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Much progress is reactive#Lightning Network

May 10th, 2023 | Sunnio


The development of the Lightning Network can be traced back to the scalability challenges of the Bitcoin blockchain.

 

2015 The concept of the Lightning Network was first introduced by Joseph Poon and Thaddeus Dryja in their white paper Lightning Network: High Speed Bitcoin Transactions. They describe the use of a multi-signature based payment channel to enable high speed, low cost Bitcoin transactions.

2016 The first Lightning Network implementation was carried out by Joseph Poon and Thaddeus Dryja on the Bitcoin test network. They demonstrated fast, low-cost transactions over the Lightning Network.

2017 The Lightning Network is better supported with the activation of Segregated Witness for Bitcoin. Segregated Witness provides the necessary transaction structure for the Lightning Network and solves some of the technical challenges of the Lightning Network.

2018 A mainnet implementation of the Lightning Network begins to emerge and more and more developers and users begin to experiment with and use the Lightning Network. Multiple Lightning Network wallet applications, nodes and payment channels begin to emerge, providing easier access for users.

2019 Over time, the Lightning Network ecosystem grows. Transaction volumes and channel capacity continue to increase, while more commercial applications and innovations emerge. Some merchants begin to accept Lightning Network payments as an alternative to traditional payment methods.

2020 to date: The development of the Lightning Network is still a work in progress. The community continues to improve and optimise the Lightning Network’s technology, increasing mobility, improving the user experience and addressing challenges such as security and scalability. At the same time, the Lightning Network is exploring cross-chain interoperability, enabling it to enable lightning payments between different blockchains.


What is the Lightning Network?

The Lightning Network is a layer 2 scaling solution for Bitcoin and other cryptocurrencies. It is designed to address the scalability and transaction confirmation time delays faced by the Bitcoin network.


Bitcoin is a cryptocurrency based on blockchain technology and its transactions are confirmed and recorded through the blockchain network. However, due to Bitcoin’s block size and block confirmation time limitations, only a limited number of transactions can be processed per second, resulting in slow transactions and high transaction fees.

Lightning Network White Paper Author to Speak at Scaling Bitcoin Montreal Conference


The Lightning Network solves these problems by building a “lightning channel” network on top of the Bitcoin blockchain. Lightning channels are multi-signature-based smart contracts that allow two counterparties to create a payment channel on the blockchain and conduct fast, low-cost transactions on that channel without having to record each transaction on the blockchain. Only when the channel is closed is the final transaction result submitted to the blockchain for confirmation.


Realization Method
  • Lightning channel creation: The Lightning Network uses the concept of a payment channel, which is an offline transaction channel established directly between two parties. The channel is created by creating a multi-signed smart contract on the blockchain. This smart contract locks in a certain amount of money and requires the signatures of both parties in order for the transaction to take place.

  • offline processing of transactions: Once the lightning channel is established, transactions can be processed offline within the channel without each transaction being written to the blockchain. Both parties to a transaction can make multiple transactions within the channel, with only the final result being submitted to the blockchain at final settlement.

  • Tracking and updating of transactions: Transactions and balances in the trading channel are tracked and updated by both parties to the transaction. Each transaction updates the balance of both parties in the channel to reflect the latest transaction status. These updates are verified and protected by transaction signatures.

  • Settlement of transactions: When both parties to a transaction decide to close the lightning channel, the final transaction result is submitted to the blockchain for settlement. This settlement transaction contains the final distribution of the balance in the channel, returning the funds to the parties.

  • Routing and payment path selection: The effectiveness and availability of the Lightning Network relies on the ability to route and select payment paths. A payment path is the path that connects a payment initiator and a recipient through a series of lightning channels. The payment initiator can choose one or more channels to construct the payment path, ensuring that the payment is delivered smoothly to the destination address.

  • Multi-signature and security: The Lightning Network uses multi-signature technology to ensure the security of transactions. Multiple signatures require both signatures to validate a transaction in a channel, thus avoiding tampering with funds by malicious acts of a single party.

Why do we need the Lightning Network?

Lightning networks offer several important benefits and solutions that make them a highly sought-after technology in the blockchain world.

  • Scalability: One of the main challenges of blockchain technology is scalability, i.e. the ability to handle large numbers of transactions and increase network throughput. Lightning networks significantly increase the scalability of blockchains by removing most transactions from the main chain by conducting them on a lightning channel. This means that the Lightning Network can handle thousands or even millions of transactions without having to write every single transaction to the blockchain.

  • Low cost and fast transactions: Because transactions take place on the Lightning Channel, rather than each transaction being written to the blockchain, the Lightning Network enables low cost and fast transactions. Payments on the Lightning Network can be completed in almost real time and transaction fees are often very low, making micropayments and micropayments possible.

  • Decentralisation and security: The Lightning Network still maintains the decentralised nature of the blockchain. Although transactions take place between channels, they are still protected by the security and decentralised nature of the underlying blockchain. The Lightning Network uses multiple signature technology to ensure the security and trustworthiness of transactions.

  • Real-time transactions and instant payments: Traditional blockchain transactions need to wait for a certain amount of confirmation time before they are sufficiently secured. On the Lightning Network, on the other hand, transactions are almost instantaneous and take place between channels without waiting for blockchain confirmation. This makes real-time transactions and instant payments possible, providing a better user experience.

  • Micropayments and micro-payments: The Lightning Network makes micropayments and micro-payments a reality. With low transaction fees, the Lightning Network can handle very small payments, providing solutions for content payments, virtual economies and other micropayment scenarios.

Overall, the Lightning Network provides a fast, low-cost, secure and scalable payment solution by addressing the scalability, transaction latency and high fees of the blockchain. It provides the foundation for the widespread adoption of blockchain technology and creates more business opportunities and room for innovation for users and businesses.

