What is lightning network? - All you need to know about Bitcoin Scaling layer

Bitcoin carries on to grow in importance and a wide range of factors are pushing the electronic or digital money further into the public's awareness. As a consequence of the continuing growth in interest, it became required to scale the Bitcoin network to be able to let it manage a much larger amount of transactions.

What is the need for Lightning network?

Bitcoin network not only should support big value transactions but also micropayments. With 1 MB block size, with two transactions each day, the bitcoin network can support 288000 users. The lightning network can support 52 million users with an unlimited number of transaction, with 1 MB block size. The number of users will increase to 105 million if there is an increase in block size to 2 MB. Further calculations can be referred at Bitcoin scalability FAQ.

Numerous scaling solutions have introduced themselves, and we will have a look at the Lightning Network, that has become the probably the most viable options. Scaling Bitcoin, in August 2017, the Segregated witness has been implemented on the Bitcoin network. SegWit is the protocol which allows the Bitcoin network to enlarge by employing a process which eliminates signature data from bitcoins transactions and increases the block size limitation on the blockchain.

The removal of certain aspects of transaction data creates extra, space and allows more transactions to be added to the chain. Analysts from the sector see the execution of the SegWit protocol as being essential to the eventual execution the Lightning network. SegWit network allows interested parties to test their scaling solutions on the primary network. This paves the way for the Lightning Network to ease almost instantaneous transactions and microtransactions to take place on the Bitcoin network. Offline Channels on the Lightning Network are backed up by technologies that enhance the process which covers transaction validation. Currently, the process requires the use of mining rigs and entails High spec computers that resolve complicated math problems in order for transactions to be written in the blockchain ledger.

Bitcoincharts.com: Tx Fees Vs Blk Size

Because of the amount of computing power used in the process it may take up to a long time to confirm only a single transaction. This is not an ideal situation for micro-payments over Bitcoin network. Also, if we can observe from above bicoincharts.com graph of average transaction fees vs block size, we can see that by the end of 2017, the average transaction fees for bitcoin transactions were skyrocketed.

How does Lightning network work?

Nevertheless, with Lightning, this process will be sped up significantly, because the Lightning Network will allow participants to agree to tack onto a separate, off-line channel (offchain). Upon completion of the interaction, the blockchain will be updated to include the final outcomes of the external transactions. This off-line channel will allow for any number of transactions to take place and may remain open for hours or decades if required. The two parties involved can access the blockchain so as to finalize their transactions and close the channel.

Below is the step by step process the transaction on the lightning network would happen.

• Multi-sig wallet: All parties who wish to transaction setup a multi-sig wallet, requiring more than one signature to execute a transaction.
• This wallet address is uploaded to main net bitcoin blockchain along with smart-contract ( a balance sheet). This helps identify percent of bitcoin shares deposited in the wallet by each party. This is called a payment channel.
• Once payment channel is setup all parties can perform an unlimited number of off-chain transactions without mainnet bitcoin blockchain.
• The smart contract aka balance sheet copy is updated after each transaction to reflect current percent share of bitcoin by each party but not uploaded to blockchain network.
• Once the transaction completes, the resulting multi-sig balance is updated on bitcoin blockchain. If the dispute is triggered, both parties can refer to mutually agreed on a balance-sheet to retrieve their agreed upon shares from their multi-sig wallet.

The current state:

The lightning network was officially launched in December 2017, with 1402 nodes online with 4617 channel. Below is the snip from data monitoring resource https://lnmainnet.gaben.win

Bitcoin Lightning network: Snip from https://lnmainnet.gaben.win

Orignal paper on the lightning network is available here.