What Is Lightning Network? How Does It Work?

Author: Sohrab Khawas

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    Back in the year 2008, Satoshi Nakamoto invented a digital form of money ‘Bitcoin’ aiming to provide an alternative option for the fiat currency. Bitcoin was intended to solve the issues people face using fiat currency like low speed, high cost, etc.

    No doubt Bitcoin provided a better experience with effective cost but for the cross-border payments and failed as an instant payment. People were unable to pay bitcoins for a cup of coffee or a pizza instantly as VISA or Google Pay.

    Therefore, Lightning Network was laid down to fasten the transaction as the name suggests. It intends to resolve the scalability issue of Bitcoin, in simpler words, it increases the rate of transactions per second for Bitcoin.

    So, after having a brief idea about the lightning network, now let’s have a deep lookout.

    What Is Lightning Network?

    The Lightning Network is a layer 2 payment protocol, which adds another layer to the blockchain, where payment channels can be created between any two parties. These payment channels can exist for as long as required. This is because of the transaction between two people. Also, transactions will be quick and the fees will be extremely low or even non-existent.

    Creators of  Lightning network

    In 2015 Joseph Poon and Thaddeus Dryja,  first described in a white paper about Lightning Network. Currently, many top companies and their teams together are executing most of the work on the development of the Lightning Network: and by taking support from members of the Bitcoin community.

    How Does It Works?

    Let us understand the working of Lightning network with an example: Consider a person A and person B. As they are doing business with each other, they need to send money to each other very often. This implemenation takes palce too quickly and with minimal fees. Thus, they set up a channel on the Lightning Network.

    The first thing they need to do is to create a multi signature wallet, which can be accessed by both with their respective private keys. Then, both person A and person B deposit a certain amount of Bitcoin, i.e 2 BTC each into the wallet.

    Now consider, they have continuous transaction with each other. These transactions are nothing but reorganizing of the funds stored in the wallet.

    Now consider, person A sending 1 BTC to person B, he needs to transfer his ownership right to other person. For each transaction, they both need to sign an updated balance sheet using their private keys.

    The real distribution takes place after the channels are closed, when the result balance is registered on the blockchain. After the channel is closed, Person A will have 1 BTC and person B will get 3 BTC.

    If any dispute arises between both parties then they can refer the recently signed balance sheet to solve it.

    Once the technology is widely adopted, you don’t even need to set up a dedicated channel to send funds to a particular person. You can send payment to someone using channels with people who are already connected with you. Automatically, the system finds the shortest route.


    The Lightning Network system works on top of blockchain, but it doesn’t have its security on itself. Therefore it will be mostly useful for small or microscopic transactions. Hence, larger transactions will still be done on the original layer.

    Currently, work is going on another feature of the Lightning Network  i.e cross-chain atomic swaps, where tokens are transferred between different blockchains. It is similar to the way of swapping any given cryptocurrency to a different one without using cryptocurrency exchanges.

    Eventually, this feature might make centralized cryptocurrency exchanges trading obsolete. The first test was successful where tokens were exchanged between the Bitcoin and Litecoin test blockchains.

    Where It Is Now?

    It looks like the cryptocurrency community is eagerly waiting for the launch of the Lightning Network. Originally, designed for Bitcoin, the technology is now currently available for various other cryptocurrencies as well , such as Stellar, Litecoin, Zcash, Ether and Ripple.

    However, the network is still very much in its early stage. Still, there is no software with which real users of the network can make transactions. Besides, the current implementations still needs improvements.

    Lightning Network developers have asked users to learn about the network using Bitcoin’s testnet and not to send any real money. But many Tech geeks and platforms are testing this network by transferring money.

    Lightning labs, which is a Blockchain development company, recently announced that it has released the first alpha version of its Lightning Network client for the main bitcoin network.

    Considering, the code complexity and its rigorous testing, developers are asking users to have patience. Because, lightning implementation at scale until SegWit grows at large.

    How vast is the Lightning Network platform?

    Lightning networks are widespread across the globe. Each node around the world is connected to the lightning Network. Therefore, if you need to send any payment to any node within the network regardless whether you are connected to that node or not, the network finds a way out to reach that node.

    The Future of Lightning Network

    Cryptocurrencies are widely adopted by many and moreover, blockchain has been accepted within the majority of sectors. Therefore, the fast and secure payments platform plays a very vital role for mass adoption.

    In these years the crypto space has seen the birth of forks like Bitcoin Cash, Bitcoin Gold, etc which were built in order to address the scalability issue of Bitcoin. However, with the emergence of a strong and secure lightning network, there could be a break on developing many more forks of Bitcoin. 


    We see lightning network as a system to solve most of the Bitcoin trading problems. But, if you’re still a normal user, then we suggest you, to just wait and see whether the lightning network is really going far and whether it’s safe.

    For your information, the Lightning Network is not the only scaling technique out there, and it’s by no means an undisputed leader. There are also many like its main rival, BCH.

    But, if you consider Bitcoin as an alternative form of payment, then Lightning Network, will play an important role, if it lives up to the hype. Quick micropayments, anonymity and almost non-existent fees really looks like to solve most of the Bitcoin’s problems.


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