For Bitcoin to become a viable alternative mode of payment, it needs to overcome its biggest challenge — scalability. While new crypto projects are popping up everywhere, each trying to solve a different problem, the scalability problem still persists. At the moment, Bitcoin is capable of only processing 7 transactions a second, which is far from Visa’s 24 000 transactions per second.
In view of this challenge, Bitcoin has come up with a solution to this problem. And that’s what Lightning Network is essentially about.
Adding a new layer to Bitcoin’s blockchain
You can think of Lightning Network as a separate chain, or “off-chain” solution. On this separate chain, two individuals can create their own payment channel where their transaction can take place instantly. The philosophy behind Lightning Network is that not all transactions need to be recorded on the main blockchain. Taking some transactions off can offload the main blockchain and allow transactions to be more quickly processed.
How do we go about using Lightning Network?
To start transacting on Lightning Network, users will need to create a multi-signature wallet, which parties can access with their own private keys. For instance, if you want to send 2BTC to a friend, both of you would need to go onto this channel. In this multi-signature wallet, you’ll transfer 2BTC and give the ownership right of the amount to your friend. After that, both of you would use your private keys to sign and create an updated balance sheet.
On this channel, you can perform an unlimited amount of transactions and the channel only closes when your transactions are completed. Once the channel closes, the final balance will then be broadcasted to the main blockchain, therefore, allowing individuals to make multiple transactions quickly.
Instantly trading cryptocurrencies without going onto exchanges
One area that developers are looking into is the possibility of trading any cryptocurrency with another one through Lightning Network. If this works out, it could immediately solve the security risks faced by many users who trade cryptocurrency on exchanges. Individuals would not need to pay any transaction fees or middleman fees at all when they trade their cryptocurrency with others on Lightning Network. In a recent test, developers tried to exchange Bitcoin and Litecoin on the Lightning Network and were pleased to find that it was a success!
Lightning Network designed for a range of cryptocurrencies
Initially, Lightning Network was designed only for Bitcoin. However, since the test was a success, developers are thinking of designing a platform that can be compatible with other cryptocurrencies like Litecoin, Ether, Ripple, among others. The successful development of Lightning Network would very possibly create a new turning point for cryptocurrency as the problem of scalability would effectively be solved, while exorbitant transaction fees are cut.
At the moment, Lightning Network is still in its infancy. ACINQ, Blockstream Works, and Lightning Labs — startups involved in creating Lightning Network — are still in the midst of developing this platform. No doubt, many rounds of testing will need to take place before an ideal platform can become fully functional. When Lightning Network is successfully developed and launched, it’s likely that the scalability problem will be solved once and for all as you no longer need to wait for transactions to be confirmed. Additionally, it’s also likely that we’ll finally see a truly decentralised cryptocurrency exchange come into fruition.
Does Lightning Network sound too good to be true? It’s hard to tell. For now, though, we’ll just have to wait and see how the development of this platform goes.