Bitcoin Lightning Network Explained: Faster, Cheaper Transactions

Anyone talking about cryptocurrencies cannot miss Bitcoin out of the discussion. Bitcoin introduced a revolutionary concept of virtual currency with the power of decentralization and cryptographic security. On the other hand, the introduction of the Bitcoin lightning network explained that Bitcoin also had some limitations. Does the biggest cryptocurrency have flaws? Yes, it does and the Lightning Network aims to solve them. The biggest problem with Bitcoin was scalability due to inherent limitations of the network.

The growing popularity of Bitcoin meant more users, which led to frequent episodes of network congestion. On top of it, the slower transaction speeds and high fees made Bitcoin transactions appear inefficient. Imagine waiting for hours to pay for coffee with Bitcoin and that too with a hefty transaction fee. The Lightning Network stepped in as a solution to transform Bitcoin into a faster and cheaper alternative for global payments. 

Enroll now in the Bitcoin Fundamentals Free Course to gain deep insights on how the Bitcoin blockchain works.

Discovering the Necessity of Lightning Network

The first thing that you need to learn before discovering more about the Lightning Network is the reason to introduce it. Most of the information about a Bitcoin Lightning Network wallet or other solutions revolves around the challenges presented by the Bitcoin blockchain. The design of Bitcoin blockchain focuses on decentralization and security albeit with limitations for scalability. As a result, Bitcoin had to bear the brunt of the following challenges.

• Slower Transactions

The successful execution of cryptocurrency transactions depends on addition of blocks to the corresponding blockchain. In the case of Bitcoin, new blocks are added at every 10 minutes. During periods of network congestion, the Bitcoin blockchain will have a list of pending transactions, thereby implying longer confirmation times. 

• Limited Throughput

The problem of slower transactions in Bitcoin blockchain is also evident from the fact that the Bitcoin network can handle around 7 to 10 transactions per second. As compared to the traditional payment methods such as Visa, which can manage thousands of transactions per second, Bitcoin has to struggle with its throughput.    

• Higher Transaction Fees

The Bitcoin Lightning Network mining connection is clearly visible in the problem of higher transaction fees for Bitcoin. Users have to pay higher fees during network congestion as incentives for miners to add their transactions in the next available block. As a result, Bitcoin cannot be the ideal choice for smaller transactions, such as everyday purchases, due to the financial burden.

Arrival of the Lightning Network

The term ‘Lightning Network’ might have had you thinking about a new blockchain or a cryptocurrency created to support Bitcoin. As a matter of fact, the Lightning Network is a layer 2 scalability protocol created over the Bitcoin blockchain. You can consider it as something similar to building an overpass on top of an existing road. The existing road is the Bitcoin main blockchain, which serves larger and less frequent transactions or journeys. On the other hand, the overpass can allow people to cover the smaller and more frequent journeys at faster speeds. 

The unique analogy to describe answer to “What is the Lightning Network in Bitcoin?” provides an accurate explanation of its capabilities. You can get a better idea of how the Lightning Network works by focusing on its core components. The most important components of the Lightning Network are payment channels. Let us learn how you can use payment channels for Bitcoin transactions.

The Magic of Scalability with Payment Channels

The Lightning Network aims to solve the issues of higher transaction fees and slower confirmation for Bitcoin transactions. It focuses on the smaller and more frequent transactions that play a vital role in increasing the adoption of Bitcoin. Lightning Network allows two users to open a payment channel between them, instead of recording every transaction on the Bitcoin blockchain. 

First of all, the two users have to contribute some amount of Bitcoin to a multi-signature address on the Bitcoin blockchain. The funding of the multi-sig address is the only transaction documented on the main blockchain for opening the payment channel.

After opening the channel, the users can rely on the Bitcoin Lightning app to conduct off-chain transactions. The transactions don’t take place on the Bitcoin mainnet, thereby ensuring minimal cost and instant confirmation. All the transactions happening in the payment channel update the balance in the channel like running a tab at a bar. Once you are done, you can pay for whatever you had before leaving. The payment channel works in the same way.

The users can close the payment channel after they complete transactions in that channel. Finally, the main Bitcoin blockchain records the final balance of all off-chain transactions as the ‘closing transaction’. Within the gap between the funding transaction and the closing transaction, the main blockchain does not have to process any transactions. Therefore, the payment channels in Lightning Network offer more block space alongside ensuring significant reduction in fees.      

The Power of Routing Payments

As of now, you might have thought that all the transactions through Lightning Network happen on direct payment channels between two users. On the contrary, the Lightning Network stands out for its capability to route payments. Users don’t have to open direct channels with every person they want to transact with. 

You can think of an instance where you have a channel with Sarah and Sarah has a channel with John. If you want to send a payment to John, then you can do it through Sarah’s channel. It helps in creating a massive, interconnected network of payment channels that allow efficient routing through various intermediate nodes. The interconnected network helps in sending and receiving payments with anyone connected to the Lightning Network without direct channels. 

Advantages of Lightning Network for Bitcoin

The next crucial aspect in the important highlights of the Bitcoin Lightning Network explained for beginners is the list of its advantages. Bitcoin can capitalize on the benefits of Lightning Network and transform into a viable payment method for everyday financial transactions. You can notice the following improvements in Bitcoin transactions with the Lightning Network.

• Faster Transactions

The most obvious advantage of the Lightning Network is that it can help in completing Bitcoin transactions at the speed of lightning. Transactions can be completed within seconds, thereby making Bitcoin useful for online purchases and retail payments.

• Reduced Transaction Fees

The working mechanism of Lightning Network involves offloading transactions from the main Bitcoin blockchain. As a result, the reduced network congestion helps in ensuring lower transaction fees. With the arrival of Lightning Network, Bitcoin can become a useful asset for micro-payments, thereby opening new opportunities for content monetization, in-game transactions and charitable initiatives. 

• Better Privacy and Scalability 

The answer to “What is the Lightning Network in Bitcoin?” focuses a lot on how it addresses the scalability problem. The enhanced transaction throughput of the Lightning Network ensures that it can process significantly more number of transactions than the base layer. Alongside the advantage of scalability, the Lightning Network also ensures privacy as payment channels offer off-chain transactions.

• Diverse Array of New Applications

Bitcoin can leverage the Lightning Network to serve as a useful candidate for many new applications. The notable use cases of Bitcoin that will be supported by Lightning Network include micro-payments, cross-border payments and retail payments. El Salvador is one of the best examples of countries adopting Bitcoin Lightning Network for faster remittances.

Final Thoughts 

The review of the challenges for Bitcoin showcases a perfect rationale to introduce solutions like the Lightning Network. With the help of the Bitcoin Lightning app, you can conduct peer-to-peer transactions in seconds. The Lightning Network uses payment channels which ensure off-chain transactions, thereby reducing congestion on the main Bitcoin blockchain. The reduced congestion translates into various benefits, such as faster transaction confirmation, lower costs and better privacy. The Lightning Network serves a major boost to the scalability of Bitcoin and can open the doors for new use cases of Bitcoin. Learn more about Bitcoin fundamentals and discover why the Lightning Network is a must-have solution for Bitcoin right now.