Crypto 101

Lightning Network layer for Bitcoin

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Bitcoin offers its users a great tool for direct value transfer without having to rely on third parties such as banks and other financial institutions. Invented by mysterious Satoshi Nakamoto in 2008, Bitcoin was initially designed to function as peer-to-peer electronic cash. However, the network’s drastic surge in popularity throughout the last decade has revealed some flaws as Bitcoin struggled to adapt to its growing user base.

As of now, Bitcoin’s biggest problem is its scalability. The network processes a maximum of seven transactions per second, while the world’s main payment providers Visa and Mastercard cope with several thousand. With such low capacity, transactions take several hours to confirm and are accompanied by high fees.

Now, the Bitcoin community has come up with a solution to both of these problems – the Lightning Network (LN).

What is the Lightning Network?

The main idea behind the Bitcoin community’s proposal is that small everyday transactions don’t have to be confirmed and stored on the main blockchain. Instead, the Lightning Network utilizes an off-chain approach.

The Lightning Network consists of a set of rules that are placed on top of the main network with the aim of simplifying micropayments between network participants. Network users can create a separate direct channel to send funds without incurring any additional fees. The channel boasts all of the advantages of the traditional Bitcoin network but manages to eliminate problems such as high transaction fees and long confirmation time.

While the idea for the Lightning Network was first offered up by Thaddeus Dryja and Joseph Poon in 2015, the technology did not achieve mass adoption until the end of 2018.

How does the Lightning Network work?

As we’ve stated above, to process micropayments, an additional channel is set on top of the main network as a means of facilitating an exchange between two parties. Here’s how this channel is used:

  • Two parties open a direct channel on the Lightning Network. At the same time, a unique BTC address is created for this particular channel.
  • The buyer deposits funds into this two-party bitcoin address to guarantee that a transaction will be paid. If both participants are going to make payments, then both of them make deposits to the channel address.
  • The deposits are recorded on the main blockchain and are subsequently recognized by the Lightning Network. This officially opens the channel.
  • As the participants make their “off-chain” transactions, each micropayment is carefully recorded by the channel. However, the funds are not released until the channel is closed. It should also be noted that the amount of funds exchanged must be smaller or equal to the deposited amount.
  • Once one or both participants decide to close the channel, all micropayments are summarized, and the final balance is released into the main blockchain as a single transaction for confirmation.
  • Once confirmed, the funds are distributed accordingly between the two parties.

Thus, the participants can make fast and secure transactions at practically no cost, and only incur the network fees once the channel is closed.

The Lightning Network in practice

Let’s review a live example of how the Lightning Network can be utilized.

Bob wants to purchase his coffee for 0.001 BTC every day from a shop owned by Alice. They open a channel on the Lightning Network, and Bob deposits 0.03 BTC to this channel. Over the next ten days, Bob purchases his daily cup of coffee via this channel. The transactions are confirmed instantly and with practically no fees, as all of the payments occur solely within this channel.

After ten days, Bob decides to break the contract. He closes the channel, all of the transactions are summarized, and the funds are released. Alice receives 0.01 BTC, and the remaining 0.02 BTC are deposited back into Bob’s wallet. These two transactions are recorded on the main blockchain.

Fun fact, there is already a dedicated service called StarBlocks – an obvious parody of Starbucks – that sells coffee with the help of the Lightning Network. However, it’s not very clear where the coffee house is located nor how the delivery works.

Scaling the Lightning Network

Here’s the next logical question. Do we have to create a separate channel between two users and deposit funds every time we want to make a transaction?

The above scenario isn’t very practical, as we tend to purchase things from and send funds to strangers. In those instances, the Lightning Network would present just another complicated obstacle for the average individual.

The good news is that there’s already a solution in place. The Lightning Network allows users to connect indirectly through intermediaries. If Alice has a channel with Bob, and Bob has a channel with James, Alice can send funds to James via Bob without opening a separate channel.

The pros and cons of the Lightning Network

Given all of this, the pros of the Lightning Network seem obvious:

  • Transaction speed: You can send bitcoins instantly, no matter how busy the main network is at the moment.
  • Transaction fees: You only have to pay the network fees once (this happens after you close the channel). The fees within the channel are negligible – if there are any at all.
  • Scalability: The maximum capacity of the Lightning Network has yet to be measured, but the project claims that it can process millions to billions of transactions per second.
  • The cross-chain solution: With the Lightning Network, it’s possible to exchange funds directly between different cryptocurrencies, even different blockchains. The first cross-chain atomic swaps have already been made.

However, there’s a flip side to every coin, and the Lightning Network is no exception. There are some concerns related to this new technology:

  • No full coverage: So far, only a small number of nodes have adopted the new technology.
  • Deposit restrictions: When sending payments through a chain of channels, you are limited by the link in the chain that contains the smallest amount of deposited funds. Thus, if you want to send a huge sum, you should carefully plan the route beforehand.
  • Complex routing: The bigger the network gets, the more difficult it becomes to build a route, as not every machine in the chain can handle such a big graph.

Other altcoins implementing the Lightning Network

Since many of the existing altcoins are derivatives of Bitcoin, they face the same problems pertaining to scalability and transaction fees. Numerous projects greeted the new technology with much enthusiasm and hurried to implement it as quickly as possible.

Litecoin – Lightning Network

This cryptocurrency is, essentially, a Bitcoin clone with improved transaction speed. As such, it adheres closely to Bitcoin’s approach and relies largely on the same technological adaptations. It was one of the first altcoins to successfully test a cross-chain atomic swap with Bitcoin via the Lightning network back in November 2017.

