Source/cointelegraph
Compile/Nick
Recently, the continued popularity of BRC-20 has led to more and more congestion on the Bitcoin network. According to BTC.com data, the number of unconfirmed transactions on the entire Bitcoin network is currently 116,494, and the number of unpackaged transactions continues to remain high.
How to solve the congestion on the chain has become an urgent problem for the ecological development of Bitcoin. The Lightning Network, which focuses on solving the problem of Bitcoin network congestion, has once again entered everyone's field of vision. Binance has also started to enable Bitcoin Lightning Network withdrawals to alleviate withdrawal congestion. .
What is the Lightning Network?
Simply put, the Lightning Network is a second-layer payment protocol built on the Bitcoin network to solve the problem of Bitcoin network congestion.
Bitcoin was conceived and created as a peer-to-peer electronic cash system. This means users can transfer value without an intermediary. In the early days of Bitcoin, the creators of Bitcoin focused on these two aspects instead of scalability and transaction throughput.
While initially, this wasn't much of a hassle, scalability has been an issue with Bitcoin-based transactions over time. On the Bitcoin network, transactions take anywhere from two minutes to several hours to complete.
This problem becomes more pronounced with the advent of newer blockchains with better transaction throughput, such as Ethereum and Solana. Ethereum's 30 transactions per second (TPS) is higher than Bitcoin's 7 transactions per second, Solana is capable of processing thousands of transactions per second, and the transaction fee is much lower.
The rise of scalable blockchains has left chains like Bitcoin and Ethereum with no choice but to rely on layer 2 solutions.
The Origin of the Lightning Network
Lightning Network (Lightning Network) was first proposed by Joseph Poon and Tadge Dryja in 2015, and is considered to be the most important innovation since the creation of Bitcoin.
Inspired by Satoshi Nakamoto's writings on payment channels, Joseph Poon and Tadge Dryja started working on reducing Bitcoin transaction fees. In January 2016, a detailed white paper was released, the Lightning Network protocol gained attention, and more developers began working with the two companies.
Subsequently, Lightning Labs (the company that maintains the Lightning Network) released a beta version for developers to test, which began to attract the attention of heavyweights in the technology industry to Lightning Labs' plans.
One of the big names behind the Lightning Network was then-Twitter CEO Jack Dorsey, who planned to integrate the Lightning Network with Twitter. 2020 has been a landmark year for the Lightning Labs team, with big releases featuring features like Keysend and Wumbo Channel. Wumbo is a key release that increases the size of transactions that can be executed over the Lightning Network.
Currently, the Lightning ecosystem features a range of products, projects, solutions, and experiments across verticals and functions, including games, wallets and payments, node management, infrastructure, and rewards. Some notable features and products built on the Lightning Network are as follows:
Loop: Loop allows users to perform lightning transactions to on-chain Bitcoin addresses.
Pool: Mining pools help manage the liquidity needs of Lightning Network users.
Taro: Taro helps issue or mint assets on the Lightning Network.
Faraday: Faraday is a data analysis tool that helps node operators optimize channels and capital flows.
With the continued development of new projects and the support of Bitcoin and the Lightning Network by several industry luminaries, the Lightning Network is turning into one of the most thriving ecosystems in the crypto world.
How does the Lightning Network work?
As mentioned above, the Lightning Network utilizes what Satoshi Nakamoto called the concept of payment channels. The protocol allows for the creation of peer-to-peer payment channels between two parties.
Once established, the channel allows transacting parties to send an unlimited number of transactions almost instantly and cheaply. It acts as its own little ledger for users to pay for smaller goods and services without affecting the Bitcoin network.
By using Lightning Network channels, two parties can transact with each other. Some transactions are processed differently compared to normal transactions on the Bitcoin blockchain. For example, when two parties open and close a channel, they are only updated on the main blockchain.
Two parties can transfer funds to each other indefinitely without notifying the main blockchain. Since all transactions on the Layer 2 protocol do not need to be approved by all nodes, it greatly speeds up transactions.
Eventually, when both parties decide to complete the transaction, they can close the channel. Then all the transactions of the channel are combined into one transaction and sent to the Bitcoin main network for recording. Merging ensures that many small transactions do not clog the network.
For example, if Mike goes to a local coffee shop every day and wants to pay with Bitcoin, he can choose to make a small transaction for each cup of coffee, but due to Bitcoin's scalability issues, the transaction may take more than an hour to verify . Mike also has to pay the high fees of the Bitcoin network, even if he makes a small transaction.
