The creation of the Bitcoin (BTC) cryptocurrency was oriented to provide a “decentralized and flexible” digital alternative to traditional means of payment. However, its adoption and receptivity in the financial and commercial world was so fast that its network was affected by high traffic, which caused problems in its scalability; because of this, they created different solutions for this problem, one of these, called Lightning Network. Next, we will explain what Lightning Network is and its effect on the Bitcoin network.
Bitcoin Scalability
Bitcoin was not only the first cryptocurrency but also the first blockchain, which has been taken as a reference by different generations of cryptocurrencies in the market. However, despite being an extensive and strengthened network, Bitcoin’s scalability was affected by the high traffic and use of the same, which is why its fees and waiting times (for each transaction) were increasing. Due to this problem, studies on Bitcoin’s scalability began to be carried out to improve the network and have faster and less costly transactions.
Lightning Network
Lightning Network is a protocol designed to improve the scalability of Bitcoin; with this protocol, it is possible to perform actions that usually cannot be performed in the Bitcoin network. One of its main improvements is the execution of transactions instantly and with a low cost in their commissions. All this is possible because the Lightning Network protocol design appoints to work in a second layer over the Bitcoin blockchain.
It is essential to note that the Bitcoin network can only process between 7 to 10 transactions per second; however, thanks to Lightning Network, this problem was solved, increasing its processing capacity.
The Lightning Network’s capacity to handle transactions per second depends on many factors: the number of nodes and payment channels in the network, channel capacity, and available liquidity, among other technical elements. In theory, the Lightning Network could handle thousands or millions of transactions per second, provided it has sufficient adoption and capacity.
Operation
The development of the Lightning Network protocol and its payment channels lies in the soft fork (software update) designed by Segregated Witness (SegWit) that served as a solution to the “non-malleability” property of Bitcoin transactions, thus allowing for a breakthrough in network scalability.
Regarding its operation, Lightning Network has four stages or outstanding features: payment channels, off-chain transactions, routing, and channel payments/closing.
Payment Channels
The Lightning Network lies in the bidirectional payment channels between two interested parties. Such routes operate as “virtual routes” through which transactions can flow without registering on the blockchain. To enable a channel, the two parties involved create a transaction on the main Bitcoin blockchain (this enablement has a transaction fee).
Off-chain transactions
After enabling the payment channel, the two parties can carry out transactions “outside” the main chain, registering the information in their local nodes. In this case, such transactions can be instantaneous and fee-free.
Routing
When one party (on the payment channel) wishes to send funds to another party that has no connection to its route, Lightning Network will use a “routing” system to find a “path” through different intermediate channels. Each node in the network has information about the capacity of adjacent channels and can calculate routes to transmit funds securely and efficiently.
Payments and channel closure
Payment channels can remain open as long as the parties involved see fit. When users decide to close a channel, they can do so through a final transaction, which the primary Bitcoin blockchain records, allowing the parties to access the funds they held in this channel. The prime blockchain records the final balance, and the parties involved can withdraw their funds to their respective Bitcoin addresses (unique alphanumeric strings used to receive payments on the Bitcoin network).
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