it has its very own set of nodes as well as a software governance framework. Even then, it can seamlessly interact with the main chain using a special set of transactions.

How does the Lightning Network work?

As mentioned previously, the core purpose of the Lightning Network is to speed up Bitcoin transactions while reducing tx fee rates by skirting the main blockchain. The network is fairly unstructured and all of the channels contained within it are created on an ad hoc basis, primarily for the facilitation of P2P payments. 

Operations related to the Lightning Network are governed by a sizeable group of node operators who not only help route payments efficiently but also keep the system decentralized. In order for an individual to make use of the network, he/she needs to lock up a set amount of BTC into a payment channel. Once done, this amount can be freely transferred across the lightning network until the channel has been closed. 

When someone wants to accept the aforementioned sum of BTC, they are required to create a digital invoice that basically consists of a string of alphanumeric characters (often even represented in the form of a QR code). In order to facilitate a transaction, all one has to do is scan this QR code with their Lightning Wallet and confirm that they want to go through with the payment process.

Other facets of the Lightning Network (LN) worth highlighting

Whenever a monetary transfer is processed using the Lightning Network, the entire tx is facilitated in a totally peer-to-peer fashion within a matter of seconds, hence the name ‘Lightning’. 

Additionally, owing to the fact that LN transactions bypass the main Bitcoin network, they are subject to minuscule processing fees. As a result, extremely small payments of as little as one satoshi (which represents a unit that is classified as one hundred millionths of a Bitcoin) are made possible using this framework, making it perfect for facilitating everyday payments. 

Key Takeaways

  • The Lightning Network (LN) is a digital framework that allows for the faster facilitation of transactions at low fee rates.
  • Contrary to popular belief, the use of the Lightning Network is not confined to just Bitcoin. 
  • As the name seems to clearly imply, LN transactions are extremely quick and can be facilitated within a matter of a few seconds.
  • Using the Lightning Network, Bitcoin transactions as minuscule as one satoshi (i.e. one hundred millionths of a Bitcoin) can be processed.
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