What is the Lightning Network and how can it help Bitcoin scale?
A plain-language explanation of the Lightning Network, a protocol for scaling and speeding up blockchains. While it was designed to solve some of the technical limitations of the Bitcoin blockchain, it can be implemented on top of any blockchain. Imagine if every computer had to store every e-mail, to receive any. That’s how blockchains work. Lightning Network allows computers to make blockchain transactions, only storing the data they care about—their own money.
Scalability was the first major motivator for Lightning, as Bitcoin’s distributed nature greatly limits the transaction rate of the network. While Visa can process tens of thousands of transactions per second, Bitcoin’s network is limited to less than 10 per second. Another motivator for Lightning’s development is that the Bitcoin blockchain’s “block confirmation time” is approximately 10 minutes long. That means it takes 10 minutes for a bitcoin transaction to confirm. Further, transaction fees on the Bitcoin blockchain can run between 5 and 10 cents per transaction, rendering micropayments infeasible. Lightning Network, by contrast, can enable near-instant transactions, at a rate of thousands to millions per second, with fees of a fraction of a cent (Bitcoin Evolution).
Lightning Network is based on a technology called payment channels. A two-party payment channel is created when both parties create a 2-out-of-2 multi signature transaction on the blockchain, with at least one party committing funds to the 2-of-2 ledger entry. Each person has one private key, and transactions spending from the ledger entry can now be made only if both keys sign. This initial transaction to open a channel takes 10 minutes (or whatever the normal block time is), but afterward the participants can transact with each other instantly using the funds allocated in the the channel. These instantaneous transactions are made by passing signed transactions back and forth, spending from the 2-of-2 ledger entry.
Each transaction would be valid if broadcast to the network and included in the blockchain by the network’s miners, but in a payment channel, those signed transactions are not broadcast until the participants want the channel to stop operating. Signed but unbroadcast transactions are exchanged using direct, peer-to-peer communication, and held like redeemable receipts by the participants.
To use Lightning, two participants, Alice and Bob, create an initial transaction on the blockchain for $20, where each party has $10 of the value.