Apr 10, 2023

How Is The Lightning Network Transforming How People Move Bitcoin?

Bitcoin was first explained in a white paper written by Satoshi Nakamoto in 2008 called "Bitcoin: A Peer-to-Peer Electronic Cash System." According to the title, this paper proposes a protocol for making electronic cash without intermediaries. Bitcoin's first block was mined in January 2009 after months of waiting.

The Bitcoin network was limited to 32MB at first. A 1MB block size limit was set to prevent network spamming and exponential blockchain growth. The Bitcoin network has seen significant growth and gone through tumultuous times with some  disagreements. 

Even though Bitcoin is decentralized and secure, it has some drawbacks, like its small block size and long block time. The Bitcoin blockchain's low transaction capacity makes large-scale Bitcoin payments challenging. In practice, Bitcoin's blockchain can process seven transactions per second, and as a comparison in 2021, Visa processed 5,200 transactions per second on average.

Payment confirmation also takes some time on the Bitcoin network. Each block is mined every ten minutes, and a transaction is confirmed after appearing in a number of mined blocks. A limited amount of space allows transactions to compete for inclusion in blocks. It is in the miners' interest to maximize their income by selecting transactions that will give them the highest fee.

Payments using the Lightning Network are instant and large in number

The Lightning Network solves the problem of limited bitcoin throughput on the blockchain and drastically reduces transaction fees for small payments. The Lightning Network lets millions of people send fractions of bitcoin simultaneously at lightning speeds.  So, how does the bitcoin Lightning Network actually work? The Lightning Network consists of payment channels that are opened with Bitcoin transactions. Channels let two counterparties resign updated bitcoin transactions, redistributing the value of the opening blockchain transaction.

Lightning Network doesn't broadcast updated bitcoin transactions to the blockchain, so they don't consume block space or pay miners. The updated transactions can still be broadcast to the Bitcoin blockchain as valid transactions.

People relay payments to each other without a direct connection to a payment channel, so network components come into play. Whenever you're connected to someone connected to the recipient, you can send your payment off-chain through all channels along the route, signing updated and valid Bitcoin transactions. Lightning Network usage is rapidly increasing. 

Lightning is crucial to fulfilling Satoshi Nakamoto's original vision

The Bitcoin white paper proposes creating a payment network without trust or intermediaries. There's no mention in the white paper that Bitcoin is meant to be a high-return investment vehicle that eventually outcompetes other forms of money and swallows their value. However, most bitcoin "users" are motivated by a version of the latter.

There's so much demand for Bitcoin transactions in the current market that fees are unreasonably high, even for transactions without instant confirmation. The Lightning Network not only allows for more transactions and faster transactions, but it also makes bitcoin payments more affordable.  Bitcoin's original vision was to become a payment option with small blocks and long block times, which is why the Lightning Network is essential.

What Is The Lightning Network, And Why Is It Important?
The Lightning Network is a network of computers that lets people transfer their bitcoin more quickly, and with much lower fees.
What Is A Lightning Network Channel?
A Lightning Network channel is a two-way connection between two parties that enables them to exchange funds.
What Does The Lightning Network Do?
The Lightning Network has the potential to improve the usability and scalability of Bitcoin.