The Lightning Network aims to speed up bitcoin transactions at a cheaper rate. It belongs to a more recent category of crypto technology called “layer 2” blockchains, comparable to HOV lanes on motorways.
The primary Bitcoin blockchain (also known as “layer 1”) can move more quickly by shifting some transaction “traffic” to the Lightning Network’s “layer 2” blockchain.
In part, the Lightning Network was created to make Bitcoin operate more like digital money. Transactions are processed “off-chain” and far more rapidly and cheaply than on the main Bitcoin blockchain, with fees that are often fractions of a cent or less. Additionally, lightning transactions use less energy than those on the main network.
The Lightning Network (layer 2) has a theoretical capacity of millions of transactions per second, but the main Bitcoin network (layer 1) routinely handles less than ten transactions per second.
How does the lightning network work?
To create off-blockchain payment channels between pairs of users, the Lightning Network uses smart contracts. Funds can be exchanged between them almost immediately after these payment channels have been set up.
It’s clever that the network doesn’t have to couple up every user. Funds can still be easily moved between all parties in a network; for example, if User A and User B have a channel together, and User C has a channel with User B but not User A, the payment method for users is pretty similar. Funds can still be freely transferred between all networked parties.
Users can terminate their payment channels and settle their outstanding balances on the main blockchain at any moment.
Users can terminate their payment channels and settle their outstanding balances on the main blockchain at any moment. The entire Bitcoin network may move more quickly since the opening and closing of payment channels are recorded on the core blockchain. Furthermore, compared to transactions done on the main blockchain, Lightning Network transactions may be more private (because layer one transactions all appear on a public and transparent ledger).
(written by Catherine S Thomas)