What is the Lightning Network – Bitcoin (BTC)?
Bitcoin has become one of the most popular payment cryptocurrencies in today’s current market. With its massive merchant networks and benefits to all who mine it, it has become a nice choice for all who invest or take part in its system.
But like with any system there are always bugs and flaws. Bitcoin’s flaws are sadly within its structure and fees. While in the infancy of Bitcoin it wasn’t a huge issue to have fees and hard fork networks, it has now become a big problem for the cryptocurrency.
Currently, Bitcoin has managed to safely patch up its major transaction malleability issue and transition the cryptocurrency into a backward compatible soft fork transaction protocol. Along with this protocol, Bitcoin has made attempts to address other issues such as high transaction fees.
Why are these fees so high? Well, besides your dishonest users, it turns out you can have some really greedy miners too. For a person to make a Bitcoin transaction, they would have to go through a process of transaction input. This input would be processed by a miner for a fee, once the block is processed it goes to the transaction output and is received by the other honest user.
A major issue with Bitcoin was the transactions were too slow, some transactions would take ten minutes while others would go for up to a half-hour or longer before being processed. This slowness was due to the miners processing the transactions at a different pace depending on the transaction fee.
For users to make their Bitcoin transactions to go faster they would have to add more on top of the fee as a sort of incentive for the miner to process their transaction quicker. Not only was this an issue among the nodes (miners) but it also clogged up transaction networks and made it very hard for users to do multiple Bitcoin transactions at once.
This slowness made Bitcoin look bad in the face of a growing cryptocurrency market. This tiny flaw fed into the massive influx of altcoins. Altcoins touting similar payment models with faster transactions than Bitcoin was the wake-up call for Bitcoin to improve its payment platform or risk falling out of favor. In fact, even Litecoin felt the burn with similar slow transaction problems.
So how did the developers of Bitcoin and Litecoin manage to fix this flaw without snatching all the mining incentives from their nodes (miners)? While many users and developers came up with many ideas for Bitcoin’s transaction malleability issues, it did manage to figure out a solution for this flaw too in the meantime. Enter the Lightning Network Scaleability protocol patch.
Lightning Network: A Simple Fix to Bitcoin and Litecoin’s Scaleability Problems
The developers of Bitcoin and even Litecoin knew they would need to find a better way to speed up their cryptocurrencies capabilities as a day to day transaction platform. They knew that with the current slow model it would only work against them unless they manage to find a faster transaction for everyday users.
Not only would they need to find a faster method they would also need to cut down on the amount of fees needed to process these transactions. Otherwise, they would end up losing users to other altcoin payment platforms.
After all, no one wants to wait more than ten minutes just for a few altcoins to finally reach their destination, just not practical compared to other instant financial systems. Slow processing times would defeat the purpose of having an alternative to the current fiat currency financial institutions.
With the introduction of SegWit as a transaction malleability protocol patch, it allowed Bitcoin to finally get other flaws fixed, one being transaction times.
Originally, Bitcoin’s coding didn’t allow for smart contracts and second-layer protocols to even work. With SegWit, Bitcoin now operates on the basis of the soft fork instead of the hard fork. This gives Bitcoin more flexibility with how transactions are processed in relation to nodes.
The Basics of Payment Protocols for Cryptocurrency
For users to make a Bitcoin transaction they had to first establish an input transaction. This input transaction would then have to go through a network of nodes. These nodes required a fee to process the transaction input into a block which would take time to have one transaction processed. Once the block was finally processed it would then send it to the output (the receiving user).
Not only was this method of processing transactions time consuming, it was also fairly expensive. While it does have the perk of keeping things transparent and decentralized, it does open up the gates to people who want to be either greedy or abuse the system.
Everyone who took part in the processing of the transaction had to be paid. Some miners required more incentive to process a transaction over others thus creating a delay in the network. These delays would then result in a clogged up transaction network and very slow processing times.
How Does Lightning Network Work?
The main goal of Lightning Network is to basically function on the basis of IOUs with an open tab between two users. This would allow instant transactions between users who share a wallet. The only time the transaction would be recorded on the blockchain was when the users sent/received their Bitcoins.
Basically, for users to use this protocol they would first have to set up a multi-signature wallet. This multi-signature wallet would require more than one signature to enact any transactions. Users deposit Bitcoins into the wallet, the wallet is then registered onto the blockchain as an open channel.
In theory, this would allow users who use the wallet to enact unlimited transactions with minimal transactions fees and shorter processing times between transactions. But this also puts a lot of strain on users since it requires all users signed to the wallet to enact the transactions simultaneously and confirm the final balance sheet once all transactions are concluded.
This balance sheet is what gets stored on the blockchain and determines who gets what from the wallet. Not only will all users have to take part, they will also have to select a functioning payment channel and determine which one they want to pay for to process their transactions. Since not all payment channels offer the same fees it can lead to some issues in predicting transaction fee costs.
Final Thoughts on Bitcoin’s Lightning Network
While some may feel this is a good protocol patch, others seem to have doubts on whether this patch can hold up. So far Lightning Network has suffered many setbacks that have required it to deal with certain issues regarding bottleneck fees, DOS attacks, bugs in the system, and so on.
While the system has managed to fix many bugs and issues it still isn’t the best solution for long-term transaction scalability. It has also taken away from the decentralized nature of Bitcoin’s cryptocurrency and has made it circumvent around specific payment channels that are online at the moment of transaction. This, in essence, makes it a bit centralized.