Everything you need to know about the Lightning Network in Blockchain

While Bitcoin provides a solution to multiple problems caused by the current monetary systems, it still has some limitations. One of its most significant drawbacks is the price and speed of transactions during busy hours. The limitations prevent it from being a reliable medium of exchange for daily micro transactions like in the case of credit cards.

The lightning network was developed to solve those issues. Designed as a second layer for the Bitcoin network, the lightning network allows its users to transfer Bitcoins instantly without any transaction charges.

Quick Summary:

  • One of the most significant drawbacks of bitcoin payment is the price and speed of transactions during busy hours
  • The lightning network was developed to solve most of the drawbacks associated with Bitcoin, and facilitate the transactions of micropayments
  • The lightning network allows both the recipient and the senders to transact on different off-chain channels and later update the blockchain when the settlement is done.
  • The payment system will be able to reach many people instantly with no overheads

What is the lightning network?

This is a proposed system created on top of the Bitcoin blockchain. It is a layer two solution if you consider Bitcoin as layer one. The network is specifically designed to facilitate the transactions of micropayments. In other words, it is a fee-less and fast system with a routed series of transactions to bridge the gaps left by Bitcoin.

Why was it implemented?

As its name implies, the lightning network was primarily introduced to facilitate the payments of micropayments and also to improve the speed of Bitcoins and other cryptocurrencies transactions.

Currently, Bitcoin has two main challenges which limit its scalability.

  • All new blocks are limited to a size of 1mb only. This creates a limitation on the number of transactions that the network can handle at ago. Presently, Bitcoin handles a maximum of 7 operations per second while some card processing companies such as VISA handle up to 1700 operations per second. The slow processing speed for a Bitcoin transaction has caused a congestion problem.
  • Bitcoins transaction fees have been increasing every day. The main reason for this astronomical increase is the congestion caused by many users of the network. The high fees have made it almost impossible for some users to perform the micropayments.

The lightning network was therefore created to reduce this congestion and also to facilitate bi-direction payments without necessarily delegating trust and funds to third parties.

How the lightning network works

The lightning network works through various payment channels. Users can only transact through the network by having an “off-chain” channel between them.

It works by:

Increasing the transaction speed on Bitcoin network-the Bitcoin system uses mining rates and therefore requires computers to record and solve the complex transactions problems. For this reason, transactions take a long time to be confirmed.

Increasing the volume of transactions without having a corresponding increase in block size results to delayed validations and congestions. The lightning network uses a hashed time locked contract (HTLC) between the transacting users. The HTLC allows both the recipient and the senders to transact on different off chain channels and later update the blockchain when the settlement is done.

HTLC uses a time lock and a hash lock to block the parties who are not trusted as well as the off chain intermediaries which are not needed. It also prevents the external intermediaries from the payments translated through the intermediary node.

Sounds complicated? Let’s check this example

Let’s say my friend, and I want to put small bets on world cup results. If we pay these small bets over the Bitcoin blockchain, we might end up paying more amounts due to the high transaction fees. On the other hand, you might wait for a long time to get the money if you don’t pay enough taxes.

Now let’s use the same scenario but using the lightning network.

To make a transaction for the bets, we will first open an “off chain” payment channel between us and then deposit 0.5 Bitcoins as the security (assuming that the value of the bets adds up to 1 Bitcoin). The deposit acts as the payment niche which reaches the blockchain layer one. All the transactions made after that deposit are settled over the lightning network channel.

Note that: if either of us decides to reverse the transaction, we can easily do that even without consulting the other party. However, the one-sided withdrawals will force me (the leaving party) to wait for approximately one week to have 1000 blocks confirmation. The party who has been left behind can receive the Bitcoins immediately.

Now let’s assume that my friend has won the bet and I need to pay him 0.1 Bitcoin. We will use our “off chain” ledger to sign a transaction stating that my friend has 0.6 Bitcoins and I have 0.4 Bitcoins.

If my friend wanted to take the winnings, he would display the ledger we signed to the network. The deposits will be returned as per the new balances.

The lightning network is very keen on avoiding frauds– It has a fraud protection mechanism which gives harsh penalties to the participants who try to cheat. For instance, if I decide to withdraw the whole 0.5 Bitcoins without paying the 0.1, the network will send the entire 1 deposit Bitcoin to my friend. As you can see, the transactions are instant and fee-less.

Key features of the lighting network

  • The channels remain open provided that both parties decide to keep it open. This reduces blockchain load.
  • Speedy payments:- the transactions made on this channel take a short period.
  • Eliminates third-party trust:- peer-to-peer payments are carried out without third parties.
  • Guarantees additional security through the multiple signatures which both parties make
  • The wallets can safely go offline and thus prevents frauds and theft of funds by either party.

Advantages of lightning network

  • It supports transactions made on different blockchains
  • The network is expected to compete favorably with the best instant payment platforms. It is also likely to revolutionalize peer to peer exchanges.
  • According to the lightning developers, the improved speed of transactions would increase the widespread adoption of Bitcoin. This would increase its usage for both devices based user transaction and point of sale terminals transactions.
  • It offers cooperative transactions which do not leave any trace. This increases privacy among the users.

Disadvantages of lightning network

  • The network is not popular- it is new, and many investors are not aware of it. This means that we are still not sure of how reliable, fast and secure it can be when subjected to a usage pressure.
  • Several apps have been created to use the lightning network. However, most of the reviews have pointed out that the network is confusing to use.
  • The technology is currently being worked on by very few developers. This might delay the onset of its application and usage.
  • Hack attacks cases are surrounding the mining and exchanges platforms. The lightning network has not been widely used, and it, therefore, remains unknown whether it will withstand the hacks or make Bitcoin more vulnerable.

Where and when will it be used?

The cryptocurrency community is eagerly waiting for the official launch of this network. It was initially designed for Bitcoin only, but it is now being created for other cryptocurrencies such as Ripple, Ether, Zcash, Stellar and Litecoin.

Bitcoin has already been sent using lighting labs and ACINQ’s implementations and proved that they are interoperable. The first version of the rules and specifications of this network have also been published. The network will use these specifications to make the necessary implementations needed to make it better.

Developers are urging users to be patient since the network is still under the infancy stages. The network score is also complex and requires rigorous testing. An official launch can only take place once the users declare it safe and useable. With that and more other actors, the network might be fully operational in the next couple of months.

Should I use the lighting network?

Well, you can’t use this network if you are not advanced in technology. The best thing to do now is to wait and see if it will live to the hype, and if it will live as per the description.

Future possibilities of the lighting network

All sorts of payment models will become possible under this network. Just think of a payment system which can reach many people instantly with no overheads. We might soon see a new era of streaming cash. For instance, if you use your smartphone and this network to watch an online video, it could be easy for you to make microtransaction payments for the partial video you have viewed. This could, however, be possible if you have connected wifi.

Or even wilder, imagine a world in which it will be possible to pay workers every second for their work instead of getting the monthly paycheck. Wouldn’t that be a smart idea?


Hopefully, you have now understood the basic concept of the lightning network as well as how it works. The network is still new, and it’s, therefore, one of the complex and technical subjects to explain. It is still in its testing phases, and that’s why it has not become fully operational. However, the lighting network will bring exciting news to the blockchain if it will truly maintain the instant and feeless payments.

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Wilson is a 3x Startup Entrepreneur. He is passionate about the cryptocurrency space. You can catch him tweeting about cryptocurrency often @itswilson8 You can also email Wilson directly at wilson@cryptomenow.com

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