It's been a big few months for Bitcoin, and with increased media attention and monetary valuation comes enhanced scrutiny of the technology underlying the world's first peer-to-peer digital currency. When Bitcoin hit the scene nine years ago, it was thought of as a new kind of money, digital gold. But as more people started using Bitcoin, the network became slower and more expensive; now, high fees have effectively priced out less costly uses of Bitcoin like buying groceries.

Over the last several years, the developer community has considered a couple solutions to the problem, one of them being the Lightning Network.

![bitcoin-lightning-network.jpg](https://steemitimages.com/DQmettqFW7tLT7zwTqSr9rYDhQw3rtE7k5roZZYjuiGH5Jx/bitcoin-lightning-network.jpg)

Lightning Network is one of the most ambitious and important cryptocurrency experiments since the creation of Bitcoin itself. The project aims to build a fast, scalable, and cryptographically secure payment network layered on top of the existing Bitcoin network.
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Essentially, Lightning Network aims to solve the big problem that has loomed over Bitcoin in recent years. Satoshi Nakamoto design Bitcoin on that way that it requires every full node in Bitcoin's peer-to-peer network to receive and store a copy of every transaction ever made on the network. Initially, that design was vital to achieving Nakamoto's vision of a fully decentralized payment network, but now we have reached a point where it's not suitable any more to keep growing.

Lightning Network could offer a way out of this bind. It shifts routine payments outside of the blockchain, clearing away the most significant obstacle to Bitcoin's continued growth.

In fact, the Lightning Network could potentially do much more than that.

Lightning payments are expected to be faster, cheaper, and more private than conventional Bitcoin payments. Proponents see Lightning Network as a new, second layer in the Bitcoin software stack. They hope Lightning Network will expand the appeal of Bitcoin in much the same way the Web helped the Internet go mainstream.

If the Lightning Network succeeds, then Bitcoin could become faster and cheaper to use, allowing it to make a stronger case for itself as being the supreme blockchain versus newer competition like Ethereum and Bitcoin Cash.

<h1>What is Lightning Network?</h1>

The Lightning Network is a decentralized network of "payment channels" that sits atop of the Bitcoin blockchain. Users who download the Lightning software and connect with the network have the option of opening up payment channels with other users. These channels operate in a similar manner to the Tor network, which routes traffic in such a way that other users do not know anything about the original party to a transaction.

In these channels, Bitcoin transactions can be sent without the normal wait times, because the transactions aren't committed to the Bitcoin blockchain. Instead, the Lightning Network keeps record of transactions without finalizing them, and later sends a message describing only the final balances of the channel to the Bitcoin network as a regular transaction, closing the channel and securing the balance on the blockchain.

The result is a system that allows small, cheap, and fast transactions while maintaining the amazing security and censorship-resistance of the Bitcoin blockchain.

In practice, it looks something like this: Alice connects with her friend Dave, whom she frequently sends money to, over the Lightning Network to set up a payment channel. To begin, one (or both) of them puts up an initial amount of Bitcoin that “funds” a coded contract that's shared between them. That contract is broadcast to the Bitcoin network as a transaction and the funds are secured on the blockchain.

Now, Alice and Dave can spend as much as they’d like from that contract balance by creating new transactions to and from each other. These subsequent transactions aren’t recorded on the Bitcoin blockchain, though—instead, the changes are recorded in a micro-ledger shared between Alice and Dave. This is a payment channel, and for as long as it’s open transactions between Alice and Dave are instant, since they don't have to wait to be included in a block of Bitcoin data, a process that can take anywhere from ten minutes to hours.

When Alice and Dave are ready to close out their accounts, they simply sign a transaction with their private keys to broadcast their final account balances to the blockchain. Many transactions may have taken place between Alice and Dave in the time the channel was open, but the Bitcoin blockchain only records two: the creation of the payment channel, and its closing.

At this point, Bitcoin miners will verify closing transaction per usual and store it on the public ledger.  As with an opening transaction, this closing transaction is the only interaction that either party will have with Bitcoin’s blockchain.

It is obvious that “payment channels” aren't enough to solve Bitcoin's scaling challenges on their own. Creating a new “payment channel” for every transaction would be just as wasteful as requiring the blockchain to compute every little message. This is where the Lightning Network gets the “network” part of its name.

In the real world, people want to make payments to a lot of different people, including a lot of one-off payments to people they're never going to interact with again. Each payment channel generates two Bitcoin transactions: one to open it, and a second to close it. So if people had to open a new payment channel to every recipient, congestion on the blockchain might get worse rather than better.

