Lightning Networks are being regarded as the answer to Bitcoin’s scalability problem which has been bothering its users for years now. With the increasing fees and the network inefficiency of bitcoin, Lightning network is going to serve as a layer 2 for bitcoin which will eliminate the fees and enable instant transactions.
What is Lightning Network?
Lightning Network is a peer to peer system which enables users to make transactions in Bitcoin, Litecoin etc. off chain between payment channels without the need of a third party. Lightning is an off chain solution which means only the transactions for opening and closing the channel will be broadcasted to the bitcoin blockchain and all the micro transactions happening in the channel will remain out of bitcoin network. Lightning makes use of smart contract functionality of the blockchain to enable this across its participants.
When two users use lightning network to set up a payment channel between them, they create transactions on the blockchain requiring both users to commit some funds to the channel. After this they can start doing transactions via the payment channel to each other and each time a transaction occurs the channel closing transaction is updated with the refund amount. This is enforced by the smart contract scripting. Any party can close the channel by simply broadcasting the closing transaction to the blockchain. Any funds that are not used will be refunded to the participant.
Lightning Network allows instant transactions which means users don’t have to wait for those 10-20 mins confirmation times while making purchases. It is capable of scaling upto billions of transactions per second as everything is off chain. It also helps in reduction of fees since users need to pay fees only for opening and closing of channel and not for the hundreds or thousands of transactions they do off chain.
Lightning Use Cases
- Cross chain atomic swaps can be integrated with lightning to enable instant swaps between various cryptocurrencies such as Litecoin, bitcoin, viacoin etc.
- Exchanges can setup channels between each other allowing users to transfer money from one exchange to another in an instant eliminating fees for exchanges and encouraging trading of arbitrage opportunities.
- Payment processors such as Bitpay can set up lightning channels with their users to allow them to buy anything from merchants in an instant.
- Websites can setup paywalls to watch video, read articles etc. which can be paid via bitcoin via the lightning network
- Game tokens can be integrated with lightning allowing users to pay bitcoin for buying or selling items in game
- Users can pay for their internet connections in a pay per use model which can be integrated with lightning with payment being updated with each use.
- Decentralized exchanges will finally be possible as users can commit funds to channel and make transactions per trade allowing them to keep full custody of their funds while trading.
Lightning is still in alpha phase and being developed but is expected to be fully functional before 2019. With lightning channels, bitcoin will finally be able to move from the digital gold status to digital currency status.
Let us know what you think about the upcoming lightning channel upgrade.
Read more: http://lightning.network/