To overcome the inherent limitations of blockchain technology, a number of scalability solutions have been proposed to increase the number of transactions that a network can handle. In this article, we’ll take a deep dive into one such extension of the Bitcoin protocol, and how to use Lightning Network.
What is the Lightning Network?
The Lightning Network is a secondary layer on the Bitcoin blockchain which allows users to create payment channels where transactions can occur away from the main blockchain, but still benefit from the blockchain’s security and decentralization. These are known as off-chain transactions. The second layer offers speed, cost savings and scalability for the entire Bitcoin network.
How Does the Lightning Network Work?
The Lightning Network is built upon smart contracts that create off-chain payment channels between two parties. These are direct payment lines that occur on top or outside of the main blockchain. For example, you and your local cafe can create a payment channel in which you pay for your daily coffee and scone.
Once the payment channel is open, you can make an unlimited number of payments. Transactions occur instantly and at a fraction of what it would cost on the main blockchain. Your payment channel has its own ledger where the transactions are recorded away from the main Bitcoin blockchain. Each party has the power to close or renew at their discretion.
Once the two parties decide to close the payment channel, all of the transactions that occurred inside are consolidated and then broadcasted to the main blockchain ledger. Consolidating the smaller transactions allow for larger transactions to be validated in a quick manner. Without payment channels, your small coffee and scone transactions would get in the way of the larger transactions, slowing down the Bitcoin network for everyone.
You could, of course, buy your coffee and scone through a normal Bitcoin transaction. However, each time you order you would have to pay the network fees which may cost more than the coffee itself and that doesn’t make sense. Instead with the Lightning Network, the only fees you pay are to open and close the payment channel.
Key Features of the Lightning Network
The combination of payments made through the main Bitcoin blockchain and through Lightning Network result in an overall better payment experience that is fast, low cost and scalable.
- Fast: Exactly how fast is the Lightning Network? It is capable of handling 1,000,000 transactions per second, while the main Bitcoin blockchain can handle around 7 transactions per second.
- Cheap: Fees for Bitcoin transactions can be expensive (sometimes greater than whatever you're paying for). Lightning Network provides an economical way to make payments of any size, at regular intervals. This opens the door for making everyday micropayments in Bitcoin, like for coffee, pizza or anything else you can buy with Bitcoin.
- Scalable: The Lightning Network allows users to jump through payment channels. If Party A is connected to Party B, and Party B is connected to Party C, then Party A can transact with Party C without opening a new payment channel.
How to Use Lightning Network?
Let’s say you want to transact with your local coffee shop. First, you’d need to send some Bitcoin to a wallet that requires more than one signature or key to release the funds. These are commonly referred to as multisig wallets. In the case of the Lightning Network, it allows people to enter into an agreement that ensures a payment is received, effectively creating a balance sheet.
Every time you buy a cup of coffee a new balance sheet is created, and you sign it with your public key to reflect what’s left in your wallet as well as what’s in the coffee shop’s wallet. If you don’t want to buy coffee anymore from that coffee shop, you can close the channel, and the resulting balance sheet is committed to the blockchain as a permanent record. Payment disputes also can be settled by referring to the last signed balance sheet between the two parties.
What happens if you don’t have a direct channel with the next place you want to buy somETHing from? The network will find the shortest route between you and the shop via others in the network.
How to Connect to Lightning Network?
You can connect to the Lightning Network either by running a node or by using a Lightning wallet. Here are our top picks:
Bitcoin Lightning Wallet on Android
If you don’t want the full-node experience, you can download the Bitcoin Lightning Wallet app on your Android phone, which sorts everything out in the background. With this, you can open a Lightning channel and start making transactions with other users. It’s also “non-custodial,” meaning you look after your own keys – keeping your Bitcoin in your hands.
Blue Wallet on iOS and Android
If you want to use the Lightning Network but don’t want to look after your own funds, Blue Wallet is a custodial service that runs a node for you. It allows you to send and receive Lightning payments, but doesn’t let you withdraw your Bitcoin from the Lightning Network.
Bitcoin Full Node
To get the full Lightning Network experience, you can try running a full node. This means that you’re now supporting the Bitcoin network and the Lightning Network by checking that transactions are legitimate. It also means you can connect it to your computer and make transactions from your own node. This literally makes you your own bank; you are the only person owning and controlling your funds. Scary, huh?
Eclair Lightning Node
If you’re feeling more ambitious, you could set up a full Lightning Node. This takes a lot more computer know-how. It means downloading Eclair onto your computer – or a homemade Raspberry Pi – and running it. You are then routing transactions on the network and can make your own transactions.
Eclair also offers a mobile version for Android users called Eclair Mobile. This is a stripped-down Lightning node, which means you stay in control of your Bitcoin. You can connect it to your own Eclair Lightning Node if you’re running one. There’s only one catch: You can’t receive payments (Eclair explains the reason for that in a blog post).
Lightning Joule
Once you’ve set up your own node, what next? Are you stuck with using a desktop app? Lightning Joule is a browser extension that lets you connect your Lightning Node to your browser so that you can easily make payments within Chrome, Firefox, Opera, and Brave. It’s a convenient hack.
What Can You Do?
For a start, you can make payments to anyone else who has a Lightning wallet set up. But there’s more to the Lightning Network: As a digital currency, it's easily integrated into websites without the need for third parties.
Although the vast majority of crypto companies don’t yet accept Lightning transactions, that figure is slowly growing. NonETHeless, a wide range of popular Lightning-capable platforms are currently operating, ranging from cryptocurrency exchanges like Bitfinex and MercuriEX to online retailers and merchants like Bitrefill, plus a wide range of casinos and other service providers.
If you are looking for somewhere local, then you might be able to find somETHing nearby on Accept Lightning or on the Lightning Network Stores.
Closing Thoughts
Since its mainnet launch in 2018, the Lightning Network has seen impressive growth, in spite of many considering it to still be in beta. There are still some usability obstacles to overcome, as it currently requires some degree of technical proficiency to operate a Lightning node. But with the amount of development taking place, we may well see the barriers to entry reduced over time.
If the issues can be resolved with more users learning how to use Lightning Network, it could become an integral part of the Bitcoin ecosystem, greatly boosting scalability and transaction speeds.
