Lightning Network = LN
Let’s be CLEAR: Lightning Network is NOT another shitcoin. Is just Bitcoin, only that is used on another sidechain level. That’s it.
If you want to jump to read the text you can watch these explanatory videos. If you don’t want to read or watch videos, but just want a short definition of LN, it would be this:
- Your onchain BTC wallets would be YOUR banks (central or commercial or whatever you want to say), the place where you save most of your BTC. Onchain transactions have a higher cost depending on the status of the BTC network and the type / mode of transaction you do at the moment. In the Tools page you will find more details about “Mempool” and “Network Fees” to consult the cost at the moment.
- Your BTC-LN offchain wallets would be YOUR pockets / wallets with cash, to spend it day by day, obviously a small amount to cover expenses. Offchain (LN) transactions have very small, almost negligible costs and are instantaneous.
Here you have a more detailed explanation about what the Lightning Network (LN) is.
Imagine if every computer had to store all the emails to receive them. This is how blockchains work. The Lightning Network enables computers to conduct blockchain transactions, storing only the data that matters to them: their own money.
Lightning Network is a protocol for scaling and accelerating blockchains. It was designed to solve some of the technical limitations of the Bitcoin blockchain, but it could be implemented on any blockchain.
Scalability was the first big motivator for Lightning, as the distributed nature of Bitcoin greatly limits the rate of network transactions. While Visa can process tens of thousands of transactions per second, the Bitcoin network is limited to less than 10 per second. Another motivator for the development of Lightning is that the “block confirmation time” of the Bitcoin blockchain is approximately 10 minutes. That means it takes 10 minutes to confirm a bitcoin transaction. Also, transaction fees on the Bitcoin blockchain can range from 5 to 10 cents per transaction, making micro-payments not feasible. The Lightning Network, by contrast, can allow for near-instantaneous transactions, at a rate of thousands to millions per second, with fees of a fraction of a cent (or even free).
Lightning Network is based on a technology called payment channels. A two-party payment channel is created when both parties create a 2-of-2 multi-signature transaction on the blockchain, with at least one party committing funds for the 2-of-2 ledger entry. Each person has a private key, and transactions that are spent on the ledger entry can now be performed only if both keys are signed. This initial transaction to open a channel takes 10 minutes (or whatever the normal lock time is), but then participants can instantly transact with each other using the funds allocated in the channel. These instant transactions are made by passing signed transactions back and forth, spending from the 2 of 2 ledger entry.
Each transaction would be valid if it is broadcast to the network and the network miners include it in the blockchain, but in a payment channel, those signed transactions are not transmitted until the participants want the channel to stop operating. Signed but undisclosed transactions are exchanged through direct peer-to-peer communication, and held by participants as redeemable receipts.
To use Lightning, two participants, Alice and Bob, create an initial transaction on the blockchain for $ 20, where each party has $ 10 of value.
This initial allocation can be updated so that Alice has $ 5 of the total value of $ 20 and Bob has $ 15, and so on. When the participants have finished transacting with each other, the signature of the most recently exchanged transaction is transmitted to the network, ending the movement of funds in the channel, some to one party and (if any remain) to the other.
Lightning takes the technology behind the payment channels and creates a network of these channels, using “smart contracts” to ensure that the network can operate in a decentralized capacity without counterparty risk. For example, Alice can open a channel with Bob, who in turn has a channel with Carol, who has an open channel with Dave. If Alice wants to transact with Dave, she can send funds through Bob and Carol, and Dave will eventually receive them. But, due to the multiple signatures and smart contracts inherent in Lightning’s design, Alice doesn’t need to rely on Bob and Carol as intermediaries; The protocol uses cryptography to ensure that funds reach Dave through Bob and Carol or automatically reimbursed to Alice.
Bob and Carol function as “nodes” on the network. The Lightning Network nodes are, in a way, analogous to the miners on the Bitcoin network. They function as servers that process transactions on the network in a decentralized manner. Like miners, they have no control over the funds they help move. Bob cannot steal Alice’s funds, as he will only receive the incoming payment from the sender if he has already sent the outgoing payment to the recipient. Therefore, receiving a payment depends on having it forwarded. Flash payments are conditional on the disclosure of a cryptographic secret, and knowledge of that secret enables the swap of previous nodes (when Dave swaps for Carol, Carol can now trade for Bob).
However, what happens if Bob goes offline? Do funds stay on a 2 out of 2 pay channel forever? To deal with untrusted nodes, Lightning has incorporated smart contract mechanisms so that users can unilaterally close their channels. It uses a “hashing time lock contract” to ensure that if Bob goes missing, Alice can always get her money back. There is a time value set in this contract, usually in hours or days, so Alice can receive the refund even if Bob’s server is down.
Similarly, what happens if Alice sends funds from her multi-signature address to Dave on the Lightning Network but then tries to renege? She could do this by broadcasting a previous transaction to the blockchain, thereby attempting to close the channel in the state it was in before sending a transaction to Dave. While the Lightning software will remove these old transaction states, Alice could have changed the software to save it. If Alice tries to claim that she still has her old balance, Dave’s software (or other designated servers) will monitor the blockchain for said transaction, and when it detects Alice’s transmitted transaction, she will lose all of her funds to Dave as a penalty. As a result, there is a disincentive for anyone to try to convey an old, invalid status.
What if Alice and Bob are online and willing to close their channel? If both parties cooperatively close a payment channel, funds can be settled on the blockchain in 10 minutes, the amount of time it takes for a bitcoin transaction to be confirmed. Alice and Bob may have transacted thousands of times on the Lightning Network in the meantime.
The Lightning Network ultimately relies on the underlying blockchain, whether it be Bitcoin or not, for its security. In the case of Bitcoin, it uses the underlying proof-of-work algorithm that protects the entire network to protect it as well. The blockchain is the final arbiter or, indeed, an automated judge. With Lightning, you always know how the judge will decide, because it is prewritten in the transactions used to create the payment channels that make up the Lightning Network. This is a judge who cannot be coaxed or bribed. In effect, Lightning allows for a “local consensus” state that is ultimately enforced by “global consensus” (the blockchain). This local consensus state does not have a custodial trust similar to traditional models, as any participant can unilaterally close and redeem their funds without the cooperation of other participants. Ultimately, Lightning uses the underlying blockchain as a means to batch settle transactions that have occurred off-chain without the trust of the counterparty.
The Lightning Network can work on the Bitcoin blockchain, on other blockchains, or it can be used to instantly transfer different assets between blockchains using “cross-chain atomic swaps.” The consensus rules for each blockchain can be different, allowing for safe crossing of asset classes without custodial clearing agencies.
With Lightning, small transactions or payments can flow through the network in a similar way to how packages flow through the Internet. It has the potential to create new use cases that were not possible before, such as machine-to-machine payments, content micro-payments, and instant asset exchanges.
More information about Lightning Network (LN) here: