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The Lightning Network is a second layer built on top of the main blockchain, meaning that it is built separately to the Bitcoin network but interacts with it. The bottom line is that it allows for faster payments, with lower fees.
First, explain the basic concepts used in the Lightning Network:
Lightning Network is a payment protocol that interacts with the blockchain, representing itself as a network of nodes and bilateral payment channels.
Payment channels are specific, p2p connections, through which payments are processed. Through one channel, you can make an unlimited number of payments; the more payment channels are open, the wider the Lightning Network becomes.
Nodes are microprocessing servers that support the network and process payments. Anyone can create a node; it can be launched both on a powerful computer and a Raspberry Pi single board computer. The number of nodes is growing every month, allowing thousands of people from all over the globe to exchange blockchain assets at lightning speeds.
The main objectives of the Lightning Network are to accelerate Bitcoin transactions and reduce commission by using separate network interacting with the Bitcoin blockchain.
For easier understanding, here are some examples:
Imagine that you signed a contract with a freelancer stating that they will do the work for you, which involves creating four texts a month, for a total of 0.1 BTC (you agreed to pay 0.025 BTC every week).
How would you send bitcoin using a standard blockchain wallet?
1. Freelancer sends you their Bitcoin address;
2. You send a 0.025 BTC + network commission;
3. The transaction is confirmed by all nodes of the blockchain network;
4. The transaction is placed into a mempool;
5. From a mempool, the miner selects a transaction and includes it in the Bitcoin blockchain, and thus the funds are "credited" to the freelancer;
- The transaction takes place in the Bitcoin blockchain, which means all network nodes confirm it.
- The time between sending and receiving can span from several minutes to several hours.
- There may be high commissions if the network is loaded.
- The transaction is not anonymous and could be easily tracked.
How would you send bitcoin using Lightning Network?
To use the Lightning Network you need to top up your lightning wallet (how to do this you can read in our article — How to start using the Lightning Network?)
1. The freelancer sends a lightning invoice to 0.025 BTC, which they generate with their Lightning Wallet.
2. You pay the invoice of the freelancer, and the funds are instantly transferred to their account.
- Sending and receiving funds occurs instantly.
- Commissions are completely transparent.
- High transaction anonymity in the Lightning Network.
- The transaction occurs not on the Bitcoin blockchain, but on the Lightning Network, and is recorded on the blockchain only after the payment channel is closed.
- To use Lightning Network, an additional wallet or application is required.