All in all, Bitcoin is notorious for its high fees and slow processing times. As a result, the base layer is rarely used for day-to-day transactions.

But what if I told you there was a solution? This is where the lightning network comes into play. This innovative scaling solution has been revolutionary in lowering fees and increasing transaction speed.

In this article, I will be providing a comprehensive explanation of the Bitcoin Lightning Network. So without further ado, let’s jump right in.

TL;DR:

The Bitcoin Lightning Network is a layer-two scaling solution for Bitcoin that enables lower fees and higher transaction speeds. This is done by moving transactions off-chain to reduce congestion. 

What is the Bitcoin Lightning Network?

The Bitcoin lightning network is a layer two protocol that facilitates fast and cheap transactions. Ultimately, it is a peer-to-peer scaling solution that enables micropayments.

In other words, it is a two-party payment system that enables payments off-chain. This reduces overall congestion by diverting traffic away from the main chain.

How does the Bitcoin Lightning Network work?

The Bitcoin Lightning Network works by facilitating off-chain payments. This provides the benefits of the decentralized nature of the layer one while simultaneously reducing congestion.

When two participants interact a payment channel is created with its own ledger. Once created it enables unlimited transactions with a fraction of the cost and vastly greater speed when compared to the base layer.

To create a lightning channel the “customer” or “payer” must lock their funds in a smart contract. Once locked the receiver invoices the specified amount.

Overall, Lightning channels are more private while also easing congestion by reducing trade volume on the main chain. Only the total value of the transfer is recorded, the transactions themselves are not broadcasted.

At any time, this channel can be closed with all the payments sent to each party. The transfer information is summarised as a single transaction and sent to the core chain for confirmation.

Pros

Speed – All in all, the Lightning Network can process around 1 million transactions per second (TPS). When compared to the 7 TPS of the Bitcoin core layer this is vastly superior.

Cost – transaction costs are currently 90%+ cheaper than Bitcoin on-chain fees. Currently, the lightning fees are just $0.0002.

Anonymity – all transactions on the lightning network are encrypted and anonymous. Only the total value transferred is recorded.

Facilitates scalability – as the Lightning Network diverts traffic from the main chain this helps scale the network. Congestion is reduced therefore fees and speed is improved on the main chain as there are fewer transactions for miners to validate.

Cons

No offline support – all in all, transactions have to be conducted online. If one of the participants in the channel is offline then this delays the settlement of payments.

Exploits – malicious actors can open several channels and force them to expire all at once. This can overload the block capacity and as a result, the funds contained are more susceptible to being stolen.

Fees – although the overall cost is lower than the main chain. It still requires transaction fees on the core Bitcoin blockchain to open and close channels. Moreover, there is a routing fee on the Lightning Network itself to transfer payments.

If you want to view this article in a more visual format then please check out my video below:

FAQ

How much Bitcoin is on the Lightning Network?

There is currently over 5000 Bitcoin held on the Lightning Network valued at over $70 million.

Is Bitcoin Lightning a coin?

Bitcoin Lightning is not a coin. It does not have a token rather it is a scaling solution for Bitcoin’s primary blockchain.

How do Bitcoin Lightning Networks make money?

Validators and nodes can earn money by forwarding transactions within the Lightning Network to other modes.

Conclusion

As you can see, the Lightning Network is a great alternative for Bitcoin transactions. Ultimately, it offers reduced fees and faster transaction speeds.

This is imperative for fulfilling Bitcoins’ vision of being a digital currency. Now participants can purchase goods and services for a fraction of a cent.

However, it is not without its challenges. From routing fees to exploits there are several factors that are hindering its adoption. That being said, as the technology continues to develop the network will only improve.

I hope you found this article useful and thanks for reading it. Want to learn about Bitcoin Mining? Click here to read my previous article.