The lightning network is Bitcoin’s solution to its scalability issues.
Bitcoin’s slow confirmation time and expensive transaction fees have severely limited further growth and adoption.
The Lightning Network aims to allow transactions to occur off-chain, meaning each and every transaction no longer needs to be verified on the blockchain.
To do this, a payment channel must be opened between two parties. This signals to the blockchain that transactions can now take place off-chain, and a HTLC contract is created to record the off-chain transactions.
However, a separate payment channel doesn’t need to be opened to conduct transactions with everyone.
The Lightning Network supports what is known as multi-hop. This is the ability to route payments through other open payment channels, but it can only work if those intermediate parties have a large enough balance in their payment channels to support the transaction.
However, for everyday transactions like buying a cup of coffee, the Lightning Network can drastically speed up the settlement process and significantly reduce transaction fees.
The more people there are with open channels as the network grows, the fewer channels will need to be opened by you to send Bitcoin.
Payment channels can be left open indefinitely, with transactions recorded in an HTLC contract.
But funds in the payment channels are locked into the network by the contract. If you wish to take those funds elsewhere, then you must close the payment channel with the funds you want to retrieve.
This action sends the recorded transactions to the blockchain for confirmation.
Only after the transactions have been confirmed on the Bitcoin blockchain can they be move around outside of the Lightning Network.
Perhaps the biggest issue with the Lightning Network is the need to constantly keep payment channels open to make transactions convenient.
This makes nodes much more susceptible to attack, making any Bitcoin stored in these channels at risk.
The only way to keep them completely safe is to close the payment channel and send them to cold storage.
Other criticism has mentioned that the Lightning Network will lead to further centralization of the Bitcoin network. We may see that some nodes exist only to provide high liquidity to allow a large number of transactions to pass through those nodes.
This can be dangerous. If one of these nodes goes offline, it can lead to a major disruption across the entire network.
The Lightning Network is already running and conducting real world transactions. As of November 2018 there were more than 4,000 active nodes supporting a total of over 12,000 payment channels.
There has been recent steady growth since it went live. There have also been recent implementations of this network with other developers. And as promised, transaction fees are also very low at around 1 Satoshi.
However, it is unknown how future growth in a bull market will impact the cost of transactions on the network.
Implementations of the Lightning Network
There are four major implementations of the Lightning Network, all of which are discussed below.
Each is acting in a very similar way with only a few differences between them. Each is based on the BOLT specification to allow each implementation to communicate with each other as one large network rather than separate competing ones.
BOLT is developed in coordination between Blockstream, ACINQ and Lightning Labs to enable each company’s products to work with others.
BOLT supports the Lightning Network to conduct transactions between both Bitcoin and Litecoin blockchains as well as any future forks of either coin, making transactions between blockchains possible without the need for exchanges.
C-Lightning is being developed by Blockstream.
It is coded in C and designed to only run on Linux, although running on macOS may be possible if you change some code and parameters.
C-Lightning supports lightweight nodes that can be run from a Raspberry Pi, allowing users to always have a connection to their payment channels without the need to keep their main devices constantly online.
This makes it much easier for people to adopt and grow the lightning network. Additionally, C-Lightning has a wallet to manage both on-chain and off-chain funds, and it also supports the connection of nodes over the TOR network to address any privacy concerns of keeping open payment channels.
C-Lightning is compatible with other implementations based on BOLT.
ACINQ is a French company developing Éclair. It works in a similar way to C-Lightning, with a few minor differences regarding the code and user interfaces.
Éclair can be run on Windows and can also be supported with a Raspberry Pi running as the network node.
There is a mobile wallet for the Éclair Lightning Network for android devices that can connect to the test net and main net.
But like C-Lightning, it is still in beta and should not be used to send any amount you do not wish to lose.
Éclair is also compatible with C-Lightning and lnd, allowing users with any implementation to connect with one another.
Lightning Network Daemon (lnd)
Developed by Lightning Labs, lnd is the third major implementation of the Bitcoin Lightning Network. It’s written in the Go programming language and is compatible with both Linux and Windows machines.
It allows for interoperability with C-Lightning and Éclair, and can also be used for the Litecoin Lightning Network.
Their desktop wallet enables users to open channels and conduct transactions, although there is currently no mobile wallet in development.
Lit is developed by MIT under their Digital Currency Initiative. It is the only implementation developed by a non-commercial entity, meaning motivation for building Lit is driven purely by the team’s interest in research and usability rather than by profit.
Although fairly similar to other implementations in terms of functionality, Lit is being developed to support all Segwit coins.
It even allows for any new Segwit coins developed at a later date to join the Lit network.
This provides greater utility compared to other Lightning Network implementations. However, because Lit is supporting more coins than specified with BOLT, it is not compatible with the previously mentioned implementations.
Lit is also developing a method to solve the issue of always needing to be online and connected to the network to maintain payment channels.
Their solution is known as LitBox, although it functions in a fundamentally similar way to solutions proposed by the companies mentioned previously.
As this project is only under development through a small research team at MIT, development is slow.
While major commercial implementations have multi-hop payment channels working, Lit is still working on developing this feature. And until this is completed, Lit offers little real-world utility.
The Atomic Cryptocurrency Wallet is based on the same technology of the Lightning Network: atomic swaps.
Unlike the Lightning Network, which focuses on fast transactions of a single currency between parties, Atomic Wallet is using a peer-to-peer network to fill orders by matching users with complementary transactions.
Although this allows exchanges to occur without a centralized exchange, users must leave the wallet open and running until the swap is complete. In most cases this won’t be an issue for popular cryptos.
But if the swap is taking an unusually long time, you cannot just close the wallet and return later to a complete transaction as you can with centralized exchanges.
The design of the wallet itself is quite impressive, and because it offers swaps based on peer-to-peer demand, theoretically any coin can be traded through the wallet.
However, this wallet is always connected to the larger network while in use.
While their website mentions that the wallet keeps the private keys exclusively on the device, Atomic Wallet is effectively a hot wallet and thus still susceptible to attack.
The lightning network provides a robust solution to the current scalability issues of the Bitcoin blockchain. The network is now being used on a small scale but continues to grow.
However, it has a way to go before we can officially confirm that it has delivered on its promise of scalability improvements.
Even if the Lightning Network does not perform as intended, atomic swap technology has broader implications for cryptocurrencies by providing an efficient and trustless way of exchanging coins between peers.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.
Providing liquidity for the crypto economy.