In 2016, developers Thaddeus Dryja and Joseph Poon proposed a protocol called the Lightning Network that would allow faster and cheaper transactions without having to change the block size. The starting point was the problem that Bitcoin’s scalability had caused smaller transactions to clog up the blockchain. The Lightning Network was created to solve this problem.
Background of it all: Since each block on the Bitcoin blockchain takes an average of 10 minutes to process, only a limited number of transactions can be done simultaneously. That’s why, starting in 2016, Dryja and Poon developed a technology that could enable fast, low-cost transactions without having to change the block size. They called their idea the “Lightning Network.”
The Lightning Network creates a second layer on top of the Bitcoin blockchain that uses user-created micropayment channels to conduct transactions more efficiently. The speed advantage comes from not having to send these transactions to the entire network. And without miners needing an incentive, transaction fees are also either low or nonexistent.
Get off the highway
If Bitcoin’s blockchain is a highway full of cars, then the Lightning Network can be thought of as a series of parallel side roads used by smaller cars, reducing congestion on the main thoroughfare.
In practice, two transaction partners each set up their multi-signature wallet with a certain amount of Bitcoins. This requires more than one signature to complete a transaction. The wallet address is then stored on the Bitcoin blockchain, establishing the bidirectional payment channel. Now, both parties can conduct an unlimited number of transactions without tangentially affecting the information stored in the blockchain. Instead, for each transaction, both parties sign an updated balance of the amount of bitcoins still stored in the two walltes.
After the transaction is completed and the channel is closed, the consolidated balance is recorded in the blockchain. This ensures that in the event of a dispute, both parties will use the most recently signed balance to recover their share of the funds. The goal of the network is to allow users to make smaller payments without transaction fees or delays.
Bitcoin Lightning Network development status.
A beta version launched in 2018, but was far from fully operational. Since then, nodes on the Lightning Network have doubled year over year, already making significant progress toward Bitcoin’s goal of everyday viability. From January 2021 to January 2022, the network grew 8,321 nodes to 19,374 nodes, though this only includes public nodes. The total number of nodes is much higher if private connections were also included.
Still, despite all the cheering, the Lightning network still has some challenges to overcome if it is to solve Bitcoin’s scalability issues. First, there is the issue of security, as nodes must always be online, making them more vulnerable to attacks. The cost issue is also not yet solved, as processing fees of transactions on the Bitcoin main network are to be lowered, there are additional costs for opening and closing channels as well as for routing. So there is still work to be done here before the technology is optimized and ready for everyday use. We at Everlast Fund believe that while the Lightning Network will not be the solution to all of Bitcoin’s future challenges, it will play an important role in the future of BTC.