By using the Lightning Network, millions of people can send fractions of Bitcoin at instant speed, at the same time. Lightning Network is a network of payment channels; each channel is opened with a transaction on the Bitcoin blockchain. It is a layer 2 (or secondary layer) that runs on the Bitcoin blockchain, allowing faster payments in Bitcoin by processing transactions outside the main blockchain, while maintaining the same decentralization and security. A Lightning Network channel is a two-party transaction method in which parties can make or receive payments from each other.
Layer two enhances the scalability of blockchain applications by managing transactions outside the blockchain backbone (layer one), while benefiting from the powerful decentralized security paradigm of the backbone. Scalability is a major barrier that restricts the widespread adoption of cryptocurrencies. If scaled correctly, a blockchain network can handle millions to billions of transactions per second (TPS). In this context, Lightning Network charges low fees when transacting and settling off-chain, enabling new use cases such as instant micropayments that can solve the traditional conundrum of “can you buy coffee with crypto?” , accelerating processing times and reducing expenses (energy costs) associated with Bitcoin Blockchain. However, while the intention is there, the Lightning Network still struggles to solve the problem and even presents several problems, such as low routing fees and malicious attacks.
For example, a small commission is required to open and close a payment channel. In addition to these small fees, there are routing fees that go to nodes that are validating transactions. The clear answer is that miners don't usually validate smaller transactions, as they will earn lower fees for validating negligible transactions. As a result, operators pay a routing fee and may have to wait long before the transaction is validated. As for malicious attacks, a bad actor could start several pay channels and close them all at once.
Then, those channels need to be validated, which stands in the way of legitimate ones, congesting the network. During congestion, the attacker could withdraw funds before the legitimate parties are aware of the situation. Due to pre-launch testing, developers would be able to create apps on Lightning Network immediately. Applications included simple use cases such as wallets and gaming platforms that harnessed the power of Lightning Network microtransactions. This protocol allows for the creation of a peer-to-peer payment channel between two parties, for example between a customer and a coffee shop.
Once established, this channel allows them to send an unlimited number of transactions that are almost instantaneous and inexpensive. It acts as its own ledger for users to pay for even smaller goods and services such as coffee without affecting the Bitcoin network. To create a payment channel, the payer must block a certain amount of Bitcoin on the network. Once this Bitcoin is blocked, the recipient can bill amounts as they see fit. If the customer wants to keep the channel open they can choose to add Bitcoin consistently. By using a Lightning Network channel both parties can transact with each other.
Unlike ordinary transactions on the Bitcoin blockchain some transactions are handled differently. For example when two parties open and close a channel they are only updated on the main blockchain. The two parties can transfer funds to each other indefinitely without notifying the main blockchain. Because all transactions within a blockchain do not need to be approved by all nodes this strategy substantially speeds up transaction times. Lightning Network nodes capable of routing transactions are formed by combining individual payment channels between stakeholders.
Therefore Lightning Network is the result of linking many payment systems. Finally when two parties decide to end their transaction they can close their channel. All channel information is consolidated into one transaction which is sent to the Bitcoin mainnet for recording. Consolidation ensures that dozens of small transactions send spam to the network at once simplifying them into one transaction that requires less time and effort for nodes to validate. Without payment channels smaller transactions get in way of larger ones congesting network and adding more for nodes to validate. For example let's say Mike goes to local coffee shop every day and wants to pay in Bitcoin.
You could choose make small transaction for each cup of coffee but due to Bitcoin's scalability issues transaction may take more than an hour validate. Mike will also have pay high fees of Bitcoin network even though he making small transaction. Small transactions work with traditional payment methods such as card because companies like Visa have infrastructure process more than 24000 TPS. On contrary Bitcoin on normal day can validate seven TPS. With Lightning Network Mike can open payment channel with coffee shop. Every coffee purchase recorded within that channel and store continues receive payment.
Transaction cheap or even free as well as instant. Then when Bitcoin that started channel spent Mike can choose close channel or refill it. When channel closed all your transactions will be recorded on main Bitcoin blockchain. Lightning Network creates smart contract between two parties rules agreement codified contract time creation cannot broken. Smart contract code also ensures contract performance automatic since contracts initially made pre-established requirements all participating parties agree. Once those requirements met such when customer pays right amount for coffee contract automatically honored without involvement third parties. Lightning Network anonymizes transactions within payment channel once validated all...