When Bitcoin started to gain more and more traction, many Bitcoin community members raised concerns about Bitcoin’s scalability. Bitcoin is only successful at processing seven transactions per second. While this was sufficient in the early days of Bitcoin, as more people participate in the ecosystem, the network became congested, resulting in slower confirmation times and higher transaction fees.
While many scaling proposals have been put forward to solve this problem, one that has gained traction over the years is the Bitcoin Lightning Network.
The Lightning Network (LN) is a second-layer solution that operates on top of the Bitcoin blockchain, allowing for direct peer-to-peer bitcoin transactions through so-called payment channels. A payment channel can stay open for as long as required since it is between two parties.
Bitcoin transactions on the Lightning Network are almost instant, private, and fees are exceptionally low.
As the Lightning Network grows and more and more payment channels are opened, sending bitcoin becomes easier and cheaper for users who choose to send and accept Lightning Network as opposed to on-chain bitcoin payments.
Imagine you want to purchase an item from an online retailer that accepts Bitcoin Lightning Network payments.
In this case, you can send bitcoin from your standard bitcoin wallet to a Lightning Network wallet and then make a near-instant, almost zero-fee payment via LN to finalise your purchase.
Instead of waiting for 15 to 30 minutes and paying $5 to $10 in blockchain fees for your on-chain bitcoin transaction to settle, you can transact with lightning speed via the Lightning Network to make bitcoin payments.
An interesting thing about the Lightning Network is that once a payment channel is closed, the initial and final balance is transmitted to the blockchain. This means you can transact numerous times outside of the blockchain but broadcast them as a single one on the blockchain.
Perhaps, the most exciting thing about the Bitcoin Lightning Network is once the technology is widely adopted, you will be able to send payments to any recipient without having to open a dedicated channel. Instead, you can use channels with people you are already connected with to send a payment. The system will automatically compute the shortest route.
Moreover, LN will be ideal for micropayments such as paying for coffee using bitcoin. The Lightning Network will allow you to pay for this almost instantly and with minimal fees.
Lastly, another fascinating feature of the Lightning Network is it provides you with transactional privacy. Unlike the Bitcoin blockchain, where transactions are broadcast to the entire network, if participants open a private channel in the Lightning Network, only they will know what transactions are taking place.