Understanding the Lightning Network

At this moment in time, scalability represents one of the biggest impediments that cryptocurrencies have before attaining mass adoption. In other words, it is impossible to migrate the entire financial market to crypto, if the currently-available technology cannot support all transactions efficiently.

The Lightning Network has often been referred to as one of the most potent solutions, capable of fixing the scalability issue. With this in mind, proposed back in 2015 by Thaddeus Dryja and Joseph Poon, the lightning network creates an additional layer on top of bitcoin, meant to enable lightning fast and cheap transactions. The catch is that these transactions can be settled together on the blockchain as a bundle, hence eliminating the need to verify and record each transaction separately.

To put things better into perspective, rather than having to pay via Bitcoin for each minute of time spent on a platform, the transactions will be carried out on a user-to-user layer. Once no more payments are needed, the transaction will be recorded and verified as a whole on the blockchain. This reduces strain put on the network, by minimizing the number of recorded transactions, while facilitating small, instant payments.

When it comes down to how it works, things are fairly simple. The two parties who wish to transact open a multisig wallet, which holds an amount of crypto. The wallet address is then recorded on the blockchain, thus creating the payment channel. Now, the two parties can transact freely and instantly on the additional layer. If no more transactions are required, the channel is closed and the balance is mined and stored on the blockchain network. The Lightning Network does not require parties to always set up a channel, rather payments can be sent via other channels as well.

It is important to point out the fact that the Lightning Network isn’t only being developed for bitcoin, but rather for numerous other cryptocurrencies, including Litecoin, Ripple, Ether, Stellar, Zcash and more.

While there is a bit of controversy surrounding the Lightning Network, especially given the SegWit debates, it continues to have great potential in stimulating worldwide adoption, by fixing the scalability issue once and for all.