What Is The Lightning Network?
The Lightning Network is a second-layer solution that aims to make Bitcoin payments faster and cheaper than is currently possible.
It is an important part of the Bitcoin community’s plan for increasing the usability of Bitcoin as a new monetary network and is therefore a key development you should understand.
Why Does The Lightning Network Matter?
One of the main criticisms of Bitcoin is that it has failed to live up to the original vision of ‘a peer-to-peer electronic cash system’ that was set out in the Bitcoin whitepaper.
This criticism revolves around payments being too expensive, which is caused by the fact that Bitcoin transactions are confirmed by being entered into new blocks that can only hold a limited number of transactions.
The Lightning network was proposed as a secondary layer that would enable the amount of transactions to scale while keeping the base Bitcoin blockchain secure and decentralized.
How The Lightning Network Works
The Lightning Network works by establishing one-to-one payment channels between users and then scaling this model so that multiple addresses are connected.
On the simplest scale, two users (who may be referred to as nodes) send an amount of bitcoin to a shared multisig address and this opens a payment channel between them. They can then send smaller amounts of bitcoin to each other, as long as these amounts don’t exceed the shared total.
These transactions are recorded on the Lightning Network but not on the Bitcoin blockchain. Only the opening or closing of the channel is recorded on the Bitcoin blockchain. Thus, the Lightning Network allows users to avoid the fees associated with Bitcoin transactions.
The Current State Of The Lightning Network
As more payment channels are established, there are more individual users who have one-to-one connections with multiple users. These users then start to act as routers. As a result, a user can pay another user they are not directly connected to simply because they are both separately connected to a routing user.
According to 1ML, a Lightning Network Search and Analysis Engine, there were around 35,000 nodes and around 87,000 channels in the Lightning Network in early March 2022. This translated into a network capacity of around 3,500 BTC or roughly $135,000,000.
Use Cases For The Lightning Network
A number of projects, including those from private companies and national governments, show how the Lightning Network is being used right now.
Strike app
Strike is a payment application built on the Lightning network that allows users to make payments at virtually no cost.
Twitter tips
Twitter has enabled tips, which are micropayments made through the social network, using Stripe and the Lightning Network.
El Salvador
This country has made Bitcoin legal tender and has introduced a Lightning Network wallet for its citizens to use.