Through the lightning network, Mike can open a payment channel with the coffee shop. Every coffee purchase is recorded within the channel, and the store still receives payment. Transactions are cheap, maybe even free, and instant. When Mike's bitcoin deposit in the channel runs out, he can choose to close the channel or recharge. When a channel is closed, all its transactions are recorded into the Bitcoin blockchain.
The Lightning Network creates smart contracts between two parties. Protocol rules are encoded into the contract when it is created and cannot be tampered with. The code of the smart contract ensures that contract performance is automatic, as the contract is initially drawn up based on pre-set requirements agreed upon by all parties involved.
Once these requirements are met, and when the customer pays the correct amount for a cup of coffee, the contract is automatically fulfilled without the involvement of a third party.
It is completely possible to conduct transactions outside the blockchain without any restrictions. Considering that payment channels end up on mainnet once they are closed, off-chain transactions can be trusted to execute on the blockchain. The mainnet is the arbiter of all transactions. While off-chain protocols have their own ledger, that ledger is always integrated back into the main chain, which is at the heart of the Lightning Network's design.
Advantages of the Lightning Network
The Lightning Network has the following advantages over the native Bitcoin blockchain.
scalability
speed
micropayment support
high security
As far as the Bitcoin blockchain is concerned, the lack of scalability has been one of the most talked about features. Adding every block to every transaction severely hinders the network from scaling. The Lightning Network solves this problem by removing transactions from the blockchain, with security and anonymity in mind.
Additionally, since transactions are off-chain from the main blockchain and happen in layer-2 blocks, they are faster and more efficient. Transactions are executed through a two-party consensus mechanism called payment channels. This makes the Lightning Network one of the key components of the Bitcoin ecosystem.
The Lightning Network also facilitates fast micropayments, which are the future of Web3 applications like games, and enabling this use case is extremely important to the chain's usability.
The Lightning Network is linked to the Bitcoin blockchain as a layer on top of it. This means that the Lightning Network still benefits from Bitcoin's security protocol. Users can then choose the main blockchain for larger transactions and swap off-chain to the Lightning Network for smaller transactions without worrying about security. Lightning payment channels also offer private transactions, as onlookers cannot view individual transactions, but only the overall transaction.
Potential Drawbacks and Risks of the Lightning Network
Costs and friction of entering the Lightning Network
Counterparty Risk During Transactions
Node is vulnerable
Although the lightning network will greatly improve transaction efficiency after creating a payment channel between the sender and the receiver, the process of setting up the channel is cumbersome. Users need to transfer funds to the Lightning Network and lock them in a channel. The process of transferring funds to the Lightning Network is very expensive.
Once the funds are locked in the channel and the two parties start trading, the funds are still at risk. Funds could get stuck on a channel due to technical issues, or a counterparty could choose to close the channel if a user goes offline and takes the funds. Lightning network service providers are mitigating these offline risks, but this makes the network more centralized.
So far, there is no foolproof solution to the counterparty risk users face on the Lightning Network after channels open. The Lightning Network also has more functional limitations.
Nodes on the Bitcoin Lightning Network must be online at all times to send and receive payments. Since the parties involved in the transaction must be online and they log in with their private keys, if the computer storing the private keys is stolen, the crypto assets inside are likely to be stolen as well. Therefore, cold storage of tokens is possible on the Lightning Network, which is considered the safest way to store cryptocurrencies.
The Development and Future of Lightning Network
Few layer 2 solutions have garnered as much attention as the Lightning Network. Data shows that $145 million worth of BTC is locked in the Lightning Network, with nearly 16,400 nodes and 75,700 channels in use. Also, the average transaction cost is 0.0016 Satoshi ($0.000000443), which makes it ideal for small transactions.
As mentioned earlier, Lightning labs has expanded the toolkit needed for the ecosystem of developers and users on the web. As a result, applications across DeFi, liquidity providers, non-fungible tokens (NFTs), and games similar to those on the Ethereum blockchain have also emerged on the Lightning Network.
A growing number of cryptocurrency exchanges now support the Lightning Network, including Kraken, OKEx, Bitstamp and Bitfinex, as well as financial trading app Robinhood.
In June 2021, El Salvador passed legislation making Bitcoin legal tender, vendors are using the Lightning Network to facilitate micropayments, and the state-sponsored Chivo wallet will also integrate Lightning Network.
In April 2022, Lightning Labs completed $70 million in Series B financing. The new financing will help enable stablecoin transactions on the Lightning Network using Lightning Labs' new Taro protocol.
The Lightning Network currently faces no small challenges. However, the ecosystem is slowly starting to build up for robustness, scalability, and a more user-friendly experience.
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