Did you know that the Lightning Network makes Bitcoin the most efficient payment system in the World? But, in basic terms, how does it work? Walk with us through this article as we highlight to you how it works.
The Lightning Network is one of the most exciting developments in Bitcoin history. It allows for instant transactions with low fees, which has made it very popular among consumers and businesses alike.
But before we dwell on the Lightning Network, let’s talk about Layer 1: Bitcoin’s Blockchain.
The Blockchain is a public ledger that keeps track of all transactions made with bitcoin. So, if I send you some bitcoins, it will show up on Blockchain for everybody else to see.
Bitcoin’s base layer is the leading method for financial transactions, but it has a few drawbacks. First, Bitcoin can only process seven transactions per second. And it takes about 10 minutes on average to confirm a block with miners who get paid by transaction fees.
Thus, Bitcoin needs faster transaction rates and lower gas fees if it wants a global audience. And that is where Lightning comes in.
How The Lightning Network Works
The Lightning Network is a second layer that operates on top of the Bitcoin blockchain. Yet, it can handle millions of transactions per second cheaply.
For illustration, you can compare Lightning to opening a tab at your local bar.
Tallying all of your drinks together at the end of a night and making one payment is more efficient than swiping your card each time you order a beer. This is how Lightning works.
Now, let’s assume your bar was working under Lightning Network.
You can start a transaction with the bar by opening up a payment channel similar to how you would keep track of your tab. When buying drinks, it will record these transactions and add them.
We’ve never used Bitcoin in this manner before. Bitcoin is being bounced between you and the bar so that transactions are not recorded on a blockchain. But instead, just bouncing back-and-forth through a payment channel like an IOU for payments when drinks arrive at your table.
Closing a payment channel is like closing the final stages of any transaction. When you do so, you complete all transactions and broadcast them on the Blockchain for verification.
Closing and settling a Lightning Network payment channel
How Does The Lightning Network Fit With The Bitcoin Blockchain?
Although the Lightning Network operates separately from the Blockchain, it’s still anchored to it. Transactions happen in this space. And they finish them on the Blockchain so that everything can work out for all participants involved.
You could make an infinite amount of transactions within your payment channel. But you only use two to transfer bitcoin from one account to another. The first transaction is when opening up the channel and setting it as active. The second is closing down the trade.
With the Lightning Network, we can now conduct our infinite transactions on a separate. And a much more lightweight blockchain. Not only does this cut strain from blocks that hold up everyday purchases, but it also lowers transaction fees.
You might think that setting up a payment channel with several businesses you manage could take forever. But this is where Lightning Network shines. You don’t need to have direct contact to pay. Instead, all transactions happen through intermediary channels on their network. So, no waiting around for checks or cashiers’ receipts.
How Do Lighting Network Intermediaries Work?
For instance, you tag your friend to a bar. Yet, he doesn’t have an open channel with the bar, but he has one with you. Your friend can pay for drinks through your channel.
The Lightning Network is so scalable. It finds the fastest path between two parties and records everyone’s transactions. It makes sure that every participant gets paid accordingly with this ingenious system.
With a few payment channels, you can have access to hundreds of businesses. But instead, it handles your money automatically by the network and only needs to appear once every time it’s needed.
Bitcoin’s Lightning Network is the answer to Bitcoin’s scalability problems. It not only combines speed and security with minimal fees, but it also processes complex payments.