THE STORY OF THE LIGHTNING NETWORK

The Lightning Network is one proposal to solve some issues with blockchain products (Bitcoin included). The technology is quite efficient, but there are several problems it fails to resolve.

I. A GENERAL IDEA OF THE LIGHTNING NETWORK

Say, you’re twelve, and your parents begin to teach you about allowance. They need to know what you’ll spend on each day, and in what amounts.

Your report should somewhat look like this:

• On the first day: coffee for breakfast (2$), several notebooks (10$), another coffee for my girlfriend (4$).

• On the second day: sandwich for breakfast (3$), and another coffee (2$) because I couldn’t live without it.

• ...

When your parents check in on this report, they’re not happy because there are excessive details. Your report comes in pages, and they’re too busy to sort through all of it. They ask you to rewrite it to this format:

• Food:

• School stuff:

• Spent with friends:

• Savings:

Your report now comes in one page, filled with numbers from which they can tell if you’re spending reasonably. The Blockchain is like this report, and the lightning technology is like how information in the report gets simplified.

As the Blockchain technology grows, we’re talking billions of blocks to be processed. The lightning network still makes sure to record everything, but it also sums things up, groups them, and presents them in the simplest form. Doing so makes data lightweight, exactly the aim of the lightning network.

II. THE PROBLEM

As with most things, size matters.

1. The Size of The Blocks

This is how blockchain works: each and every transaction, no matter when, has been and will always be recorded and encrypted/hashed into a string. This string is used to encrypt the next transaction, creating string after string linked to each other, called a chain. Upon reaching 1MB, the chain is sealed into blocks and needs miners to confirm, a.k.a, to make sure each block is valid and can’t be tamed.

This method ensures security, but also makes the next block exponentially bigger than the previous. To miners, this is known as the scaling problem.

2. The Scaling Problem

The scaling problem is basically, how slow it is for miners to seal and confirm each block of data.
One Bitcoin transaction consists of 3 data: sender address, recipient address, and Bitcoin amount. This looks simple, but at the scale of thousands of billion transactions, miners can only confirm roughly 3 transactions per second. Meanwhile, Visa can confirm roughly 4000 transactions per second.

Intuitively, this could be solved by increasing the number of miners, but it can’t be done. In fact, miners don’t get paid much, and it takes lots of resources to mine the coins now that it’s enormous in size. At this pace, it’s a matter of time before the system becomes obsolete compared to traditional banks.

Proposals such as Bitcoin Unlimited and Segwit have been suggested, increasing the block size limit to improve transaction speed. They worked for a while, but their efficacy eventually peaked in 2018.

The Lightning Network is a system built upon Bitcoin, created to allow faster payments and reduce transaction fees by keeping them off the main network. Ever since, Bitcoin has been more useful in making daily payments.

III. HOW THE LIGHTNING NETWORK REALLY WORKS

As said earlier, it’s all about summing up lots of little, tiny bit transactions into one.
The network requires the sender and receiver to set up a ‘multisig’ wallet, where these two ‘multi’ need to sign ‘sig’ to confirm each transaction.

Once validated, the transactions are recorded into this wallet, and the address of this wallet gets hashed into future transactions. No matter how many transactions between these two, thousands or billions, just one simple address gets hashed.

Doing so groups transactions up significantly, minimizing the block size.

Once finished, they could just write down the final amount of money each actually get, close the channel and the main blockchain would automatically record the result they provided.

The multi-sig wallet is a record of both parties’ crypto wallet addresses, and after each transaction, whose wallet gets what amount. When in need, both parties open this channel, state the transaction, and sign before closing it. It’s pretty much like how regular trades are done.
No matter how many changes take place within the channel, its address remains unchanged throughout future encryptions.

This method does get both parties involved more. They are held accountable for every piece of information they provide since the written transactions can’t be erased. No room for mistakes, in other words.

IV. IS THE LIGHTNING NETWORK EFFECTIVE?

The private channels significantly reduce the workload on miners, hence, upping the processing speed. Reduced workload also means reduced transaction fees, stabilizing payment towards miners.

Unfortunately, these channels inherit no security from the Blockchain technology as they are outside of it. Thieves are not interested in transactions worth 1/1000 of a bitcoin, but ones worth thousands of dollars are very tempting. It’s encouraged that huge transactions not be done via these channels, but through another solution that’s hopefully soon to be announced.

V. HOW IS IT DOING NOW?

Fortunately, reality with the network has so far matched the proposed theory.

On December 28, 2017, Alex Bosworth tweeted that his Bitrefill phone bill was paid using the lightning network. It’s an online service that allows users to pay phone bills with Bitcoin or Litecoin. The fees would be enormous if paid the conventional way, but the result was as he tweeted: ‘Speed: Instant. Fee: Zero. Future: Almost Here.’

Questions arose since the network’s official version was not available yet, but Alex said he was using the beta version.

On Mar 15, 2018, an official blog regarding news of this new technology, announced their fourth, latest beta version. As stated on the blog, this version gives out "a considerable feature set, deeper cross-implementation compatibility, a new wallet seed that is specialized, comprehensive fault-tolerance logic, a bunch of bug fixes, and much, much more". Their open source is available on GitHub.

THE BOTTOM LINE:

Although the Lightning Network is quite new, it could be an innovation to solve the scaling problem that has been around for… years. As micropayments get solved on their very own channels, the workload given to miners is significantly reduced. It also allows payments with big money to be focused on the main blockchain. Remitano hopes for the official version to be established, allowing Bitcoin-paid coffee to be delivered every morning, and night.