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Bitcoin on the Lightning Network

Segregated Witness (SegWit), a soft fork of the Bitcoin Blockchain implemented on August 24, 2017, was an update which effectively increased the bitcoin block size limit and allowed for the implementation of second-layer solutions for issues concerning scalability. One of these second layer additions to the Bitcoin blockchain is a payment protocol known as the Lightning Network (LN). Although its rollout picked up many critics (and maybe rightfully so), many of those same people are now commenting on the positive improvements being made as the Lightning Network matures. If progression on this track continues, the ability to send or receive bitcoin payments instantly could potentially solidify bitcoin as the go-to cryptocurrency to both store wealth and transact with.

Lightning Network data currently reports a total network capacity of $156,000 USD, which is up from $4,265 on March 15th (the date the Lightning Network Statistics began posting information), and the network currently has close to 2,000 active nodes and 6,132 channels. So what exactly is all the excitement behind this growth? A post on the Lightning Network blog may shed light on this as it attempts “to give the Bitcoin community and prospective Lightning users insight into what the end user experience of the Lightning Network will be like once the initial infrastructure components are complete” with the relatable character of the future named “Carol.”

The example goes as follows: After downloading the Lightning App, Carl would then send bitcoin to that wallet with a regular, on-chain payment. After the deposit has been confirmed, a system called Autopilot assumes the deposit and moves her funds into the Lightning Network. Although this process takes up to an hour to complete, it is a one-time only process which must take place initially in order to set up the Lightning App. Now on the network, Carol can make purchases in real-time without the need to wait for any number of minutes for a single confirmation. After picking out some items, Carol will use the Lightning-integrated point-of-sale- system from Rectangle, where a QR code is generated by the sales associate for Carols purchase. All Carol will need to do is open her Lightning App, scan the QR code, and confirm that the amount is correct. Within seconds, after pressing “confirm,” the transaction is complete with associated fees amounting to less than one cent. When funds on the Lightning App begin to run low, Carol would press “Add Funds” and enter the amount she would like to add, selects her exchange with Lightning support, and enters her account ID. A payment request is sent to the exchange, which will automatically issue a confirmation page on the exchange’s website/app. After confirming the transaction, the funds are instantly deducted from her exchange account and added to her Lightning App.

Mainstream adoption, especially for technological innovation, mandates that a users’ experience on the front-end must be seamless and the need to understand the underlying technology in order to use the product is kept as minimal a condition as possible. Most people, for example, could not explain how an internet connection is made possible; and yet those same people use it everyday. This is the goal of the Lightning Network, which is made clear with the case of Carol. Carol has to know nothing about the technology that underlies the Lightning Network in order to use it. As this example scenario moves closer to becoming a reality, the prospects of mainstream adoption, too, increases.

So what exactly is going on behind the scenes to make the Lightning Network function? The spine of the lIghtning Network is formed by payment channels. These direct channels allow for fast, low-cost transactions with the underlying security of the Bitcoin Blockchain. Within these payment channels are bitcoin smart contracts, with the primary type being a Hash Time Locked Contract (HTLC). These contracts allow for Lightning payments to be sent across multiple channels. Routing nodes, which are intended to be online at all times, are what connect and facilitate the sending of the payments between users. Should there be errors, such as a disruption in a payment channel, Watchtowers exists as a security mechanism which automatically handles the recovery process. Should a user want to send bitcoin from the Lightning Network to a merchant that is not yet Lightning-enabled, a process called Splicing is used which allows for this transaction to take place. Lastly, Atomic Multipath Payments (AMP) are used to  split large payment into multiple small payments, each of which is sent via a different route through the Lightning Network. The payment recipient will receive all payments at once and will accept or reject the payments as if it were a single payment.

Source: Lightning Network Blog

While the back-end may be technical and not easy to understand, the projected front-end user experience certainly poses to shake up the cryptocurrency market. Although the Lightning Network can be used as a secondary layer payment protocol on other blockchains, the fact that it can make instantaneous bitcoin payments will likely solidify bitcoin as the continued go-to digital currency well into the future; especially as many of these cryptocurrencies were created in order to solve a problem with bitcoin that the Lightning Network resolves. With the speed of the Lightning network and the security of the world’s largest blockchain, many of the arguments predicting the “end” of bitcoin will surely be put to rest as Lightning Network implementation continues to progress.