What Are Lightning Networks and What They Are Used For?

[Finley Adams]

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.

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.

 

[Lebedev]

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]

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]

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.

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.

 

[Lebedev]

Looking through a few other forums have found some questions that often occur but that weren't answered just yet.

A new payment channel has to be created for each transaction?

No, but the Lightning Network is a network at first place. What means that John and Mark mustn't have their payment channel, but they can be connected by another user Bob or even a few users. That way, network users can create transactions with anyone within the network who is connected to their payment channels network through nodes.

People create such nodes to earn some money on transactions, commision is very small even compare with cryptocurrencies, however, it is paid to each nod.

Because of the usage of smart contracts architecture, Lightning Network doesn't require truth of the sides that create transaction. Money can't be lost in LN as they can in standart blockchain architecture. The transaction will get to receiver through as many nodes it is needed, otherwise it will be canceled and returned to the person who send it.

At the scheme below Bob and Carol works as nodes in the Lightning Network who can be compared with miners in blockchain. Just as miners do nodes main work is to confirm transactions. In the same scheme Bob isn't able to steal Alice coins, because he can get the incoming bill only when he sends a bill with the exact amount of money to the person, who created the transaction.


Can payment channel do anything else?


In the case described in the thread, when you are creating a payment channel in order to buy a cup of coffee, the channel you created will be of one-way type. Money there can be send only in one direction. But you can also create a payment channel that supports transactions from both users as well as a channel which works according to a smart contract describing requirements for a transaction.

This is how a network looks from inside

For example, the same Bob and Carol decided to bet whether bitcoin worth more than $10000 by the end of the year. Bob is a positive person and insists on that it is the only way bitcoin will go, Carol on the other hand, denies such a giant leap in price development taking in count bitcoin has been going down for a year now. Both of them agreed to bet for 0.1 BTC, in order to do this, both of them send their money on multisig-wallet. And their money will remain there until:

• Bob as well as Carol have signed a channel closing transaction using their private keys - if Bob win he gets the money, otherwise Carol do
• One of parties to a dispute decides to leave it signing the closing transaction. Obviously, money held on a multisig-wallet before will be received by another person
• A certain time is passed. For example if closing transaction must have been signed before 1 January 2020, but it didn't happen. In this case the same amount of money will be returned to those who have sended them

And this is the very basic example, in real, Lightning Networks offer countless quantity of instruments that can help to implement whatever you want to.