Lightning Network
Written by Regan Grishaber
Introduction
The Lightning Network (a.k.a. Lightning or LN) is a permissionless network of payment channels built on top of the Bitcoin blockchain, designed to enable secure peer-to-peer payments at faster speeds and lower fees than the base chain. It was proposed in a 2015 whitepaper as a second-layer solution to improve Bitcoin’s scalability. Since transactions on the base chain are broadcast to the entire network, each node has to independently download the entire history of the ledger to validate the network. As the network grows, it approaches maximum throughput capacity and storage fees will continue to rise making it uneconomical for lower-value payments. On chain changes to the Bitcoin blockchain make sacrifices to Bitcoin's security model, so Lightning operates by moving a large number of transactions off chain.
In practice, two parties open a multi-signature payment channel with a funding transaction that is broadcast to the bitcoin network, but then defer subsequent broadcasts to the main chain until no further payments are desired. As intermittent payments are made off-chain, Revocable Sequence Maturity Contracts (RSMCs) are used to create revocable commitment transactions that express the present balance. At any time, either party can close out the channel by broadcasting the most recent commitment transaction to the base chain. If a malignant actor attempts to post a prior balance, the counterparty can post a more recent state, causing the offender to lose their funds. Funds are routed along a network of these open channels using Hashed Timelock Contracts (HTLCs), which enables a global state across multiple nodes.
For users, a few manageable trade-offs exist which allow Lightning payments to be instant and extremely low-cost. Namely, Lightning users need a server with high uptime, a secure hot wallet, and must continuously backup their Lightning data. With these precautions, Lightning shares the trustless security and monetary scarcity properties of the core Bitcoin protocol.
Suggested Reading
Understanding the Lightning Network: Part 1, Part 2, Part 3 - Aaron van Wirdum
The Lightning Network: Evolving Bitcoin into a layered system - Jordan Clifford
The Blockchain Scalability Problem & the Race for Visa-Like Transaction Speed by Kenny Li
To find more content and up to date information check out our series of boards on:
Lightning Network Deep Dive
Lightning Developer Resources
Lightning Network Implementations
Lightning Network Products and Apps
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