Spain’s largest bank, a top-20 global bank, $2 trillion in assets, recently shared about the Lightning Network.
So what is lightening network?
The Lightning Network is a layer 2 scaling solution for the Bitcoin blockchain. It is designed to address the scalability and transaction speed limitations of the Bitcoin network, enabling faster and cheaper transactions.
In the Bitcoin network, each transaction needs to be verified and recorded on the blockchain, which requires computational resources and time. As more people use Bitcoin, the network can become congested, leading to slower transaction times and higher fees. The Lightning Network aims to alleviate these issues by moving a significant portion of transactions off the main blockchain.
Instead of recording every transaction on the blockchain, the Lightning Network establishes a network of payment channels between users. These payment channels are like off-chain, private ledgers that allow participants to conduct multiple transactions without immediately recording them on the Bitcoin blockchain.
To set up a payment channel, two parties create a multi-signature transaction on the Bitcoin blockchain. This transaction represents the total amount of Bitcoin that both parties are willing to commit to the channel. This initial transaction locks the funds and creates a temporary balance between the two participants.
Once the channel is established, the participants can transact with each other by updating the channel’s balance. These updates are signed by both parties but are not immediately recorded on the blockchain. Instead, they are stored off-chain. This enables instantaneous and low-cost transactions between the two participants.
The Lightning Network further enhances scalability by allowing participants to route transactions through multiple payment channels. For example, if Alice wants to pay Bob but doesn’t have a direct channel with him, she can route the payment through other connected channels until it reaches Bob. This network of payment channels allows for a highly interconnected and efficient system of transactions.
The final settlement of funds on the Lightning Network occurs when the payment channel is closed. The latest channel balance is recorded on the Bitcoin blockchain, and the participants receive their respective amounts. This settlement ensures the security and integrity of the transactions.
Overall, the Lightning Network provides a way to perform fast, cheap, and scalable transactions by leveraging off-chain payment channels. It complements the Bitcoin blockchain by handling a large volume of transactions off-chain, reducing congestion, and offering a more seamless user experience.
