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What is Lightning Network? Explained

With the usage of Lightning Network, an extra layer to the Bitcoin blockchain is added, and users can create payment channels between two people on that layer.

Photo by Quantitatives / Unsplash

Bitcoin was introduced to the world by the pseudonymous Satoshi Nakamoto with the hope that one day it would be able to obviate the usage of fiat currencies. The creators of Bitcoin didn’t realize that it wouldn’t be a cakewalk to replace the traditional money that people were used to seeing, or to say the least, they didn’t give enough thought to how they would scale their revolutionary creation into the market.

Being one of the veterans of the cryptocurrency business, Bitcoin has been around for more than ten years and has tasted success in achieving some extraordinary feats. Though grave allegations have been made by many experts time and again that it is akin to a Ponzi scheme and the amount of energy being splurged in mining Bitcoins is way too high to be deemed as feasible, it has continuously been achieving ATH (all-time high) figures compared to fiat currencies now and then. To say the least, the superannuated cryptocurrency is one of its industry's primary, if not the paramount, hotshots. That said, there’s still a long way to go for it to be deemed a global currency.

Today, we will discuss the major impediment that Bitcoin and other cryptocurrencies in the world have faced ever since their inception, i.e., the long-standing scalability issue. Throughout its tenure, Bitcoin has only been able to process at a rate of seven transactions per second. While it was a considerable number in the rudimentary phases, it is not good enough because it was created to conquer global transactions with the unique peer-to-peer transaction ideology in a decentralized system.

The transactions system has been congested for quite a while now, posing huge risks to the growth of the cryptocurrency. It goes without saying that if cryptocurrency wants to replace existing payment systems, it needs to be better than them. But that is not the case as of now, as Bitcoins puny seven transactions per second are nowhere close to defeating Visa’s average 24,000, with its peak capacity reaching 50,000.

A lot of contemplation has already happened within the Bitcoin community, but a concrete solution to the scalability issue is yet to be finalized. One of the forerunners as the possible solution to this problem, which is still under testing, is the Lightning Network.

Explanation of the Lightning Network:

As of now, the Bitcoin platform is keeping track of every transaction on the blockchain, which is the reason behind the slow transactions. At one stage or the other, it was obvious that someone would be tempted to preempt these tracks of transactions, thereby speeding up the process.

These channels would be eternal, and as the channel is being set up between only two people, the transactions would go through almost instantaneously. Also, the transaction charges would be really low, or there could be no charges.

Modus operandi of the Lightning Network:

Since most people have their transactions limited to a few people who they transact with more frequently, this technology would come in handy and would be advantageous for them. Say, for example, Kelly and Morgan want to send money to each other with minimal effort & charges, and they wish to achieve this swiftly without getting into the network congestion hassle. To achieve this, they need to create a payment channel on the Lightning Network.

The wallet we’ve just referred to needs to be a multisignature wallet to ensure that both of them can access it via their respective private keys. This concept is similar to the working of shared mailboxes, wherein two or more users can see the contents of the shared mailbox and perform disparate functions accordingly within/with the use of the mailbox. Once the wallet has been set up, they can both deposit a certain amount of Bitcoins into the wallet, say, 4 BTC each.

They can now proceed with transacting with each other using the wallet. Now, the point to note here is that all the transactions made within/using the wallet are, essentially, just the re-allotment of the funds within the wallet. To put things into perspective, if Kelly wants to send some money to Morgan, say, 2 BTC, she’ll have to do that by transferring the ownership rights of the said amount to Morgan. Also, once the transfer has been done, they can sign into the wallet to see the updated balance sheet (it will reflect all the transfers made, including the recent one).

Here’s the catch, the actual redeployment of the funds would occur only after the channel’s closed. Let us consider a situation in which the channels closed, provided the last and only transaction made was the one that included Kelly giving out 2 BTC to Morgan. If that happens, Morgan will get 6 BTC (4 that he had + 2 BTC received from Kelly), and Kelly will get only 2 BTC.

