What is the Lightning Network and How Does it Work?

We Dive into What the Lightning Network is and How it Works
By 
Coin Cloud Team
, published on 
February 14, 2019
What is the Lightning Network and How Does it Work?

Since its inception, Bitcoin has struggled to achieve widespread adoption, mainly because of its slow transaction speeds. When Bitcoin first burst onto the scene, it was capable of processing 7 transactions per second. At first, this was perfectly fine, but as the network has become more congested, those transaction speeds have slowed down. From a scalability standpoint, it simply isn’t quick enough; people like to send and receive money instantly. However, it looks like this soon will change, as the Lightning Network continues to grow and improve. In this blog post, Coin Cloud dives into what the Lightning Network is and how it works.

What Is the Lightning Network?

The Lightning Network is a “second layer” payment protocol that operates on top of blockchain. The goal of the Lightning Network is to enable faster transaction speeds between nodes in hopes of solving Bitcoin’s scalability issues. The Lightning Network was first proposed by Joseph Poon in 2015. He thought a network could be created that lies on top of the Bitcoin blockchain before eventually settling on it. He believed that by doing this, transactions could be instantaneous and because there are no miners, transaction fees would be extremely low or even nonexistent.

How Does the Lightning Network Work?

The Lightning Network uses smart contract functionality in the blockchain to allow for instant payments between a network of participants. The success relies upon the underlying technology, blockchain, by using its scripted smart-contract language to create a network of participants that are able to transact at high speeds.

We’re going to use a real-world example to help explain how the Lightning Network works. Let’s say Bob and Jim want to engage in a business relationship where they will need to send one another money back and forth with minimal fees. To do this, they set up a digital wallet that they can both access with their own unique keys, then deposit money into those wallets (let’s say they both deposit 5 bitcoin into their wallets).

Once that network is created and money is deposited, Bob and Jim are able to perform unlimited transactions between each other. When Bob sends Jim 1 bitcoin, Jim now has 6 bitcoin in his wallet and Bob has 4. If Jim sends 2 bitcoin back to Bob, Jim now has 4 bitcoin in his wallet and Bob has 6. These transactions are immediate and can continue for as long as their business relationship persists. Because these transaction were done on the Lightning Network, the transactions aren’t actually recorded onto the Blockchain until the channel is closed. So, the Lightning Network kind of served as a buffer zone for their back-and-forth transactions until the final transaction was recorded onto the Blockchain.

Why Is This Beneficial?

Transaction Fees: Unlike blockchain where users have to endure long delay times for transactions to be confirmed, transactions that happen on the Lightning Network will be instantaneous, no matter how busy the network is. (Side tip: by using a Bitcoin ATM instead of an online exchange, users can avoid those long transaction times.) This allows Bitcoin to compete with traditional methods of payment like Visa or Master Card. In addition, because the transactions take place outside of the blockchain, users will have to pay no fees or very minimal fees.

Scalability: Lightning Network’s fast transaction speeds solve Bitcoin’s scalability issues. Where Blockchain was only able to complete 7 transactions per second, the Lightning Network will be able to complete up to one million transactions per second.

Security and Anonymity: Technically, transactions that take place on the blockchain are not completely anonymous because all of them can be traced back to individual wallet addresses. On the Lightning Network, all transactions happen outside of the blockchain, making them nearly impossible to be traced back to an individual wallet.

The Future of Bitcoin With the Lightning Network

The Lightning Network is still in its infancy. Its possibilities are only just being imagined and very much still in development. The entire cryptocurrency market is patiently (and maybe impatiently) waiting for the launch of the Lightning Network. All of us have been looking forward to the day that Bitcoin, and other cryptocurrencies, can be used at everyday stores such as the grocery, coffee shop and convenient stores. The Lightning Network will be the solution that brings all of our dreams to fruition. We look forward to what’s to come.

To buy and sell Bitcoin using cash while only sharing minimal personal information, find the Coin Cloud Bitcoin ATM closest to you. We boast the largest network of two-way Bitcoin ATMs in the world, and our robust technology and live support team are here to show for it.

Disclaimer: The information and views supplied on the Coin Cloud blog are for educational and entertainment purposes only. We are not financial advisors, so please do your research and consult with a trusted financial specialist before investing your money.

What is Coin Cloud?

Founded in 2014 in Las Vegas, Nevada, Coin Cloud is the leading digital currency machine (DCM) operator. With over 4,500 locations nationwide, in 48 states and Brazil, Coin Cloud operates the world’s largest and fastest-growing network of 100% two-way DCMs, a more advanced version of the Bitcoin ATM. Every Coin Cloud DCM empowers you to quickly and easily buy and sell over 40 cryptocurrency options with cash.

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