Lightning Network 101

22 Oct 2022

Design by  Guirong Hao

The Lightning Network is a decentralized network of payment channels that allows for speedy and cheap transactions. It is built on top of the Bitcoin blockchain, thus taking advantage of all of Bitcoin's security. The Lightning Network is still in its early stages, but it can potentially revolutionize how we use Bitcoin.

The Lightning Network is a new way to process payments on the Bitcoin network. It is designed to be much faster and more scalable than the current system. This article will explain how the Lightning Network works and why it is needed.

Bitcoin's Origins: A brief history

Since its inception in 2009, Bitcoin has been the subject of much controversy and speculation. But where did it come from? And what is it used for?

Bitcoin - Open source P2P money

Bitcoin was created by a person or group using the pseudonym Satoshi Nakamoto. Its original purpose was to provide a decentralized digital currency that could be used without a central bank or other financial institution.

Since then, Bitcoin has become much more than that. It is now also seen as a store of value and a way to transact without the need for third parties.

While its use is still limited mainly to the online world, it has become increasingly popular as more and more people recognize its potential.

Bitcoin Background Technology

When it comes to Bitcoin, there is a lot of talk about the "blockchain" and how it is used to secure transactions. But what exactly is the blockchain? How does it work? And why is it such an essential part of Bitcoin technology?

Blockchain and Cryptocurrencies: Technical Background

The blockchain is a digital ledger that records all Bitcoin transactions. It is maintained by a decentralized computer network that constantly verifies and updates the register.

This ensures that all transactions are secure and cannot be tampered with.

The blockchain is integral to Bitcoin because it allows the system to work without a central authority. This means that no one person or organization can control or manipulate the Bitcoin network.

The blockchain is also transparent, meaning that anyone can see all the transactions that have taken place on the network.

The Importance of Blockchain

While the underlying technology of blockchain is complex, its potential is enormous.

Blockchain provides a way to securely and efficiently create and maintain a tamper-proof record of transactions.

Why Blockchain is Important? Here is Everything You Need to know 

This could revolutionize everything from how we do business to how we vote.

Blockchain has already begun to make an impact in several industries. For example, blockchain is being used in the financial sector to streamline processes and reduce costs.

Blockchain in Supply Chain Management - ConsenSys

In supply chain management, blockchain can track goods moving through the supply chain, from raw materials to finished products. And in healthcare, blockchain can store and share patient data securely.

The possibilities for blockchain are nearly endless. As more businesses and organizations explore its potential, we will likely see more innovative applications for this transformative technology.

Bitcoin Scalability Issues 

Bitcoin is the largest cryptocurrency by market capitalization. Bitcoin has seen tremendous growth in recent years. But, its scalability issues have hindered its mass adoption.

The problem of scalability in the Bitcoin network - Bitpanda

The Bitcoin network can only handle a maximum of seven transactions per second, compared to Visa's 24,000 transactions per second. This scalability issue needs to be addressed for Bitcoin's full potential.

Bitcoin Lightning Network vs Visa and Mastercard

There are a few proposed solutions to help Bitcoin scale. The Lightning Network is one solution allowing for near-instant and cheap transactions.

SegWit is another solution that has been activated on the Bitcoin network, which helps to reduce transaction fees and speed up confirmation times.

Something needs to be done for Bitcoin to reach mass adoption.

What is The Lightning Network?

The Lightning Network is a decentralized network of payment channels that allows for fast, cheap, and private transactions.

The web is built on top of the Bitcoin blockchain, and its primary purpose is to improve Bitcoin's scalability issues.

Lightning Network

The Lightning Network was first proposed in 2015 by Joseph Poon and Thaddeus Dryja, and since then, it has been under development by various organizations and individuals.

The network is still in its early stages but has already seen some success with small-scale test payments.

What is Lightning Network? Bitcoin's Scalability Solution

One of the key advantages of the Lightning Network is that it doesn't require any trust between parties. This means there is no need for a third party to facilitate payments, which makes the system much more efficient.

Additionally, the network can be used to send both small and large payments without incurring high fees.

How Does it Work?

The Lightning Network uses a "smart contracts" system to allow two parties to transact without needing a third party or central authority. These contracts are called "payment channels."

Payment Channels - Builder's Guide

Payment channels are created by locking up funds in a multi-signature wallet. This wallet can be considered a virtual safe that requires two keys to open: one key belongs to each party, and the other is held by a third party (called a "watchtower").

How To Set Up Watchtower Lightning Node - Bitcoin Magazine

Once the funds are locked up, the parties can transact with each other without ever having to touch the underlying blockchain.

How to use The Lightning Network?

Lightning Network is a "Layer 2" payment protocol that operates on a blockchain-based cryptocurrency (like Bitcoin).

It enables instant, high-volume micropayments that settle off-chain.

Layer 2 | Lightning Network - MIT Digital Currency Initiative

Lightning Network can be used to make payments for goods and services or to send tips and donations. It can also be used to play games or bet on sports outcomes.

How To Set Up A Lightning Network Node - Bitcoin Magazine

To use the Lightning Network, you will need a wallet that supports it. Several wallets are available, including Eclair, Lightning Labs, and c-lightning.

You will also need to connect to a Lightning Network node.

The SegWit Activation

Following a soft fork activation in August 2017, SegWit – short for Segregated Witness – was finally activated on the Bitcoin network last week.

Segwit Activated: How it Works & What's Next for Bitcoin

This long-awaited update scales the Bitcoin network by increasing its capacity and making transactions more efficient.

Bitcoin Independence Day: How SegWit, UASF Define community consensus 

SegWit had been locked in for months but was only recently activated after a successful hard fork to upgrade Bitcoin's software.

The hard fork removed the old 1-megabyte block size limit, which SegWit then increased to 4 megabytes. This increase in capacity will help the Bitcoin network keep up with demand as more and more people use it for transactions.

The activation of SegWit is a big step forward for Bitcoin, and it is hoped that this will help make the cryptocurrency more widely adopted and used.

Final Thought

The Lightning Network is critical for Bitcoin's growth. It allows for near-instant, cheap transactions, crucial for mass adoption.

The network also has the potential to significantly increase Bitcoin's scalability, which is sorely needed as the cryptocurrency grows in popularity.

Without the Lightning Network, Bitcoin may reach a point where it can no longer cope with transaction demand, leading to user frustration and a loss of confidence in the currency.

Therefore, it is clear that the Lightning Network is beneficial for Bitcoin's growth and essential if the cryptocurrency continues to thrive.

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Great article explained very clearly about the lightning network 101