Bitcoin transactions are slow and expensive. Transactions can take hours to complete, not to mention the high transaction fees that comes with it. Furthermore, the non-scalability of blockchains is a huge obstacles towards global adoption.
The Lighting Network presents a solution to all the challenges mentioned.
What is it?
Lighting network is a network that resides on the Bitcoin blockchain, relying on channels created by users to send payments back and forth without broadcasting to the whole network. Since the transactions are essentially between two parties, it is almost instantaneous and the transactions fees are low, or even zero.
A multisignature wallet is set up and would hold some amounts of Bitcoin.The address is saved to the Bitcoin blockchain with a balance sheet to show the distribution of Bitcoin in the wallet. A payment channel is effectively set up.
Between the two parties, transactions are conducted with each activity signed and approved by both parties. An unlimited amount of transactions can be carried out without ever touching information stored on the blockchain as it is transacted off the chain. The balance sheet is constantly updated after each transaction and signing to reflect the true distribution in the wallet.
Note that the updated balance sheet not uploaded to the blockchain. When either party decides to close the channel, the final balance (determined by the most recently signed balance sheet) will be registered onto the blockchain network.
The network utilizes smart contract functionality to enable security.
With the lighting network, there is no need to transact directly with the party; one can send payment to the intended end user via channels with people you are connected. Essentially you are transacting via 'mutual friends' or nodes, and the network automatically finds the shortest route to process the transaction.
These nodes can only receive incoming payment if he has already sent the outgoing payment to the intended end user.
Bitcoin Lighting Network seeks to resolve the issue of scalability by providing the ability to transact off the Bitcoin chain. Lightning network is capable of handling millions to billions of transaction of seconds, allowing Bitcoin adoption to be scaled across millions of businesses and consumers.
Also, payment speed is almost instantaneous, with transactions ranging from miliseconds to seconds.
There is also increased privacy, as not all transaction is stored on the public blockchain. However, this is also a con if abused for illegal transactions.
Parties involved in a transaction have to be responsive. If one does not respond in a transaction, other parties involved would have to wait for potentially hours for a transaction to pass.
Nodes that act as intermediaries receive a small fee that are paid out every time a transaction is conducted through them. However, these nodes needs to be sufficiently rich enough to manage the different transactions that occur through them. A node with 10 BTC may not be able to handle hundreds of 0.1BTC transactions if they occur simultaneously. Hence Lightning network is not suitable for large payments.
The issue of legality comes in when nodes involved are essentially money transmitters or worse case, accomplices in a money laundering scheme. Lightning Network presents a huge compliance and legality issue which awaits to be resolved across nations worldwide.
Results (as of 1st July 2018)
Despite the growing popularity of the Lighting Network, results are not promising so far.
A report by cryptocurrency research firm Diar suggest that 100% success rate only occur for transactions of up to three cents. For sums larger than $5, there is a 50% chance of failure. However, there were criticisms with regards to Diar data set and methodology.
There are approximately 7,800 channels opened and over 2,500 nodes.
Tom and Jane deposits a certain amount (ideally equal amount) of money into a safebox and reports the distribution of money to the authorities. On a piece of paper, both Tom and John records and signs all transactions that occur between each other with the distribution of money in the safebox constantly being updated. At the end of the day, either Tom or Jane can decide to open the safebox and the money is distributed according to the last balance signed on the paper. The distribution of money in the safebox is once again reported to the authorities.