What Is The Lightning Network?

While Bitcoin is the most secure and decentralised unit of exchange/store of value ever invented, one of its major drawbacks is its limited ability to process transactions at scale. (see The Bitcoin Trilemma for more info)

Currently, Bitcoin can only handle about seven transactions per second, which is minuscule compared to Visa’s capacity of up to 45,000 per second. This issue has led to the ongoing "block size debate" in the Bitcoin community, as many believe scalability is essential for Bitcoin to become a mainstream financial tool.

Addressing Bitcoin’s scalability issues 

Several solutions are being explored to address Bitcoin’s scalability problem, and one of the most promising is the Bitcoin Lightning Network. This second-layer technology has already been adopted by companies like Blockstream, which has enlisted Rusty Russell, one of Bitcoin's core developers, to lead the effort. Blockstream has raised $76 million to support Lightning Network’s development. Similarly, Blockchain.info has launched its own version, Thunder Network, which entered alpha testing in May. The Lightning Network itself was co-founded by Joseph Poon and Tadge Dryja, the developers who first proposed this solution in 2013.

What does the Lightning Network do? 

The Lightning Network is a decentralized system that operates outside the main Bitcoin blockchain, allowing users to bundle multiple transactions and broadcast only the final result to the Bitcoin network. This reduces the burden on the Bitcoin blockchain by shifting smaller transactions off-chain, only settling them when necessary. The network can scale dynamically, handling a large number of transactions without changing the Bitcoin blockchain’s core structure.

How does it work in practice? The Lightning Network operates using payment channels between two parties. For example, Alice and Bob can open a channel by locking a sum of Bitcoin in a joint wallet. They can then trade back and forth without informing the blockchain about every transaction. If one party tries to cheat, the other can immediately broadcast the correct transaction history. Channels can connect to form a larger network, allowing users who are not directly connected to transact through intermediaries, making Bitcoin more scalable and efficient for everyday use.