The Lightning Network is a “second-layer” network that is built on top of the Bitcoin blockchain. The economically efficient off-chain processing of transactions enables the network to send transactions at lightning speed without the blockchain filling up and thus contributes to the scalability of Bitcoin.
No transactions take place on the blockchain via the Lightning Network. Instead, transactions take place in a layer above the blockchain. The current Bitcoin blockchain can process up to seven transactions per second and also consumes a lot of energy when every transaction appears on the blockchain. With the Lightning Network, there are up to 1,000,000 transactions per second within a channel, the transactions can be transferred in almost real-time and cost almost nothing, sometimes even nothing at all. International financial transactions are also possible with Lighting Network, benefiting from the high speed and very low transaction fees. The following example shows the possible savings that could be made by citizens of El Salvador on transaction costs over the Lightning Network. It is estimated that money services providers like Western Union and MoneyGram will lose $400 million a year in commissions for remittances, thanks to the country’s Bitcoin adoption. The money stays with the citizens, who mostly send money home from the USA.
How the Lightning Network works
For example, if two users want to send each other amounts of money quickly and easily regularly, they can set up a channel by setting up a wallet with several signatures, i.e. multi-sig, and paying into it. From now on you can carry out an unlimited number of transactions, which are covered by the wallet credit. Essentially, these are off-chain transactions that are recorded using a type of digital ledger that is in turn protected by a timer. Both parties provide a digital signature and update their version after each transaction, usually by scanning a QR code. The actual redistribution of the original credit in the wallet only takes place on the blockchain when the channel is closed, based on the final balance.
The channel established between the two users is also part of a network of connected channels. Amounts can be transferred to everyone else with a Lightning Wallet, with the most economical distance between sender and recipient being determined by algorithms running in the background.
Both parties can also access their deposits again based on the last stock subscribed. In addition, both users can unilaterally close the channel and end their relationship. When the payment channel is closed, the updated balance is verified in the blockchain and the user can use his remaining Bitcoins again in the standard network.
Anonymity and Security of the Lightning Network
The Lightning Network is highly secure. At the same time, the security in the Bitcoin blockchain remains as high as possible. The anonymity is given by Lightning. For example, there is no transaction history here. Of course, every user can create such a history himself, but there is no such history in the network itself. Anyone who is not part of a channel cannot track payment transactions. The anonymity is very high.
The Lightning network scores with its low transaction costs, the high possible transaction volume, and enormous security and anonymity. For example, it is also much more secure than Visa and could do more transactions than Visa. I wouldn’t be surprised if more and more countries adopt Bitcoin as their official currency and Lightning grows to be one of the most widely used networks in the world. The Lightning Network is going to change how people think about Bitcoin.