So, now the question arises, will the history of transactions within that channel between the people show up anywhere on the main blockchain layer? The answer is both a yes and no. Here’s the explanation for this. Once the channel is terminated, only the initial and the final balance is broadcasted to the Bitcoin blockchain, not the entire number of transactions (only 1 in the above example shared) that led to the eventual balance sheet you see.

Another enthralling aspect of the Lightning Network is that once it gets streamlined and adopted across different cryptocurrency platforms, you won’t necessarily have to create different wallets for different individuals to send your cryptocurrency. That being said, you would be able to make payments using the existing wallets to different individuals (with those individuals not being a part of that wallet originally). And that would be entirely possible because the system would find the swiftest route on its own to initiate the transaction in question.

What a life-saver that would be for Bitcoin and other cryptocurrencies! This could well be the turning point the cryptocurrency world was looking for, as such fast transactions would ease out otherwise convoluted transactions and with no additional compensation for transactions at all.

Like there are two faces to a coin, with huge merits of the Lightning Network technology, challenges lie ahead for adopting the technology. Some of which are discussed below.

  • The first and foremost challenge for the Lightning Network to take over would be to ensure the security of the transactions. Since the principle of the technology warrants it to work above the blockchain and create an additional layer to facilitate payments, it no longer would have the original layer of security it had earlier. Currently, the only recourse that the Bitcoin community is coming up with for security concerns is limiting this technology to smaller transactions. This infers that the big cryptocurrency transactions would still be happening on the original blockchain layer.
  • Another conundrum in its adoption is that it’s still a “work in progress,” so the chances of other better options coming to solve the scalability issue are high. The Lightning Network, to stamp its authority, needs to corroborate its feasibility and reliability to the Bitcoin community. Bitcoin Cash (BCH) is one of the front-runners in the list to pip the Lightning Network.

As per the tests being conducted, one of the riveting things that came up is that the Lightning Network is capable of supporting cross-chain atomic swaps, which is a transfer of tokens between different blockchains. So, one would be able to trade one cryptocurrency for the other without having to go through the cryptocurrency exchanges. The initial tests of exchanging tokens between the Bitcoin and Litecoin test blockchains have been quite successful, raising some serious expectations about the Lightning technology.

Who developed Lightning Network technology?

The technology's white paper description was released in 2015 by Joseph Poon and Thaddeus Dryja – the current version of the paper can be seen here. The three teams who are responsible for most of the work about the development of implementations of Lightning Network that are currently working on their respective implementations of the Lightning Network written in different programming languages are as follows:

  1. Blockstream- It works on the Lightning Network version programmed in C language.
  2. Lightning Labs- They are developing a Lightning Network Daemon (lnd) written in Golang.
  3. ACINQ- This startup accounts for the Scala implementation of the technology.

There are some other implementations too, which are in the development stage. The startups listed above work rigorously to get the best of the technology. Also, all three implementations work together, exuding some great interoperability.

Answering the essential W’s for this technology:

We shall now move forward to answering why, when, and where this technology would find its application. The technology was meant for Bitcoin only originally. Still, with the problem of scalability rising for almost every cryptocurrency, it was always on the cards that the Lightning implementations must also be developed for other cryptocurrencies such as Litecoin, Zcash, Ether, etc., and that’s what happened.

The developments of implementations for other cryptos are going on, and they’re expected to come up well in the not-so-distant future. With real Bitcoin being sent and received almost every time using the three implementations, the interoperability of the implementations seems impeccable, at least as of now.

However, there’s no real software for the real-life users to make the transactions using this technology owing to the technology developments still being in the nascent stages. The mainstream release of the technology is being procrastinated because the developers already admit to the complexity of the code used. Plus, the current implementations are quite buggy and aren’t that safe to be used just as of now.

The users have already been advised to learn about the network using Bitcoin’s testnet and not send any real Bitcoins. The test environment would help users to get acquainted and well-versed with the systems and procedures of the technology and would do a world of good to their knowledge about the network.

