When lightning strikes.How the Lightning Network Improves Bitcoin… | By Naomi Oba | The Capital | July 2021
If you are like me, you have never used your Bitcoin to pay for real-life purchases. Until today, the only thing I settle with BTC is the transaction fee for transferring my BTC from my trading account to my wallet, and vice versa. Maybe you have already bought something with BTC; if so, I would love to know what it is.
Anyone who uses Bitcoin for a transaction for the first time will quickly realize that it will take a few minutes or even longer to confirm your transaction. For small bitcoin transaction fees, “worse” is quite high. Currently, to verify your transaction within the next hour, you must pay $8.88. If you just want to buy a cup of coffee, it is obviously disproportionately high. And you must wait for 10 minutes to confirm the transaction, by which time your coffee will only be warm.
The root of the problem lies in scalability issues. Scalability describes how many transactions the network can handle. Centralized payment providers such as PayPal (150 transactions per second) and Visa (up to 5600 tps) can verify transactions in a matter of seconds, making them a convenient choice for all of us daily shopping. However, as a centralized network, they are vulnerable to attacks, and customers are at their mercy.
Bitcoin, created as a peer-to-peer electronic cash, will change the way we transfer value to the decentralized paradigm. More than a decade later, we are far from fully switching to cryptocurrency. However, some serious work is being done in order to make it easier to use Bitcoin for micropayments, the Lightning Network.
First of all, if you still want to know why Bitcoin has scalability issues, while other cryptocurrencies (such as Litecoin or Ripple) don’t seem to be. Bitcoin relies on proof-of-work, which means that all nodes in the network are competing to solve puzzles at the same time to verify transactions. The larger the network, the more nodes participating in the consensus, which makes the network highly secure, decentralized, and censorship resistant. Proof of work itself limits scalability because all nodes need to agree. In contrast, in a proof-of-stake network, it is just a limited set of nodes that participate meaningfully.
In addition, another limitation of Bitcoin’s scalability is the block size. If a block can only contain a certain number of transactions, it will automatically limit the throughput.
Did you know that Bitcoin Cash originated as part of the Bitcoin community that wanted to increase scalability by increasing the block size? It was created through a hard fork of the Bitcoin network, during which the block size was increased to 32 MB to achieve higher scalability. In addition, the difficulty level of mining depends on the transaction and verification speed, rather than the total number of miners-which makes BCH quickly a viable option for small purchases.
Bitcoin’s scalability solution was first proposed by Thaddeus Dryja and Joseph Poon in 2015. They did not make major changes to the network, but suggested a second-layer solution. Adding another layer to the Bitcoin main chain will enable users to conduct small and medium-sized transactions without having to deal with all the information on the chain. Since transactions are settled almost immediately, it is called the Lightning Network.
The Lightning Network is a decentralized network, run by thousands of users on the Bitcoin blockchain. Currently, more than 22,441 nodes are active on the Lightning Network.
So far, we know that Lightning is another network layer on top of the Bitcoin chain that allows users to trade at a lower price. In the next part, I will introduce how to do it.
The Lightning Network has created a network of payment channels through which users can transact with each other. Suppose I decide to use Bitcoin to pay for each cup of coffee in my local coffee shop, to give a simple example. We can set up payment channels instead of manually spending each time. In the first transaction, the anchor transaction, we created a contract that stated all the key conditions, and I deposited some Satoshis into the contract. Then every time I go to a coffee shop to buy coffee, we will check out through payment channels.
Once my funds ran out and I felt that I needed to detoxify the coffee, we closed the channel. So far, all transactions have departed from the Bitcoin main chain. When the payment channel is closed, the final balance will be reported to the main chain and included in the ledger. Therefore, instead of reporting all 30 coffee purchases on the Bitcoin blockchain, we only added two transactions:
- Anchor transaction
- Final balance
We assume that both the coffee shop and I will run the lightning node in this example. However, this is not necessary. As long as we all have lightning wallets, we can use the lightning network. The Lightning Network does not use the payment channels established between the coffee shop and me, but uses the existing payment channels to find the best way for our transactions.
Payment channels are interconnected to create a growing network. The more payment channels opened, the more routes are available, providing users with cheap and fast transactions.
A key element in this setting is multi-signature. Multi-sig is the abbreviation of multi-signature, which describes a kind of lock that can only be opened by using enough keys in a predetermined set of keys. This is useful when managing joint accounts and adding extra security to individual accounts.
Multi-signature also supports the creation of payment channels, because these require each user to provide information about the transaction that took place, including their key pair. If either party fails to provide the information, the transaction will not occur.
