The Lightning Network: Blockchain off the Chain
20th November, 2017
The issue of how to process more transactions, quickly and cheaply, continues to be a hot topic in the cryptocurrency world. Earlier this year SegWit laid the foundation. The Lightning Network offers a potential solution.
While blockchain technology is revolutionary, it still has drawbacks. Under the current system, transactions are processed according to the amount of the transaction fee. That is, the transaction with the highest fee goes first. Philosophically, this isn’t exactly in line with egalitarian ideals. Practically, it takes time. Miners (a/k/a computers running the blockchain) have to go through a process of evaluating fees and prioritizing. If you’re at the back of the queue, you could be in for a wait. The more commonplace cryptocurrency becomes, the more things slow down.
The idea behind the Lightning Network is that not all transactions have to be recorded on the blockchain. Users who frequently exchange cryptocurrency can open a “payment channel.” This is recorded on the blockchain. The two users can then transact any number of times through this channel, and keep it open as long as they want – days or years. The only time the blockchain is involved again is when the payment channel is closed.
Pure peer-to-peer cryptocurrency transactions
The payment channel has been compared to a safety deposit box. It opens when two users deposit an equal amount of money, making the “opening transaction.” Each user puts a lock on the box. This ensures that neither one can spend the money in the box without the other. The two users then exchange money by transferring a “promise of ownership” of the amount of Bitcoin or other cryptocurrency. Either user can close the channel at any time.
The “true power” of payment channels, as Cointelegraph explains, “is unleashed when two or more payment channels work together to form a network.” For example, if two people have a payment channel between them, and one of them opens a payment channel with a third person, both can use the first payment channel to transfer money to that new person.
Over time, this creates a network of payment channels which hardly ever need to interact with the blockchain. Everything, other than channels opening and closing, happens on this second-layer payment network. Having so many transactions take place off the blockchain frees up bandwidth, so transactions are faster and cheaper for everyone.
Things are getting even more interesting, as the development team behind this breakthrough has found a way to send transactions across different blockchains - say, Bitcoin and Litecoin. SpicePay will keep you posted.