Lightning network how it works

lightning network how it work

Cryptocurrency lover that at present learn about blockchain technology, may have read about the lightning network, what exactly is a lightning network, Lightning network how it works?

Simply put, the Lightning network payment protocol on layer two that operates on blockchain-based cryptocurrency. This is a solution for cryptocurrency scaling which is currently in the development stage. That allows Bitcoin transactions to be fast and cheap that can be completed by the Bitcoin blockchain.

This lightning network emerged from the ideas of Thaddeus Dryja and Joseph Poon in the 2015 white paper. Based on the network that is above the blockchain that finally settled there.

The network consists of channels created by users who can send payments in a safe and trustless way.

Case in point, for example, I want to pay you for every minute of the video I watch. We will open a lightning channel. And as time goes by, periodic payments will be created from my wallet to your wallet.

When I finish watching, we will close the channel to complete the payment amount related to the Bitcoin blockchain. Because the transaction is only between me and you and does not need to notify the entire network, the transaction runs instantly. And because there are no miners who need to provide incentives, transaction costs are low even zero.

Lightning network how it works

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Lightning network explained

Lightning Network is a network that is above the blockchain that is designed to facilitate faster peer-to-peer transactions. Bitcoin has adopted this network, which is called the bitcoin lightning network. But not only is Bitcoin using this network, but Litecoin has also adopted this network.

What is meant by being above the blockchain network means? Its mean lightning network is an off-chain solution or is on layer two. With this lightning network, it is possible to make transactions but not have to record every transaction on the blockchain.

To communicate with the main chain, this lightning network has its own nodes and software that are separate from the Bitcoin network. This requires special transactions on the blockchain being able to enter and exit the lightning network.

lightning network

This first transaction requirement is like you build a kind of smart contract with other users. The analogy is that smart contract stores a personal ledger with other users. And their users do a lot of transactions.

Both users cannot cheat, and This ledger is only visible to these two users. The settings in it have prevented users from being able to cheat.

We call this the channel for the mini ledger on this second layer.

This example might make it easier for you to understand, David and Tudor each included 10 BTCs in the smart contract. It is a special channel for both who use the lightning network.

Each has a balance of 10 BTC in the channel. David can then write to the ledger to pay 2 BTC to Tudor. Now Tudor has 12 BTC on its channel, while David has 8 BTC.

A few days later Tudor sent 4 BTC back to David. So David’s balance is now 12 while Tudor’s balance is only 8. As long as they haven’t left the lightning network they can continue to do this for a while.

Transactions using the Lightning network work as fast as lightning, as the name suggests. This transaction does not require block confirmation so payment can be made as fast as your internet connection.

Lightning network how does it work?

First, two users who will transact prepare a Multisig wallet. Multisig wallet is a wallet that requires more than one signature to enforce a transaction.

This wallet will be the destination of a number of Bitcoin transactions. The wallet address is then stored in the blockchain which will later prepare the payment channel.

After the payment channel is available, both users can make transactions without ever touching the information stored in the blockchain. Both users mark an updated balance sheet to check how much Bitcoin is stored in their own wallet for each transaction.

After the two users complete the transaction, then they close the channel. And the resulting balance will be entered into the blockchain. In case of a dispute, both can use the last marked transaction balance to get their funds back from the wallet.

Remember that it is not mandatory to prepare a direct channel for transactions on the lightning network.  You can send payments to someone through the channel where the two users are connected. The network will automatically look for the shortest route.

However, using a lightning network has risks, if without improvement the feasibility of the transaction. Lightning networks are not safe if there is no security from the blockchain behind it.

So that the lightning network is widely used for small or microtransactions that have low risk. If the user will transfer in large quantities it will be far safer to use the original layer.

What is the advantage of a lightning network?

The development of the lightning network has high flexibility, if there is a mistake, it will not have an impact on the actual Bitcoin network. This is because the lightning network is on the second layer which keeps the protocol running.

There are several benefits of Lightning Network, as we explain below.

Scalability

For smaller transactions, using a lightning network lower transaction costs. With Lightning Network, indeed you will pay two fees. The first fee to open your channel and one more fee to close the transaction. But with this fee, you and other users as opposed to transactions after the channel is opened, for free, can make thousands of transactions.

After completion, the final status will be registered to the blockchain.

If the use of the Lightning Network is on a large scale where many users use off-chain solutions like Lightning Network, blockchain space will be more efficient.

This off-chain transaction runs outside the blockchain, and without requiring miners to confirm the transaction, so there is no waiting time which makes the transaction faster.

With an increase in the number of transactions every second, it will help blockchain scalability.

Micro and high-frequency payment transfers can be made on the payment channel on the lightning network, and block space is used for larger transactions.

