The lightning network is hailed as the solution to the scalability issue that has long plagued Bitcoin. Once mass adopted, this "Layer 2" protocol will enable users to make much faster transactions at a cheaper fee across the network.
As predicted by James A Donald, the first person to publicly make a comment about Bitcoin when it was initially proposed by Satoshi Nakamoto, the biggest issue Bitcoin and altcoins have is scalability. In 2008, he had the following to say about Bitcoin.
"The way I understand your proposal, it does not seem to scale to the required size,". Unfortunately, that is still the case today."
You must be wondering why we say Bitcoin's biggest problem is scalability.
Since its inception, Bitcoin could process about 7 transactions per second. This could have been more than enough during its inception, but not anymore, as the system is packed. This problem results in high transaction fees and long waiting periods to process transactions.
The network is an extra layer built on Bitcoin that allows users to create a payment channel between the involved parties. With this layer, transactions will be instantaneous, and the fees will be reduced greatly as these transactions won't be kept on the main Bitcoin network.
Its concept was created in 2015 by Joseph Poon and Thaddeus Dryja. Currently, 3 startups are working on 3 significant developments of the Bitcoin Lightning Network. As shown by recent tests, these major developments can work with one another effectively.
These companies make use of different programming languages in the development of the Network.
The Lightning Network proposes a system without needing a third party and a decentralized network of payment channels. In the Lightning Network, every party is seen as a node, and the nodes are then interconnected with other nodes.
Assume an individual does not have an active payment channel with you, and this person wants to send you a lightning transaction. The person can use other nodes as a 'hop' to locate an already opened channel and make the payment immediately. Take these payment channels below as an example.
Assuming Mark needs to make a payment to Dave but doesn't have a payment channel with him, Mark will have to use John as a 'hop' to send the Lightning Network transaction since John and Dave already has an active payment channel. This process would reduce congestion because Mark wouldn't have to open a new payment channel with Dave.
On the Lightning Network, users can make transactions by finding the nearest hop for a transaction, and then the network does the rest.
The Lightning Network makes it possible for payments to be settled immediately: Payments made via the Lightning Network happen instantly. It takes a fraction of a second for the money sent to cross the Bitcoin network to its destination and back to you.
The Bitcoin Lightning Network makes small payments Possible: Since the cost of transactions is significantly reduced and transaction fees are now a proportion of the total payment amount, a person can end up paying a fraction of a cent.
Privacy is greatly improved: The record of every transaction can be kept from the blockchain, at least not until the payment channel is closed and the balance is paid to the involved parties.
Centralization: This is encouraged in payment hubs by the Bitcoin Lightning Network. It is comparable to miner centralization.
There could be peer failure: If one of the peers involved in a transaction is not responsive, the users could be kept waiting for hours until a payment channel is closed before the money can be sent through another route.
The Lightning Network is not ideal for payments of significant funds: There might need to be more funds in peer's multisig wallets for a large transfer even though
Offline payments are not available. The bitcoin Lightning Network does not allow users to make payments to anyone that is not online.
This network would make the payment of tiny funds seamless rather than filling the blockchain with millions of tiny transactions. Large transactions can also be settled as a combination of hundreds of tiny transactions.
With Layer-2-Network, scalability would no longer be an issue for Bitcoin. It could handle billions of transactions daily without taking forever. A significant importance of Layer-2-Networks is that they can also be used on other blockchain protocols as long as it has the recipe built-in, which is the multi-sign scheme. Several experiments are currently being carried out for Layer-2-Networks on other blockchain systems, such as Cardano, Ethereum, and EOS.
All major wallets also support the lightning network. Once its application goes full-scale, there would be no problem regarding scalability.
All the Layer-2-Network solutions, like the Lightning Network, bring us closer to the vision of a decentralized global currency.