There’s no denying the fact that the cryptocurrency world is eagerly waiting for the new technology to be unveiled and functional ASAP. However, the developers prognosticate that there’s still time before the technology can be completely adopted, ranging from some months to a couple of years. This is because some rigorous tests are being conducted frequently to gauge the entire technology’s shortcomings and how to better them.

This technology will be used if it solves the fundamental problem of scalability. It would be well received and adopted across different cryptocurrency platforms if it proved a vital countermeasure to the scalability issue. If it indeed gets accepted across sundry cryptocurrency platforms, chances are high that the cross-chain atomic swap technology would be developed further, and the testings for that would augment. This would mean embarking upon building truly decentralized cryptocurrency exchanges.

Merits of Lightning Network

We are enumerating some of the pros associated with the Lightning Network. With that being said, it needs to be reiterated here that the technology is still a work in progress, and nobody can tell with a great degree of certitude that it will work ideally as the team of developers intends it to. If everything goes right, below are some of the perks that you would enjoy with the technology being in place:

1. Speed of transactions:

It is one of the primary reasons why the technology was put forward in the first place, i.e., augmentation of the speed of the transactions and removal of delay. So, once the technology is full-fledged or completely established, the payments would be almost instantaneous irrespective of the state of the queue of transactions.

This would enable the cryptocurrency platforms to be more user-friendly and feasible. Furthermore, it would help cryptocurrency platforms to compete with traditional platforms like Visa, and PayPal, or perhaps, if everything goes well, beat them.

2. Transaction fees:

This could be one of the best brighter aspects of this technology. As you’re doing the transactions within the Lightning Network channels and outside the blockchain, you’ll have to pay the least amount as fees, if any. This is because there are fewer channels to go through for your transactions to be verified, so there would be less or no charge.

The relaxation you’d get on transaction fees using the Lightning technology could be revolutionary and may result in true globalization of the cryptocurrency. This would mean you could use it easily for making payments in shops, cafes, bars, and everywhere else.

3. Scalability:

The Lightning Network is expected to take the transactions per second figure of major cryptocurrencies to at least a whopping 1 million! If it can achieve that, it could well be the red-letter day in the history of cryptocurrencies.

4. Cross-chain atomic swaps:

It would be able to facilitate a smooth transfer of one cryptocurrency token into another’s blockchain without depending upon any third-party mediating authority such as an exchange. The only condition for the cross-chain atomic swap is that the two blockchains in question must have the same cryptographic hash function, and luckily, most major ones do have it.

5. Security and anonymity:

All the transactions taking place for Bitcoin and most cryptocurrencies are on the blockchain, making almost all the payments made from within the wallets traceable. Thus, the security and anonymity of the payments get compromised. With the Lightning Network, the payments are occurring outside of the blockchain, so it would be difficult to trace the small transactions within the wallets.

Demerits of Lightning Network

Well, there’s nothing with certitude we can say about the demerits or merits of the technology as it isn’t functional as of now, and we are just extrapolating how things might work when it’s (the Lightning Network technology) around. Though, there’s a great chance that all the enlisted pros and cons might just unravel or undergo metamorphosis as mere speculations once it is life. Below could be some of the cons of Lightning Network.

1. Non-operational:

The true test of the technology’s efficiency of speedy processing payments would only be done once it’s there in practice, which the Lightning Network is sadly not at the moment. All the information we have available is only speculative. Thus, we can’t jump to a straight conclusion about how well the technology would be.

2. The complexity of the channels:

The seamless transactions are based on the Lightning Network channels’ efficiency. However, it has still not been properly documented what happens if a transaction has to be verified by following an intricate route. The general idea suggests that if the transaction has to go through a series of secondary channels, the associated transaction fee would only rise.


It remains to be seen whether the Lightning Network proves to be the answer to the scalability quandary of Bitcoin, but it appears to be an exciting prospect nonetheless. The Lightning technology shows immense promise of processing seamless micropayments with little to no transaction fees, thereby helping in the globalization of cryptocurrency. It is safe to assume that if it performs as per the claims & expectations, it would be the answer to the questions Bitcoin’s problems were looking for.