What is Lightning Network — key facts and figures

Inherent drawbacks of Bitcoin blockchain

  • Long processing times. Rising traffic slowed the blockchain down, so sending Bitcoin could take up to 1.5 hours. The mining difficulty also soared, and the blockchain desperately needed a new, lighter way to confirm transactions.
  • High costs. High traffic inevitably amplified the costs. At the all-time high in December 2017, users paid $37 on average to process one transaction, regardless of the amount. The fees seemed particularly exorbitant to those who sent fractions of Bitcoin.
Transaction fee statistics. Source: Bitinfocharts.com
  • High energy consumption. The Proof-of-Work consensus protocol is extremely unsustainable. With more computations for miners, the energy demands rose. The network needs more power than the entire Czech Republic, while the annual carbon footprint is comparable to that of Romania!
  • Absence of smart contracts and multi-signature scripts. The original version of the blockchain had no smart contract support, which allowed Ethereum to forge ahead. Bitcoin also lacked multi-sig, a safeguard that ensures that transfers reach the recipients.

What is Lightning Network?

  • The payment channels are ad hoc peer-to-peer connections.
  • Each direct channel enables an unlimited number of payments between two BTC users.
  • Parties send and receive Bitcoin without engaging Bitcoin’s blockchain for verification.
  • The ecosystem relies on thousands of nodes for decentralized payment routing. These nodes are operated by individuals or entities — such as corporations — that run dedicated software on PCs, laptops, or even credit-card-sized computers called Raspberry Pis.
  • These bidirectional payment channels can perform off-chain transactions involving exchanges between cryptocurrencies (learn about atomic swaps below).
Using the Lightning Network for Bitcoin transactions. Source: BitPay
  • faster
  • more affordable
  • more readily confirmed

What does Lightning Network look like?

Visualization of the Lightning Network nodes. Source: 1M

How does Lightning Network work?

A transaction on the Lightning Network. Source: Genesis Block

How many transactions can Lightning Network handle?

How Bitcoin Lightning Network extends to altcoins

Who invented the secondary Bitcoin network?

Lightning torch

Where Lightning Network falls short

Users still pay fees

  • Fees for opening and closing payment channels. The Lightning Network still requires an opening transaction, or deposit, made on-chain. Once the bill for a transaction is settled, the parties must record a closing transaction for the amount on the blockchain. This includes the fee for forwarding — either a fixed base fee or a percentage of the transaction amount.
  • Fees for routing transactions. Participants pay to have their payments transferred between channels.
  • Fees from watchtowers. The watchtowers are third parties that run on nodes to prevent fraud within the network. Many of them charge fees for this service.

Lack of decentralization

Closed Lightning Network channel fraud

Hacks

Price volatility

Using Lightning Network transactions

Example

Lightning Network transaction. Source: Genesis Block

What merchants accept Lightning transactions?

Pros and cons of Bitcoin Lightning Network

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CoinLoan is a Crypto Lending Platform