Lightning Network - what is it?

Lightning Network is a technical solution for creating second-level blockchains.

The development of any cryptocurrency system, if it enjoys users' trust and has serious capitalization, is certainly associated with the problem of quickly conducting transactions. To solve this problem, a new Lightning Network technology was introduced, otherwise called a second-level solution. It is used on Bitcoin blockchains.

This protocol is a special network of payment channels, thanks to which it is possible to increase the network capacity. This is done by scaling the network, which also helps reduce the cost of transactions.

How is LN convenient?

The standard throughput of the Bitcoin network is 7 transactions per second. The time required to create a new block is 10 minutes. At the same time, it is necessary to constantly maintain a balance between decentralization, productivity, and security.

This factor is why a decentralized financial system cannot bypass centralized networks like Visa or other cryptocurrency ecosystems, where the indicators are much higher (from 10 to 400 thousand transactions per second).

The second level solution is designed to solve this problem. It allows you to achieve the optimal compromise to maintain core-level security and decentralization while speeding up transactions. In theory, scaling through LN has no limitations. The maximum capabilities of this technology are calculated in millions of transactions per second.

Architecture and features

According to this protocol, it is proposed not to count each individual transaction but to provide separate channels in an additional layer between two users. As a result, the Lightning Network architecture assumes the following conditions:

  • unlimited number of channels;
  • the lifespan of individual channels is not limited;
  • instant execution of transactions;
  • reduction of system commissions.

In the process of confirming a transaction, the system processes a network of nodes; instead of a cryptographic key, a QR code is used for verification.

Lightning Network - Application

Since the main operating principle of the second-level system is dedicated payment channels, a separate wallet with a multi-signature option is created. Coins can be placed in this wallet by either one participant in the system or both users.

An open channel occurs by creating a regular Bitcoin transaction. Data on it is registered in the blockchain, and the coins themselves are blocked. In the future, transactions for which this channel is used will be carried out directly between participants, bypassing the blockchain.

Simply put, this protocol is an alternative safe where money is stored. A certain group of Bitcoin owners can use it. To activate transactions, you must use a private key.

Disadvantages and criticism

In practice, some shortcomings of this system have already appeared, which, however, are being eliminated. One example is blocking coins for up to 2 weeks after making many payments (about 500 transactions).

Experts identify the second serious disadvantage as the lack of ability to develop due to the lack of significant economic incentives. They also do not lose sight of the fact that when using the Lightning Network, there are certain problems with the anonymity of participants.