Bitcoin’s Lightning Network: what is it and how does it work?

lightning network bitcoin

What is it and how does Bitcoin’s Lightning Network work? A simple guide to the crypto queen’s second layer, created to improve the scalability of transactions on the Blockchain. 

Bitcoin’s Lightning Network: what is it and how does the second layer work?

Bitcoin’s Lightning Network was created for the purpose of improving the scalability of Blockchain transactions, becoming the second layer most widely accepted by the crypto community. 

In fact, the scalability of the Blockchain has been a major obstacle to mainstream cryptocurrency adoption from the start. That is why the second layer has become the solution. 

The Lighting Network intervenes by handling transactions outside the first-layer Blockchain mainnet, while still benefiting from the mainnet’s powerful decentralized security paradigm.

In practice, it enables off-chain transactions, meaning transactions between parties that are not part of the blockchain network, creating multiple payment channels between parties or BTC users, thus constituting the second layer. 

By stepping out of the official chain, Lightning Network can scale Bitcoin transactions per second (or TPS), charge lower fees, and enable new use cases such as micropayments. Not only that, the second layer would also reduce the energy costs associated with Bitcoin’s Blockchain. 

Bitcoin’s Lightning Network: the story of the layer 2

Thaddeus Dryja and Joseph Poon were the first two developers to propose “The Bitcoin Lightning Network,” in 2015, taking inspiration from the descriptions of payment channels made by Satoshi Nakamoto (creator of Bitcoin himself) published in 2013. 

In the paper, Dryja and Poon, in addition to describing the off-chain protocol for instant BTC payments, explained how the second layer was capable of increasing Bitcoin’s TPS, taking as an example the peak of 47,000 TPS reached by Visa in 2013. 

In this regard, in fact, Lightning Network’s off-chain payment channels were created to solve Bitcoin’s lack of scalability, as the channels allow for several smaller transactions without congesting the network.

Not only that, Dryja and Poon and other collaborators founded Lightning Labs in 2016, a company totally dedicated to the development of Lightning Network. After the soft fork of Bitcoin based on SegWit in 2017, pre-launch tests confirmed the possibility of creating applications on the Lightning Network, such as wallets and gambling platforms. 

In 2018, Lightning Labs finally launched a beta version of the Lightning Network implementation in the Bitcoin mainnet, involving public figures. And in fact, former Twitter CEO Jack Dorsey included Bitcoin’s Lightning Network as a tip payment on the social network in 2021. 

Peer-to-peer payment channel on Lightning Network

The Lightning Network (LN) protocol allows users to create a peer-to-peer payment channel between two parties. This channel, allows an unlimited amount of transactions, even micro-amounts, to be sent, almost instantaneously and inexpensively. 

Opening an LN channel requires the party to make the transaction to block a certain amount of BTC in the network. Only then, will it be possible to scale the quantities whenever a transaction is made to the counterparty. Within the channel, parties can transact with each other. 

Each channel is registered on the main Bitcoin blockchain, while transactions within it can take place off-chain, validated by Lightning Network nodes, thus registered in the LN ledger, and therefore without informing the main blockchain. 

The parties who open the LN channel, create a smart contract containing the codified rules of the agreement, which cannot be broken. The smart contract ensures automatic fulfillment of the predefined requirements already accepted by the parties. 

Bitcoin’s LN capacity: surpassed the record of 5,000 BTC

The capacity of Bitcoin’s Lightning Network is the number of BTC locked in the network. To be clear, this is the BTC used by parties opening their peer-to-peer payment channels. 

At the time of writing, Bitcoin’s Lightning Network has broken its new record, bringing the capacity above 5,000 BTC, the equivalent of nearly $99,000. 

“http://1ML.com observed: 17,865 nodes, 86,448 channels, 5,017.747 BTC capacity ($97,994,688), median node capacity: 0.005 BTC ($97.65). Past 24h:

+1 nodes +5 channels +0.260 BTC ($5,083).”

This is another 200 BTC locked in the Lightning Network compared to last month’s 4800, up from 4500 BTC two months ago. 

This means that the trend of LN usage is continuing to increase, and that these BTC can be used within the second layer, allowing for faster and cheaper transactions.

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