So that the system will growth for the long term if more increases lightning network users.
Transactions without a Lightning network will take longer than using a Lightning network.

And in terms of costs, there are a number of cases, which can cost more than $ 5. Even at the peak of the bull market in 2017, costs actually exceed $ 50.

Micropayment

If you use Bitcoin transfers, a minimum transfer of around 0.00000546 BTC. The value is around four cents, this is a small amount. But if you use the Lightning Network, transactions can be made even smaller with the smallest part currently available – 0.0000000001 BTC, or one satoshi.

Thus the Lightning network is more attractive for micropayment. Very impractical when sending in small quantities through the main block, related to the confirmation fee.

With a lightning network, you can transfer even the smallest amount. that this method can be a viable substitute for a subscription-based model, where users pay a small amount each time they use the service.

Privacy

Lightning Network has another benefit, which is to provide a high level of privacy to users. Channels created by developers do not need to be known by the wider network.  Even though you might be able to see the blockchain and know that a transaction is opening a channel, you can’t know exactly what is happening in it.

If participants choose to make their channel private, only those who will know what transactions are there.

Receive multi-signatures

Multisig is an abbreviation of multi-signature, which is a unique type of digital signature that allows for two or more users to sign documents as a group. Therefore, a multi-signature is produced from a unique combination of signatures.

Multi-signature technology is produced through a combination of several signatures. Multi-signature technology has existed since the advent of digital currencies, however, the principle of multi-signatures existed before Bitcoin was created. Transactions will take place if everyone present in the channel agrees.

Using a Multisig wallet in the use of a lightning network will only occur with its own uniqueness.

Reducing blockchain load

mWith a lighting network running on this blockchain chain will ensure the burden that must be taken by the main chain.

With a lightning network that works at layer 2 above the blockchain, it will reduce the main blockchain load.. Thus it will make the block more efficient with a reduced burden if on a large scale the user chooses a lightning network to make a transaction.

Hash Timelock Contract (HTLC)

Lightning network systems only offer trusted settings. Meanwhile, to enforce the use of transactions he uses a mechanism called, Hash Timelock Contract.

This is a certain rule which if one from the two does not obey the rules then he still has the right to withdraw funds from the Lightning network.

This mechanism is called the Hash Timelock Contract (or HTLC) which combines two different technologies (hash lock and timelock) in order to overcome uncooperative behavior in the payment channel.

Hashlock is a condition that is placed on a transaction. You must prove by knowing the secret code to be able to transact. The recipient will see the hashing in the data sent by the sender in the transaction.

The only way the recipient can spend it is if the data provided is original (confidential) data that matches the hash. And the only original data is that provided by the sender.

Timelock is a certain time set to prevent you from spending funds before the specified time is met.

Does Lightning Network prevent fraud?

Lightning networks use settings that can prevent fraud, with a Hash time lock contract the user must wait for the timelock to expire, which will prevent fraud.

Other requirements allow recipients to immediately spend the same funds. He needed a secret code that he did not have at the time. But he has it now that the second round of transactions is made, the sender gives the secret.

While the sender cannot do anything while waiting for the timelock to end, the recipient can move the funds. This penalty-based mechanism means that it is impossible for participants to try to cheat because the other party will get access to their coins.

Weaknesses of Lightning Network

However, even though the lightning network offers its own advantages compared to using the main block, it also has its own weaknesses.

Complex use

For now, Lightning Network cannot be used through smartphone applications so there are some beginners this will make it a complicated way. In the process, Lightning requires access to the Bitcoin node in order to fully function.

After the device is set up, users must also start opening channels before they can make payments. this process takes time and can be confusing for some beginner users.

Limited liquidity

The biggest drawback of Lightning Network is that you can only make transactions as much as you put in the channel. This means you can only make limited transactions.

If you use 2 BTC in a channel, you cannot make transactions above 2 BTC. Even though you still have other funds outside the channel.

The hub is centralized

It is possible that there are large entities that are highly connected with a lot of liquidity. Significant payments routed through some of these entities are very dangerous. This can weaken the system because if these entities are offline, carrying out large-scale transactions will disrupt peer relations. Another risk is increased censorship because there are only a few points where transactions flow.

Final thought

Lightning network is still in the development stage so there are still gaps in bugs that can occur. Although so far it still looks healthy. This network grows and has more than 12,000 online nodes, has more than 30,000 active channels, and a capacity of more than 920 BTC.

But until now still able to continue more and more people who use lightning networks with various benefits. Especially in terms of transaction speed, compared to using the main block that requires the confirmation of the miner which takes longer, with the lightning network will be faster, this is what makes users like to use the lightning network.

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