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The Lightning Network

With so much talk about Bitcoin, it follows that there will be talk about The Lightning Network as well. In order to understand how the latter helps Bitcoin scale, we need to first understand what the Bitcoin Lighting Network is and how it works.

Understanding The Lightning Network 

The Lightning Network system is slated to be built on top of Bitcoin; it would allow people to instantaneously receive or send out payments. This helps reduce the transaction fees as they are kept off the system’s main network and helps Bitcoin become more useful as a regular use currency.

The Lightning Network- how it functions

As mentioned, The Lightning Network is a smart system contract that’s built on the Bitcoin blockchain base that allows for direct, cheap and speedy payments between two parties. In order that these fast and cheap transactions go through, the steps that have to be taken are:

  • A multi-signature wallet that holds a certain amount of bitcoin (this needs to be provided by at least one of the two parties) is set up.
  • This wallet’s address is saved to the standard public Bitcoin blockchain; it includes a balance sheet (with is the smart contract) and it proves what amount each person owns.
  • This is a one-time exercise; once this type of a payment channel has been set up, it becomes possible for these two people to carry out any number of transactions they want to without having to touch any of the information that’s stored on the Bitcoin
  • With every transaction, both these parties sign the balance sheet that has the updated information. This means they both have visibility of how much Bitcoin is stored in the multi-signature wallet and how much of it each person owns.
  • Both the parties get to keep a copy of this updated balance sheet and it isn’t uploaded to the main Bitcoin blockchain.
  • In case the payment channel is blocked or in the event of any dispute, both the parties are able to use the most current mutually-signed balance sheet to clear their share from the multi-signature wallet.

At first glance, this may sound a little complex and tedious, but the fact is that the end user doesn’t have to make any additional effort to conduct their lightning payments. All these things take place in the background via an automatic system.

The privacy aspect

The Lightning Network uses the payment channels in such a manner that the users are able to conduct their transactions directly with each other rather than advertising these to the rest of the Bitcoin users via the blockchain. Since both the parties are able to track the payments made via their transactions, it saves them a lot of time and money on interactions with the blockchain.

While The Lightning Network offers a number of benefits to users, it is highly scalable too. It has the capacity to handle literally billions of transactions every second across the network. This kind of capacity outruns all traditional payment rails by a significant number. In short, The Lightning Network will only help Bitcoin scale and become appealing to a larger number of users.

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