What Are Lightning Networks and What They Are Used For?

Finley Adams

Finley Adams

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Despite the fact cryptocurrencies have giant amount of benefits compare with fiat money (i.e. anonymity and full financial freedom). They can't be used in daily life and no one has even thought of that until the idea of lightning network came up.

What are lightning networks and what they are used for?

So what is it?

Lightning network is a technical solution creating a protocol for the second layer of blockchain networks. Working on the Bitcoin LN can use smart contracts to make faster transactions saving the old basic principles of peer-to-peer (what means that there are no mediators between someone who pays and someone who gets the money).

This solution was first suggested during the Scaling Bitcoin conference in 2015.

That is all I've managed to find for five minute search on the internet, I feel however, that there are much more about Lightning Networks and I would really appreciate your help at expending our common knowledge.
 
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Lebedev

Lebedev

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The main target of Lightning Network is scale of a cryptocurrency blockchain in order to make it work more productive, especially an opportunity to do fast transactions with lower commissions.

To simplify, LN make it real to do local cryptocurrencies transaction without need to put all of them into global blockchain register. This way it can be helpful for all main problems of any coin:
  • Faster and cheaper transactions
  • Making the public blockchain way to shorter
What is more, this technology also makes everything more anonymous.


How this all works?

Lightning Network uses a system of payment channels, where money of network users are held. This payment channel is a wallet with built in function of multiple signature (multisig) where located a few bitcoin coins. These coins can be provided either from one side or from both.


The channel is opened using a standard bitcoin transaction, that way data about the transaction is kept in the public blockchain (data is also being written after closing of the channel). All transactions after however, are done in the channel staying unknown for the blockchain.

Payment channel is sort of a vault, where they put money available for a certain people then. But unlike a real world wallet, you have to use a private key for a access instead of a number code.
 
Golem

Golem

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Lightning Network is a payment protocol designed to improve and simplify the use of cryptocurrencies. Some experts believe that cryptocurrencies with Lightning Network support could be a good alternative to Visa and Mastercard payment processing.
 
Lebedev

Lebedev

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#4
A real life example (to make it a bit easier to understand)

For example, your favourite coffeehouse has recently announced that it would start to accept crypto in all of its cafés. In fact, one of the world's most famous restaurant chain did such announcement, but unfortunately it seems it was just a huge misunderstanding. Anyway good to know:

Cryptocurrencies were literally Developed to pay for Coffee - HYIP.com


So your coffee shop make it real for you to pay in bitcoin. But creating a transaction for each cup of coffee people are used to buy there daily is a bit irrational - it would require lots of time for approval as well as lots of money spent on commissions. This way Lighting Networks are extremely helpful.

What Are Lightning Networks and What They Are Used For?

Client and a seller (in this case, café visiter and the café itself) create a payment channel and client puts there 0.01 BTC, he is going to spend on coffee. At the time of channel creation there are 0.01 bitcoin on the visitor wallet and nothing on the restaurant one.

Let's say that a cup of coffee costs about 0.0005 BTC. So after the first cup ordered, there would be 0.0095 BTC on customers account and 0.0005 BTC on the merchant's one. That way, you can purchase more and more coffee unless you either have no money left on your wallet or you've decided to close the channel. With every transaction, client and seller sign an updated smart contract, that shows which amount of money is owned by each side. As it was said, these data aren't saved in global blockchain - every member of the deal stores this data in their own smart contracts instead.
 
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