Lightning network for beginners

The original form of the Bitcoin blockchain has a limited capacity  to process transactions. The Lightning Network – an innovative Layer-2 protocol under development – enhances the efficiency of Bitcoin and has the potential to disrupt the crypto landscape.

Today, Bitcoin’s blockchain can only process roughly 7 transactions per second. An issue in times of high demand. The network becomes congested, leading to slower confirmation times as well as higher transaction fees, a suboptimal situation.

To be able to turn Bitcoin into a means of payment, transactions must be both fast and cheap. It’s here that the Lightning Network (LN) comes into the picture. The LN enables off-chain Bitcoin transactions, which means that the transactions are not recorded on the blockchain. They therefore don’t require the involvement of any Bitcoin miners, and as a consequence offer next to immediate and much cheaper transactions. Such transactions also offer privacy and anonymity.

In the Lightning Network, participants create payment channels between each other – Lightning channels. This enables microtransactions and cuts the burden on the main blockchain for smaller value, everyday transactions. Ultimately, the final settlement of these off-chain transactions is sent back to the main blockchain, ensuring the security and integrity of the network.

Adoption challenges

But why isn’t the LN widely used? One reason is that few merchants currently accept payments through the LN and that funds can end up locked on the Lightning channel. Others are security concerns, vulnerabilities, challenges to integrate the LN into existing payment services and platforms, as well as regulatory uncertainties.

Another weakness is that all participants on the LN must be constantly logged into the bidirectional Lightning channel created to send or receive payments. (A collection of these channels is called a node.) The coins can thus be stolen if the node is compromised. To prevent fraud within the LN, third-party watchtowers, monitor transactions on the LN for a fee.

Lightning Network’s capacity at record high

The capacity on the LN has steadily increased since its launch in 2018. Its capacity stood at 218 million dollars end-2023, just below its all-time high of 230 million dollars reached earlier in December, data from the Block shows. The value of Bitcoin transactions on the LN is steadily on the rise. Only time will tell whether the LN will change the landscape of crypto payments. Undoubtedly, it holds the potential to do so.