Cryptocurrencies and blockchain are still considered new technology, and as such — highly advanced. However, while this might be true when you compare them to older technologies, this description is not always completely accurate when you compare one cryptocurrency to another.
Let’s take Bitcoin as an example — it is the first and oldest cryptocurrency, which is only three months away from its 11th birthday, and less than a month away from 11 years since its white paper was published. While BTC did receive a number of updates and upgrades over the years, in its core — it is still the same as it was at the time of launch.
However, this design is considered flawed today by many, especially when it comes to its inability to scale. The demand for BTC is huge, but its blockchain is very slow, which results in long waiting periods for transactions to be processed. At the same time, people who are in a hurry to have their transaction completed have to pay high fees that will be attractive to miners.
This is far from advanced when you compare it to younger coins that can handle hundreds, or even thousands of transactions per second, whereas BTC can only handle 7 transactions per block, and each block takes 10 minutes to be processed. You can learn more about Bitcoin by reading our article on the subject.
More to the point, since this technology is considered outdated before even reaching mass adoption, developers have spent years trying to find a solution. Some have proposed larger block sizes, but that led to arguments and disagreements. Other solutions were considered as well but eventually abandoned. Finally, the Lightning Network was proposed, and it is considered to be the first solution that could actually do the trick.
Lightning Network: What is it, and how does it help?
To put it quite simply, Lightning Network (LN) is a new technology that was designed to act as a second layer of the blockchain. If you are not entirely familiar with blockchain technology, you can read more about it in our article about what the blockchain is.
The most important thing to understand about Lightning Network is that it will be a Layer 2 payment protocol, which will be much faster than Bitcoin’s original technology. It is still blockchain-based, and it will operate on top of the blockchain, but it will not record every single transaction on it, which will significantly speed things up, simply by allowing fast transactions between BTC holders.
As such, it will be a perfect solution for smaller payments, as it will remove a large portion of the ‘traffic’ from the blockchain itself. In other words, while Bitcoin’s blockchain won’t be faster by itself, all of the smaller transactions that are burdening it will be removed, which will also reduce the fees for those transactions that remain.
How does the LN actually work?
Imagine the Lightning Network as an actual network that connects different payment senders. If you wish to send a payment to another person, you would simply be able to establish a tunnel or a channel, that would connect the two of you.
After that, you are free to send BTC to one another as many times as you want or need, without paying fees, and without waiting. All of the transactions would be delivered instantly, and none of it would be recorded on the blockchain, at least for a time.
The channel would remain open for as long as necessary, and when your dealings with that specific individual/entity are finished, it would be closed, and only then would the total amount that was exchanged be recorded on the blockchain. In other words, one big transaction would represent a number of smaller ones, which is a massive improvement over having to send each of the smaller ones via regular means, have them recorded, and pay fees for them.
That is not all, however. The LN would also act as an actual network, allowing you to reach someone with whom you do not have a direct connection, as long as there is a path to them through other users.
For example, let’s say that person A wants to send money to the person D. They are not directly connected. However, the person A is connected to the person B, who is, in turn, connected to C, while C is connected to D. The transaction from A to D can still be made via this long way, instead of the two having to open their own channel that would connect them directly.
This remains true regardless of the number of participants within the network, and if there is a way to come from A to person Z, the transaction will find it. This can also significantly simplify atomic swaps (the process of trading cryptocurrencies directly with another user), so you might say that it delivers multiple solutions at once.
Of course, there are some limitations, which might even be considered potential drawbacks, with one of the biggest ones being the fact that any of the parties connected by the channel can decide to withdraw, which would cause the channel to close, and be recorded on the blockchain. However, the developers came up with a solution to this issue, as well. Their idea was to create a sort of a watchtower, that would have its own nodes responsible for preventing fraud.
What is the Lightning Network for?
As mentioned, the LN will only be useful for smaller transactions and micropayments, while the larger ones will still be sent via the regular method. However, there are numerous possibilities when it comes to the use of the Lightning Network.
Anyone can use it and for pretty much any purpose, which opens infinite possibilities when it comes to making payments. Similarly to video or content streaming, LN might start the new trend of streaming money. You could use it to make minor contributions to services, where one example would be for people to connect to WiFi hotspots and only pay for parts of the content they watch, such as a portion of a video.
Another possibility is that people might get paid small amounts for every minute, or every second that they spend working, instead of receiving monthly payments. That way, if you work overtime, you would be rewarded immediately, instead of wondering if you would be rewarded at all.
The possibilities are endless, and they might even revolutionize the way society works. Of course, this will all take time, even if it does actually arrive. Bitcoin and other cryptocurrencies are still far away from actual mass adoption, and the adoption won’t happen before they get regulated. In other words, there are many steps to take before these possibilities become a reality, and during the initial period, you will only be able to instantly send money to other Lightning Network users, although that is also more than good enough, for a start.