The Lightning Network is a second layer added to the Bitcoin (BTC) blockchain that enables off-chain transactions, i.e. transactions between parties that are not on the blockchain network. Multiple payment channels between parties or users of Bitcoin form the second layer. A Lightning Network channel is a two-party method of transaction that allows parties to make or receive payments from each other. It improves the scalability of blockchain applications by managing transactions outside the main blockchain network while benefiting from the powerful decentralized security paradigm of the main network.
How does a lightning network work?
This protocol enables the establishment of a peer-to-peer payment channel between two parties, such as, between a customer and a coffee shop. Once that channel is set up, they can send an unlimited number of transactions that are almost instant and inexpensive. It works as its own little ledger so users can pay for even smaller goods and services like coffee without affecting the bitcoin network. To create a payment channel, the payer has to block a certain amount of Bitcoin in the network.
By using a Lightning Network channel, both parties can do business with each other. In contrast to normal transactions on the Bitcoin blockchain, some transactions are handled differently. For example, when two parties open and close a channel, they only update on the main blockchain channel.
The two parties can transfer funds between them indefinitely without notifying the main blockchain. Since not all transactions within a blockchain have to be approved by all nodes, this strategy speeds up transaction times considerably. By combining individual payment channels between those involved. Therefore, the Lightning Network is the result of many interconnected payment systems. When the two parties finally decide to finalize the transaction, they can close the channel, combined into one transaction that is sent to the main Bitcoin network for recording.
The Future of the Lightning Network
Fortunately for the Lightning Network, the adoption of this network is growing. Bitcoin worth more than 110 million US dollars is locked on the Lightning Network. These can be used by people to pay for goods and services, use apps, gambling, and more.