Ethereum – Raiden

Ethereum has a slightly higher transaction capacity, as it is capable of processing 19 transactions per second (compared to Bitcoin’s seven). However, since the platform also runs ICOs, it’s much busier than Bitcoin. Raiden, a solution whose underlying logic is similar to that of the Lightning Network, was introduced in September 2017.

Zcash – BOLT

Zcash is the privacy-oriented fork of Bitcoin that comes with additional anonymity features. The new technology presented an innovative challenge for developers, as the payments that are made through the Lightning Network’s channels cannot be private. While Zcash introduced an initial solution back in August 2016, the code wasn’t released publicly (via the project’s GitHub) until a full two years later.

Monero – Atomic swap

Monero is yet another privacy-oriented fork of Bitcoin. Unlike Zcash, Monero’s developers are still searching for their own way to increase network capacity, and only make use of the atomic swap technology provided by the Lightning Network.

Ripple – Interledger

Ripple doesn’t need to increase its capacity, as it has been equipped to handle a whopping 1,500 transactions per second since the very beginning. However, its team made use of the Lightning Network’s atomic swap technology by introducing it into Interledger, Ripple’s protocol for conducting transactions between different blockchains.

NEO – Trinity

The NEO team has developed a scaling solution for their blockchain and, adhering to their Matrix analogy, named it after the main hero’s romantic counterpart. As of now, Trinity is still under development, and it doesn’t seem as though it will be released any time soon. However, according to the white paper, NEO can already process 1,000 transactions per second, with the potential to reach up to 10,000 transactions per second. So there doesn’t seem to be an urgent need for the scaling solution.

Stellar – Lightning Network

Stellar is a separate blockchain with the capacity to process 1,000 transactions per second. The project announced their plan to implement the Lightning Network through an official blog post in March 2018.

While there is no urgent need to introduce a scalability solution, Stellar founder Jed McCaleb nonetheless aims to make use of the atomic swap and increased capacity provided by the Lightning Network.

Lightning network layer for bitcoin Crypto Heroes

Wallets with the Lightning Network support

Some reputable Bitcoin wallets, such as Electrum, are planning to implement the Lightning Network technology in the near future. There are also some projects that have chosen to develop new wallets specifically with this feature. Among them are the following:

  • Éclair – one of the first wallets to support the LN; available on GitHub; installation requires some experience with the Linux command line interface
  • Zap – still in its beta phase; available on GitHub
  • Spark – available on GitHub
  • Fulmo – available on GitHub
  • LND Thin Wallet – the mobile wallet for Apple iOS devices
  • Shango – the mobile wallet for both Android and Apple iOS devices; available for testing on GoogleApps and iTunes

However, none of these projects offers an ultimate solution that would fully embrace the Lightning Network’s capacity potential in a trustless manner. This could be addressed in two ways: users must either entrust their funds to the centralized server (which eliminates Bitcoin’s main advantage) or must be willing to give up some features. For example, some wallets only allow users to send funds and do not allow them to accept payments.

All-in-all, the new technology is still very raw, and there is a lot to be done to make it accessible for a mass audience.

The current state of the Lightning Network’s implementation

Several teams are currently working on the Lightning Network’s successful implementation. Each of them uses a different programming language and has its own tricks and hacks. The most notable teams are:

  • Lightning Labs – one of the first adopters. Its platform is still in the beta phase, but the code is already available on GitHub.
  • Asinq – this company has developed a Lightning protocol for its platform Eclair (their wallet is mentioned above).
  • Elements Project – a network of developers on GitHub that are working on creating their own version of the Lightning protocol based on the programming language C.

The Lightning Network continues to grow: despite starting with a mere five nodes on the testnet back in January of 2017, it recently surpassed the 5,000 level.

The map of the nodes that have implemented the Lightning Network

The map of the nodes that have implemented the Lightning Network

Here are the major milestones from the past few months:

  • September 5, 2018: The Lightning Network gets its first boost as the payment processing startup CoinGate adds all 4,000 of its merchants to the off-chain system.
  • November 15, 2018: New records: the Lightning Network coverage exceeds 4,000 nodes, with an overall capacity of 130+ BTC.
  • December 26, 2018: 4,800 nodes, 500+ BTC.

If the Lightning Network continues to grow at this pace, we can safely anticipate that new records will be set in the coming months.

Conclusion

Bitcoin has many flaws and, in its current state, the chances for mass adoption in the near future remain slim. While the Lightning Network may help resolve some of these problems, it ultimately serves as a quick fix for a larger issue.

The pros and cons of the Lightning Network are still widely debated. For one, people have expressed concerns that the Lightning Network will lead to increased centralization, thereby eliminating the benefits of the decentralized payment system provided by Bitcoin. A closer inspection of the nodes that already run LN does seem to legitimize these concerns, as a small number of nodes (primarily in Europe and the US) accumulate a majority of the paths.

The Bitcoin network has already grown to such extent that it might just be easier to create a new blockchain with rules that eliminate Bitcoin’s deficiencies, rather than fix the existing structure. There are, in fact, already some projects that outperform Bitcoin on many fronts (EOS, TRON, Waves, etc.).

Bitcoin’s current dominance of the crypto sphere ensures that developers will continue to provide new solutions aimed at improving its scalability. In the meantime, the Lightning Network will continue its expansion despite its imperfection.

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