You may want to know, but what about security? Of course, the Bitcoin blockchain is difficult to crack, but when only a few people have their own payment channels-it doesn’t seem very secure. If it is not for several functions such as smart contracts, you are right.
Smart contract Protect all micropayments by establishing a set of rules to be followed. For example, users can add fees to the transaction, and these fees will be paid to the lightning node once the funds reach the destination address. Therefore, the node has no incentive to do anything stupid.
Onion routing Encapsulate the optimal route calculated according to the current network state into each encryption layer. Opening the route map is like peeling an onion-don’t cry. 🧅 Each node can only see the top layer of the map, while the rest remain encrypted. Because of this encryption, no one knows how many transactions the Lightning Network has processed.
Time lock Integrate into the payment channel, setting an upper limit for the time the channel can remain operational. This ensures that no user can disappear and makes the balance in the channel “untouchable”. If one user in the channel decides to leave, the time lock allows another user to claim the remaining amount in the channel at a predefined time (in the example below, after 1000 blocks).
with Asymmetric revocation, commitment Conditions can be defined to punish users who try to cheat and delete their share in the channel. For example, you can determine that if one user tries to cheat, another user will be eligible to claim the full balance of the wallet, leaving the cheaters with nothing.
The Lightning Network follows the spirit of Bitcoin and is an open source software developed by many companies in this field. ACINQ, Blockstream, and Lightning Labs jointly defined the specifications for scalability solutions. Although this idea was proposed in 2015, it made changes to the Bitcoin network in 2017—introducing Segregated Witness—to make the Lightning Network possible. In March 2018, a tool for developers to build lightning applications such as payment services was released. The earliest lightning app is Poketoshi, which is an app that allows players to bid to control famous Pokemon characters.
In 2018, the new lighting network became a victim of DDoS attacks. Since then, the developers have been working to improve the system and protect it from future attacks.
A more prominent criticism of the network is the fear that large operators will dominate in the long run. When opening a lightning channel, operators must invest any amount of bitcoin in their channel-limiting the scale of transactions they can handle. If larger operators start to invest large amounts of money in their channels, it may reduce decentralization.
However, so far, the lighting network is run by ordinary people like you and me, who use their laptops, desktops or Raspberry Pi to run the lighting network.
Another disadvantage of Lightning is that the user’s transaction size is limited to the minimum amount held by any channel they cross on their route. Currently, offline transactions are not supported-this can be a challenge in places with poor network connections. For example, some villages in Germany. 😅
With the Lightning Network, transaction fees are kept at a low level because users do not have to pay miners, and nodes that demand higher prices will be slowly but surely driven away by market forces. The payment settlement speed is fast, so it is very useful in daily shopping.It also allows you to tip people online, such as tip, You can use Satoshis on Twitter to tip your favorite content.
To use the Lightning Network, you need to obtain a wallet that supports it, such as BlueWallet or Satoshi Wallet. Once you have added some funds to the wallet, you can spend it.
To spend your Satoshis, you can scan the QR code created by the seller. However, unlike transactions on Bitcoin, you won’t have a Blockexplorer to check the status of your transaction-but since it is confirmed within a few seconds, you may find it difficult to do faster than this.
Finally, we cannot fail to mention El Salvador. I am sorry.
Although the country made headlines for its decision to make Bitcoin legal tender, what attracted more attention was their pledge to distribute $30 in Bitcoin to every citizen who registered and installed Chivo, a state-backed wallet.
In El Salvador, the average annual income per capita is about 4,000 US dollars, and earning 30 US dollars is an important motivation for people to register. However, since the Bitcoin network fee is currently between 7 and 9 US dollars, it will be a very expensive measure for the government to pay this fee. Instead, the Salvadoran government will use the Lightning Network to conduct this “airdrop” together with its development partners. LATAM has used Strike; however, although it does use the Lightning Network for internal operations, this does not mean that end users will get lightning attributes. Strike controls users’ private keys, and only when they withdraw funds, they will have their Satoshi Nakamoto.
Finally, in terms of privacy, if the user must perform KYC, it will immediately provide the government with a record of who owns the Bitcoin address. It might be naive to assume that every Salvadoran who claims to own Bitcoin knows how to create a new wallet or how to withdraw Bitcoin.
Regardless of what happens in El Salvador, the Lightning Network continues to grow despite some minor flaws and provides a fast and cheap way for anyone who wants to spend Bitcoin in real life.
You can track the operation of the network here: