Lightning Network and Blockchains as Alternative Payments

Lightning Network and Blockchains as Alternative Payments

BELDEX-Lightning Network 101

The lightning network has been making quite the uproar within the Bitcoin community and people cannot wait to get their hands on it. In fact, a lot of people have begun adopting the lightning network. How much though? 

According to 1ML, the website that gives real-time status about the Lightning Network (LN), currently, there are approximately 11,246 nodes that support the network. At press time, the number of channels over the network was 35,999 which support a transaction capacity of 880.48 BTC or $8.2 Million. In the last 24 hours alone, 28 new nodes were added to the network. Basically, the Lighting Network is growing and fast. 

But wait. . .

What is the Lightning Network? 

The Lightning Network is a second-layer protocol that operates atop the Bitcoin blockchain. It is a proposed off-chain solution to one of Bitcoin’s long-time problems: Scalability. 

It makes the Bitcoin Core protocol scale to modern-day payment systems such as Visa, PayPal and MasterCard. The Lightning Network achieves this by opening a peer-to-peer two-way channel over Bitcoin’s network, where the channel participants can transact without having to wait for confirmation. The participants can make ‘n’ number of transactions before closing the channel. The final output is broadcast as one single transaction to the Bitcoin network. The network’s hash rate remains largely unused during the off-chain transactions, aiding scalability. 

This leads us to another important question. . .

What is scalability and why is it important?

Scalability of a decentralized network refers to its ability to function effectively under increasing load. A scalable network must be able to handle stress induced on it regardless of the size of requests that it gets. 

The Bitcoin blockchain can handle 7 transactions per second (post-SegWit) at its utmost capacity, which was well and fine as long as the network didn’t expand. But it eventually did, and its minimal capacity couldn’t cope with the surmounting transaction requests, resulting in congestion. A simple Bitcoin transaction today takes anywhere between 10 minutes to one hour or even a day depending on the load on the network and the transaction fee. The Bitcoin block size is still 1 Mb and if over 90% of the block is filled, then no one can prevent the network from clogging. 

The graph below shows the number of transactions the Bitcoin network handled on the 29th of January 2020 – 340,562 – on an average, that’s 3.94 TPS. The highest it processed was 439,549 txns on the 1st of May 2019 (5.08 TPS approx).

 

Bitcoin Txns on January 29, 2020.

Bitcoin Txns on January 29 2020

 

Even Ethereum, the second most popular blockchain only processed 583,358 txns on the 31st of January 2020 (6.75 TPS approx). These figures confirm the need for the Lightning Network.

 

Ethereum Txns on January 31, 2020.

Ethereum Txns on January 31 2020

 

This is by and far, lower than the maximum of 65,000 TPS Visa claims that it can handle (as of 2017). But realistically speaking, Visa’s current capacity is around 1,736 TPS. This value is obtained from Visa’s claim of handling 150 million transactions every day. But this figure keeps changing from time to time and there is no other independent, secondary source that can attest to it. 

However, the lightning network helps Bitcoin’s scalability. Theoretically, it is predicted that the transaction per second volume would shoot from a mere 7 to over 1 million. Even if it doesn’t reach that mark, the off-chain protocol should allow crypto networks to compete with the existing fiat payment systems.

So, how does it work? 

If you’re executing a regular transaction on the Bitcoin blockchain, you’ll send or receive it to an exchange or wallet’s address.

LN transactions are quite different and maybe not for the average Joe. But anyone using crypto should be able to execute them with a little bit of technical knowledge on how it works. 

Consider that Mr. Average Joe wants to send Bitcoins to Mrs. Joe. He’d first have to set up a channel on the Lightning Network. This channel is a gateway between two parties that allows peer-to-peer transfer. Setting up this channel is an on-chain process, meaning that it would be broadcast to the Bitcoin network and would incur a transaction fee. 

Once the channel is set up though, the transactions via the channel would incur an almost negligible fee. This is because these transactions are not broadcast to the network. And any transaction that is not broadcast to the network doesn’t require confirmation from the network, thus minimizing the load and maximizing the throughput (TPS). Instead, the parties involved, Mr. & Mrs. Joe in our case will be transferring coins through a Smart Contract. 

To do this, they first have to create a Multisignature wallet. A Multisig wallet is one which requires multiple signatures (usually more than two) to access the funds stored in it. Both Mr. & Mrs. Joe will have to deposit a certain amount of Bitcoins into their wallets. For example, assume that both deposit 1.5 BTC each. Now, let’s say that Mr. Joe transfers 0.5 BTC to his wife. Both parties then confirm the transfer by signing a balance sheet using their respective private keys. 

The balance sheet will now look like this: Mr. Joe would have 1 BTC and Mrs. Joe would have 2 BTC. But the actual transfer takes place only when the lightning channel is closed and the transaction is broadcast to the network.

 

Lightning Network and Blockchains as Alternative Payments

 

Advantages

    • The LN requires miners only to confirm the balances while opening and closing the lightning channel. The payments over the channel are settled instantly. 
    • It helps decongest the network, thereby increasing the network performance and TPS rate.
    • Channel participants can transfer and re-transfer funds as many times as necessary, provided the channel remains open. 
    • Cross-chain atomic swap with LN is being researched which will enable the exchange of coins over different blockchains.
    • In Multisig wallets, keys of all or most of the participants are required to transfer or access the funds. Thus, payments cannot be made without the consent of other participants. 
    • Network of channels: Wide scale adoption will create a network of channels. So, your payments can be sent even to someone with whom you’ve not established a dedicated channel. The LN will try to send the payment through the shortest possible route. 
    • Lightning channel payments are made off-chain and are almost untraceable, providing anonymity to your transactions. 

 

Constraints 

    • Lighting Network is still testing the waters and is not live on the Bitcoin Mainnet. 
    • Both participants must sign the balance sheet for the smart contract to take effect. If the participant on the other end of the channel is offline, the transfer (of funds) cannot be made. 
    • The best of its implementations are still beta. The payment may not be routed through the shortest available channel path, which might consequent additional fee. 
    • Large transfers are still a concern. The LN does not inherit the decentralized security of its underlying blockchain. Moreover, large transfers will not reach the intended recipient if the wallets on the LN do not have sufficient balance. 
    • The opening and closing of the network is still an on-chain process. 
    • At present, there is no simple interface that facilitates the users to interact with the network. Users must possess the technical know-how to transfer their coins or risk losing them.

 

Altcoins and the Lightning Network 

The Lightning Network, when fully functional, can be applied to other blockchains. For example, it would serve to further enhance blockchains with low block times and higher block size. 

The Beldex blockchain has a dynamic block size and its block time is 2 minutes. Designed to anonymize transactions, the Beldex chain if integrated with the lightning network, can lead the future of cryptocurrencies. It can bring to life, the prediction of one of the leaders in the industry, that a privacy coin will be at the forefront of crypto-revolution in the 2020s.