Bitcoin scalability issues mean that small transactions can overload the blockchain. Lightning Network was created to fix this.
Each block on the Bitcoin blockchain takes an average of 10 minutes to process, so the number of transactions that can be performed at one time is negligible. In 2016, developers Thaddeus Dryja and Joseph Poon came up with the idea of enabling fast and cheap transactions over the network without changing the block size. They called it “Lightning Network”.
Lightning Network creates a second layer on top of the Bitcoin blockchain that makes transactions more efficient using user-generated micropayment channels.
These transactions are much faster than regular Bitcoin transactions because they do not have to be broadcast across the network. Also, there are no miners who need incentives, so transaction fees are low or none at all.
How to use
Think of the major Bitcoin blockchain as a highway and the Lightning Network as a series of side streets. This alleviates congestion on smaller transaction paths.
First, two parties that want to trade with each other set up a multi-signed wallet (multiple signatures are required to perform a transaction). The wallet contains a certain amount of Bitcoin. Next, the wallet address is stored on the Bitcoin blockchain and the payment channel is set up.
Both can now execute an unlimited number of transactions without touching the information stored on the blockchain. In each transaction, both parties sign an updated balance to reflect the amount of Bitcoin stored in each wallet.
When both parties complete the transaction and the channel closes, the resulting balance is placed on the blockchain. In the event of a dispute, both parties can use the last signed balance sheet to regain their share of the wallet.
You don’t need to set up a channel directly to trade on Lightning Network. You can send payments to someone through a channel with the people you are connected to. The network will automatically find the shortest route. The purpose of the network is to allow users to make small payments without transaction fees or delays.
Where are we now on the Bitcoin Lightning Network? Lightning Network released a beta in 2018, but it was far from fully functional. Since then, the number of Lightning Network nodes has doubled year by year, and the project is approaching its goal of making Bitcoin a viable currency for everyday transactions.