What is the current status of the Lightning Network?

After El Salvador fiatized Bitcoin in 2021, the Lightning Network gained more adoption and the number of BTC in channels grew rapidly (see Figure 7). As of February 8, 2023, the Lightning Network had a total of 16,000 nodes, nearly 77,000 payment channels, and approximately 5,356 Bitcoins (approximately $124 million) in channel funds.


Number of BTC in the Lightning Network

The concentration of Lightning Network channels is mainly in the United States, Canada and Germany. The US alone accounts for 30.15% of the channels, while in Asia only Singapore has a relatively high percentage of channels (1.644%). Due to the minimal use of Lightning Network in Asia, there is a perception gap between East and West regarding Lightning Network.


Lightning Network nodes and channels worldwide

Application Scenario
  • Fast micro-payments: The Lightning Network allows for fast, low cost micro-payments by conducting transactions on a lightning channel. This is useful for scenarios such as everyday spending, micropayments and small transactions, eliminating the delays and high fees associated with traditional payment networks.


  • Cross-border payments: Lightning networks can also be used for cross-border payments, making cross-border remittances faster and cheaper. Because of the speed and low cost of transactions, Lightning Networks can provide a more efficient cross-border payment solution while reducing remittance costs and intermediary bank involvement.


  • Peer-to-peer payments: The decentralised nature of the Lightning Network makes peer-to-peer payments possible without the need for third-party intermediaries. This peer-to-peer payment model is suitable for a variety of scenarios, including payments between individuals, merchant collections and more.


  • Micro-tasking and content payment: The Lightning Network can be used for micro-tasking and content payment scenarios. Users can pay a small fee through the Lightning Network to access specific content or complete specific tasks, such as accessing paid articles, unlocking specific features, etc.


  • Games and virtual economies: Lightning Networks can support in-game virtual economies, making it easier and more efficient to trade items and virtual currency between players. This creates new economic opportunities for game developers and players alike.


  • Service and subscription payment: Lightning Network can support service and subscription payment models. Users can subscribe to specific services or content through the Lightning Network and pay for them on demand, enabling a more flexible subscription model.


Support for Lightning Network payment methods

It is important to note that the application scenarios for Lightning Network are still evolving and expanding, and more innovative applications are likely to emerge in the future. As the technology matures and user adoption increases, it is expected that Lightning Network will be useful in a wider range of areas.

Problems with the development of the Lightning Network
  • Usability and user experience: Despite the relative technical maturity of the Lightning Network, there is still a learning curve and complexity for the average user to use it. Users need to set up and manage lightning channels, as well as pay attention to security and backup measures. In addition, the usability of the Lightning Network’s applications and wallets could still be improved to provide a simpler, easier-to-use interface and functionality.

  • Network liquidity and routing: The effective operation of the Lightning Network requires sufficient liquidity and reliable routing. However, liquidity on the Lightning Network is currently relatively low, leading to the potential for some payment paths to be unreachable or illiquid. Addressing this issue requires a wider range of participants to join the Lightning Network, providing more liquidity and improving routing algorithms and strategies.

  • Security and risk management: As the Lightning Network is a second layer solution built on top of the blockchain, security and risk management are key issues. There may be a number of security vulnerabilities or attack vectors that could lead to the loss of funds or other undesirable consequences. Therefore, it is important to ensure the security, privacy and risk management of the Lightning Network, which requires continuous security audits and improvements.

  • Scale and scalability: As the Lightning Network grows and adoption increases, there is a need to ensure its scale and scalability. As the number of transactions on the Lightning Network increases, more channels and a better network topology will be required to handle large scale transactions. In addition, as more blockchain projects and cryptocurrencies support lightning networks, cross-chain interoperability solutions are also needed to enable lightning payments between different blockchains.

What is the future of lightning network development?

Wider adoption and user growth: Adoption of the Lightning Network is expected to continue to grow as the technical maturity of the network increases, the user experience improves and more applications and services become available to support it. More users will use the Lightning Network for fast, low-cost transactions and enjoy its benefits, which may include individual users, merchants, exchanges and financial institutions, among others.

Improving usability and user experience: Improving the user experience and simplifying usage will be a key direction in order to facilitate the widespread adoption of the Lightning Network. Wallet applications will offer a more intuitive and easy-to-use interface, while handling the setup and management of lightning channels becomes more automated and user-friendly. In addition, transaction speeds are likely to improve further as technology advances, making the Lightning Network payment experience even smoother and more instantaneous.

Increased liquidity and improved routing: To provide a better user experience and ensure payment reliability, the Lightning Network needs more liquidity and better routing solutions. Liquidity providers will provide more funds for lightning channels to support larger transactions. At the same time, routing algorithms and protocols will be improved to optimise the choice of payment paths and ensure reliable fund flows.

Cross-chain interoperability: Currently the Lightning Network is mainly used in the Bitcoin network, but other cryptocurrency projects are starting to support it. In the future, cross-chain interoperability will be an important development, making it possible to make lightning payments between different blockchains. This will increase the usability and flexibility of the Lightning Network and provide convenience to a wider range of cryptocurrency users.

Commercial applications and innovations: As the Lightning Network matures and becomes widely adopted, more commercial applications and innovations are expected to emerge. Lightning networks can support scenarios such as micropayments, peer-to-peer payments and real-time transactions, providing new business opportunities and solutions for a variety of industries and sectors. For example, Lightning Network can be used for payment real-time streaming, IoT device interconnection, in-game virtual economy, etc.

But we should all believe that perhaps one day the Lightning Network will be to Bitcoin what Visa is to money.

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