The wallet interacts with the blockchain network and locates your bitcoins for you. The blockchain is a ledger with parts of bitcoin stored in it. Because bitcoin are inputs and outputs of data, they are scattered throughout the blockchain in pieces because they have been used in previous transactions. The cryptography behind bitcoin is based on the SHA-256 algorithm designed by the U.
S. UU. Deciphering this is, for all intents and purposes, impossible, since there are more possible private keys that would have to be tested (225) than there are atoms in the universe (estimated to be between 1078 and 108).The Lightning Network is a second layer added to the Bitcoin (BTC) blockchain that allows off-chain transactions, that is, transactions between parties that are not on the blockchain network. Multiple payment channels between parties or users of Bitcoin make up the second layer.
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 the creation of a peer-to-peer payment channel between two parties, for example, between a customer and a coffee shop.
Once established, the 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 the Bitcoin is blocked, the recipient can bill the 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 the two parties decide to end the transaction, they can close the 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 the same time, simplifying them into a transaction that requires less time and effort for nodes to validate. Without payment channels, smaller transactions get in the way of larger ones, congesting the network and adding more for nodes to validate. For example, let's say Mike goes to a local coffee shop every day and wants to pay in Bitcoin.
You could choose to make a small transaction for each cup of coffee but due to Bitcoin's scalability issues; it may take more than an hour for it to validate. Mike will also have to pay high fees on top of it due to Bitcoin's network limitations; even though he's making small transactions. Small transactions work with traditional payment methods such as cards because companies like Visa have infrastructure capable of processing more than 24000 TPS; whereas Bitcoin on an average day can only validate seven TPS. With Lightning Network Mike can open up a payment channel with his local coffee shop; every purchase he makes will be recorded within that channel; allowing him to pay instantly with low or no fees at all; then when all his Bitcoins from that channel have been spent he can either choose to close it or refill it. When closing a channel all your transactions will be recorded on Bitcoin's mainnet; Lightning Network creates smart contracts between two parties; where rules of agreement are codified at creation time; ensuring contract performance is automatic since contracts are initially made with pre-established requirements agreed by all participating parties. Once those requirements are met such as when customer pays; both parties can close their channels; consolidating all their information into one transaction sent back into Bitcoin's mainnet for recording; simplifying dozens of small transactions into one requiring less time and effort from nodes validating it. Without payment channels smaller transactions get in way of larger ones congesting network adding more work for nodes validating them; for example if Mike wants buy coffee with crypto he could make small transaction but due its scalability issues it may take more than an hour validate plus he'll have pay high fees associated with Bitcoin Blockchain. With Lightning Network Mike can open up payment channel with his local coffee shop allowing him send unlimited number of almost instantaneous inexpensive transactions without affecting Bitcoin's network; plus when closing their channels both parties consolidate their information into one transaction sent back into mainnet simplifying dozens small transactions into one requiring less time effort from nodes validating it.