In layman’s words; Lightning Network can be defined as the protocol that allows blockchains to scale up and to speed up processing. It was initially developed to sort out technical hurdles faced by Bitcoin blockchain, yet it can be implemented on any blockchain.
Let’s assume a situation where every computer had to save every e-mail simply to receive more. The very same notion applies in blockchains function as well. Lightning Network enables computers to accomplish blockchain-based transactions while they are allowed to store only the data which is concerned to them and to their money.
For lightning, scalability is the first needed scenario as space is provided to proliferate and given the distributed aspect of Bitcoin which puts a cap upon the rate of the transaction of the network. Take the case of Visa, which is programmed to process millions of transaction on every second gone by, but with Bitcoin network, such is limited to under 10 per second. Then, as Bitcoin blockchain’s “block confirmation time” remains lesser than 10 minutes duration, i.e. every bitcoin transaction took 10 minutes to complete and this factor has also contributed to the need for Lightning speed programming.
Besides, there is levied a fee ranging from 5 to 10 cents per each transaction on Bitcoin blockchain which is simply meaningless, in light of such micropayments. With Lightning Network quick transactions are enabled, that is, at the rate of thousands to millions of transactions taking place per second but with a minimal fee, that is a fraction of a cent.
The underlying technology of Lightning Network is payment channels, where a 2 way payment channel is crafted involving 2 parties when both carry out 2-out-of-2 transactions bearing multiple signatures on blockchain and when either part is committing to funds to the 2-of-2 ledger entry and every person is provided with a one private key, and transactions spending from the ledger entry is made only when both keys sign. Such initial transaction needed to open a channel took 10 minutes or such type of block time, after which, those participating in it, are allowed to transact with each other quickly using funds provided to them in the channel.
Such instantly transactions are accomplished by enabling signed transactions to pass on, back and forth, which are spent from the 2-of-2 ledger entry.
Every transaction is set as valid when network broadcast takes place and is incorporated in the blockchain by the dedicated miners of the network, but in case of payment channel, such signed transactions are not broadcast till the time, when the members want the channel to cease operations. Besides, the transactions which users signed for, but which were not broadcast, are made to get exchanged by using either direct or peer-to-peer communication and such are treated like receipts which can be redeemed later by participating members.
Clearly, implementation of Lightning requires a couple of participating members, for example, Alice and Bob, who initiate a transaction using blockchain for $20 and where each of them reserves $10 of value. Just go through this diagram.
Here, the initial allocation is updated making Alice have $5 of the total $20 value where Bob gets$15 and so forth. When the members are done with the transaction with each other, such transaction, held recently, gets a signature which is broadcast to the network, which triggers the funds’ movement in the channel- some amount to one party and the remaining to other.
Lightning simply utilizes the underlying technology of the payment channels and then a network comprising such channels, is created. During the process of network creation, “smart contracts” are used in a bid to allow the network to function in a decentralized manner without involving risks towards anyone.
For instance, Alice invokes a channel with Bob who runs a channel with Carol and Carol has one operational channel with Dave. Now, if Alice wants to transfer some fund to Dave, she will send through Bob and Carol and Dave will ultimately get those funds. But, as multi-signature and smart contracts are innate to the Lightning design, Alice may not need to trust Bob and Carol as mere intermediaries- the protocol smartly uses cryptography in a bid to ensure that the funds will either get to Dave through Bob and Carol, otherwise, be automatically get back to Alice.
Not surprisingly, Bob and Carol can be logically taken as “nodes” which are identical to the mining function on the Bitcoin network. They act like powerful network servers processing transactions in a decentralized way and then, just like miners do not exercise any control over the funds’ movement, such servers are also away from this. Bob can never have bad intent over Alice’s funds as his status is programmed to receive incoming funds provided he has sent the pavement to the recipient. Clearly, getting payment depends upon having it forwarded. Further, lightning payments rest on cryptographic code needing disclosure and with knowledge of such secret code enables one to redeem it from earlier nodes, like when Dave gets redemption from Carol and Carol is eligible for redeeming from Bob.
Then, in case Bob shows offline what will happen? Will the funds stay there in a typical 2-of-2 payment channel? To overcome such situation, Lightning comes ready with inbuilt programming framework for smart contracts to enable users to deactivate their channels on their own. There is utilized a “hashed timelock contract” so as to ensure users (Alice in this case) get their money back if any of channel members (like Bob) get invisible. As such, within hours or days, there is sought a time value variable on such a contract in a bid to ensure that Alice can get money back if Bob shows or goes offline or server breakdown takes place.
Lightning Network is designed to function smoothly on Bitcoin blockchain, or on the other blockchains or it can also be relied upon for transferring diverse assets quickly between blockchains when they use “cross-chain atomic swaps”. The golden rule applicable here for each blockchain can be distinct thus allowing for the cross transfer of asset classes in a secure manner but without involving clearing agencies.
Adhering to the Lightning technology, limited transactions involving payments can be made to transfer through the network just like packets holding data which are transferred across the internet. Besides, unlike before, such a technology has the superior potential to enable new use cases and with such machine-to-machine payments, content micropayments and asset swaps that are done in a jiffy.
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