“Bitcoin makes all banks look ridiculous!” This is a sentence I hear too often! Indeed, there are still many steps take before convincing our people to replace traditional currencies in order to benefit from the advantages of the blockchain. Indeed, the network is confronted with several limitations and today we will focus on one size limitation, I named scalability, the ability to use the blockchain network on a large scale. Without the possibility of making the Bitcoin usable by several thousand people simultaneously, the advantages of the blockchain are non-existent. In other words, the hardest work still needs to be done because the capacity to process banking transactions managed by visas has reached 50,000 peacefully. Concerning bitcoin, we are talking about 7 transactions per second and the number of transactions waiting to be processed is exploding as the enthusiasm around this technology increases. The solution designed to solve this problem is called the Lightning Network.
What is the Lightning Network?
It is a kind of network that overlaps with the Bitcoin network, which would make it possible to pay in pairs without transaction fees, at the rate of several hundred thousand transactions per second. In this case, transactions are made outside the blockchain.
How does the Lightning Network work?
The scripting language of Bitcoin is used to program intelligent contracts on which bidirectional payment channels will be based. This two-way channel should be considered as a tunnel with a safe in the middle of the road. In this tunnel, the buyer and seller must meet to engage a part of their fund as a signature in order to formalize the opening of the payment tunnel and ensure the next transaction is successful.
To explain more simply how it works, let’s say I want to pay a service to my friend Florian. To do this, we will both put into escrow an amount greater than the amount of the transaction as a guarantee. This money guarantees that there will be a transaction. Indeed, in the event that a person wishes to cheat by not honouring his requested transaction, he would take the risk of being penalized by losing all the funds committed.
Once the payment channel has been formed, both parties are free to proceed with any transaction agreement within the limit of the number of Bitcoin they have in their possession. This means that the bitcoins are not deducted directly from the accounts.
The payment channel remains open for the desired time and can be closed when both parties reach an agreement. We will not be able to recover all the money, i.e. our guarantee followed by the transactions carried out only when the payment channel is closed. Thus, the final balance of the parties will be credited according to the transactions previously carried out.
What software is used?
The number of companies developing the Lightning protocol implementation software can be counted on the fingers of one hand and look like the following ones:
lnd which is developed by Lightning Labs.
c-lightning which is supported by Blockstream.
Éclair which is developed by the French start-up ACINQ.
What about the protocol?
Following the deployment on the Bitcoin network during the “Segwit” update in March 2018, the Lightning protocol is still in the BETA test phase.
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Currently there are more than 25,000 payment channels for more than 3200 nodes and 665 BTCs.
Advantages and disadvantages of using Lightning
Transaction costs: being carried out outside the blockchain, transaction costs are considerably reduced. Transaction fees would only finance the opening and closing of the payment channel.
Increased transaction speed: While verification of a transaction through Bitcoin takes ten minutes after six verifications, the Lightning Network would allow payment to be made instantly and independently of the network’s transaction volume. This would initially allow us to compete with market giants such as VISA for example.
Scalability improvement: The protocol would theoretically handle up to one million transactions per second, 20 times the theoretical capacity of VISA. This is a key factor in the massive adoption of crypto-currencies.
Anonymity: Since transactions are carried out in OFF chain, exchanges that take place using these different channels are almost impossible to trace.
Technology in need of maturity: As long as the protocol is in the test phase, it is still difficult to see the theoretical advantages that can be drawn from this technology. Many technologies offer fast, secure and free payment methods. As a result, the road to success is still full of pitfalls for Bitcoin.
Payment Limit: Each payment channel has a maximum authorized amount that can be placed in a “common safe”. This greatly reduces the target of future users because they will not be able to transfer more money than they want.
Strengthening of centralization: The way intermediaries are selected is called routing. Each payment will take a route from participant to participant until it reaches its recipient. The routing algorithm is struggling to find the optimal route for transactions. As a result, these often obstructed roads contribute to the weakening of the network. This does not correspond to the very ideology of the blockchain whose goal is the decentralization of all information
Plausible increase in costs: The last disadvantage is not related to the Lightning network itself, but to transaction costs on the main chain: if Bitcoin were massively adopted and the size of the blocks were not increased, there would be a record increase in costs, if only to open and close a payment channel. This is a rather serious problem when you know that you can be forced to close (non-consensually) a channel at any time.
A word from the CIA
Although the protocol is still in the test phase, the development of Lighting seems to be bearing fruit. Indeed, the number of payment channel networks and their reliability is constantly increasing. However, if you would like to test the Lightning Network, I advise you to take precautions and make small transactions first. Scalability being a major problem for the massive use of bitcoin, lightning will decongest the Bitcoin network. This bodes well for the cryptocurrency ecosystem. To be continued…