If you’re involved in the cryptocurrency space, chances are that you often hear about the “lighting network” for Bitcoin. There are all kinds of things going on in the community, but this is one of the largest developments. The creation of the lighting network was designed to solve a some of the problems we see with Bitcoin today. Though the lightning network is still in its early stages now, it’s likely going to have a big impact on the way we use Bitcoin.
Here at CryptoLearningAcademy, we know that cryptocurrency topics are often confusing and unnecessarily complex. Because of that, we’re going to take a minute to explain the lightning network in an “explain-to-me-like-I’m-5” format. There’s no need for confusing language, we just want to focus on what it is. Let’s get right into it!
Why the Lighting Network?
First things first: “Why?”
As many of us already know about Bitcoin, transactions are not exactly the fastest or cheapest right now. The problem with the current Bitcoin network is its inability to handle a lot of transactions at one time. Since the network can only process 7 transactions (txs) a second, we start running into issues when dealing in large numbers.
Just to give you an idea for scale, Visa (another name we’ve all heard before and that’s big in the payment processing area) can handle “up to 24,000 transactions a second.” That’s against Bitcoin’s 7. Not 7,000. Not even 700. But 7.
If it wasn’t clear enough already, our problem with Bitcoin here is speed and scalability. That’s where the lightning network comes in.
What Does the Lightning Network Do?
The lightning network solves the scaling and speed problem. The network is designed to put significantly less strain on the Bitcoin blockchain and make transactions much faster. With the lightning network, users will be able to see not only faster transactions, but also much lower transaction fees. However, that still leaves the question of “how.”
How Does the Network Achieve That?
The idea is simple: take daily, small transactions that go on all the time and put them in their own separate chain. By doing this, we’re able to keep from clogging up the amount of transactions on the main Bitcoin blockchain.
Take ordering a cup of coffee for example. Imagine you use Bitcoin to pay for your morning joe at a shop that accepts cryptocurrencies. Well, that daily transaction of $2 or $3 is still being placed on the blockchain next to the $200,000+ transactions going on. There is no way to weight transactions. Instead, all are verified as they come in.
The lightning network is working to solve this by implementing something called an “off chain” solution or a “second layer.” With the second layer added to the network, all of those small coffee transactions are being completed on a separate payment channel outside of the main blockchain. With that, we’re limiting the number of transactions needing to be completed on Bitcoin’s blockchain and reduce congestion on the network.
When a user and a business (or another person) want to be able to pay each other quickly, they create a “payment channel.” This channel acts as a way to transfer BTC much faster. That’s because instead of initiating a payment and waiting on the network to confirm it, you’re using a different layer for paying. That channel can be used by you and others for paying much faster. Then, at the end of channel’s use, all of the transactions that occurred on it will be added to the public Bitcoin blockchain together. After everything is done, all of those transactions are still on the public ledger, they just don’t show up immediately when on the lightning network.
If you’re still interested in the lightning network and are more of a visual learner, “Simply Explained” has a fantastic video available on YouTube.