So the Lightning Network provides a cryptographically secure method for chaining payment channels together. If Alice has a payment channel with Dave and Dave has a payment channel with Carol, then Alice can pay Carol by sending some money to Dave and asking Dave to forward the money on to Carol. Crucially, the Lightning protocol guarantees that Dave can't steal the money as it passes through his hands.

The ability to securely chain payment channels together creates the possibility of stitching millions of people together into a single global payment network. Instead of opening a new payment channel to each new recipient, users find a chain of already-open payment channels that connect them to new recipients. That means you can use a single payment channel to make lots of payments to many different people, all while generating just a handful of transactions on the underlying blockchain.

If the Lightning Network becomes large enough, the effect could be less congestion on the Bitcoin blockchain and lower fees. Most of Bitcoin transactions would be happening on the Lightning Network, and only finalized on the blockchain.

Lightning payments will be very fast! Conventional Bitcoin transactions can take anywhere from a few minutes to many hours to clear, depending on how congested the network is and how conservative recipients are about making sure the network has confirmed a transaction. In contrast, a typical Lightning payment will clear in seconds.

In the long run, the biggest reason for Bitcoin users to adopt Lightning Network will likely be lower fees.

The Bitcoin network has been getting more and more congested over the last few years, and as a result transaction fees have skyrocketed. In December, the daily median transaction fee peaked at $34. It has since fallen to around $5, but is still vastly higher than it was at any point prior to 2017.

<h1>Why the Lightning Network Matters</h1>

The Lightning Network is an off-chain system that allows individuals to swap currencies multiple times without having to put all of these transactions on-chain. Instead, only two transactions, opening and closing, are recorded on the blockchain, while all other transactions, as many as there may be, are processed through a secondary layer of off-chain nodes. These two events can occur weeks or even months apart, and an unlimited number of payments can flow over a payment channel in between. So the per-payment cost of opening a payment channel could be quite small!

Once a payment channel is set up, single-hop payments over that channel will probably be free. Multi-hop payments will likely cost money because intermediaries will want compensation for letting third parties use their channel capacity. We don't know how much these fees will be, but we can expect market competition to keep fees low.

If Lightning fees rise above a few pennies per transaction, anyone who has a few Bitcoins to jump into the market came make a profit—all they have to do is open some payment channels and offer to help people shuttle their Bitcoins from one end of the Internet to the other.

Conventional Bitcoin transactions are publicly available on the blockchain. Bitcoin addresses aren't directly tied to real-world identities, which has given some people the mistaken impression that Bitcoin is an anonymous payment network. But analyzing blockchain data allows people to infer plenty about who is paying whom. Lightning is different.

Payments within a “payment channel” are only visible to the two parties at either end of the channel. Someone examining the blockchain might be able to determine the date that Alice and Dave opened a payment channel, the date they closed it, and the net change in Alice and Dave's Bitcoin holdings. But that's all they'll learn. The blockchain won't reveal whether Alice and Dave made one payment over the payment channel or a thousand, and it won't tell them anything about individual payments.

Moreover, the Lightning Network uses “onion routing” to limit how much intermediaries can learn about the payments they help to complete. Suppose Alice pays Sara using Dave and Bob as intermediaries. In this scenario, Dave and Bob only know the identity of their immediate predecessors and successors in the chain. They don't even know who the ultimate sender and recipient are. For all Dave knows, Alice was actually forwarding a payment from her friend Tom.

Lightning Network will become more useful as it becomes more widely adopted. If the Lightning Network has many redundant connections, people will be able to dynamically rebalance funds between different payment channels. That will make actually closing payment channels an increasingly rare event, reducing congestion on the blockchain.

Lightning advocates like to talk about Lightning Network as a layer two protocol for the Bitcoin stack. As we've seen, bare Bitcoin transactions have some significant flaws, high transaction fees, slow confirmation times, weak privacy protections, poor scaling, that make it unattractive for mainstream use. Lightning Network providing a more scalable and user-friendly payment network that's built on top of the blockchain.

2018 is poised to be a big year for Bitcoin scaling, and the Lightning Network will definitely be one to watch.

Today, three different startups, Blockstream, Lightning Labs and ACINQ, are working on parallel implementations of the Lightning technology stack. The trio released <a href="https://medium.com/@lightning_network/lightning-protocol-1-0-compatibility-achieved-f9d22b7b19c4">version 1.0 of the Lightning specification</a> in December, and the companies are now racing to get their software ready for use by the general public.

Currently, Lightning Networks are being developed for Bitcoin, Litecoin, and Vertcoin. The Lightning Network is still in a test, and no main net launch date has been confirmed yet at the time of this publication.

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