What is the Lightning Network?

Written by Alexander Hilton

August 6, 2021

Let’s say that Mark likes to buy coffee daily and he wishes to use Bitcoin (BTC) to pay for it. This practice is not sustainable with the normal BTC network and Mark would more often than not pay more in gas fees than he would for the actual coffee. Imagine paying $8 dollars (estimate) in transaction fees for a $2 cup of Joe! Therefore, he approaches Dave’s Coffee and they set up a multi-signature wallet. Mark loads the wallet with 0.3 BTC, he then goes to Dave’s Coffee and orders a coffee and pays for it using the channel they created. Mark will then transfer the ownership rights to 0.00004 BTC to Dave’s Coffee shop, which will require both of their private keys to update the balance sheet to reflect the latest balance. At the end of the month, it is time to pay and the channel gets closed between Mark and Dave’s Coffee. The latest balance entry is sent to the blockchain and Mark’s wallet will send a final BTC amount to Dave’s Coffee. 

It seems that the Achilles heel of ETH and BTC are currently the issues surrounding scalability. The networks are unable to keep up with all the active usage on the network, thus the price of the gas fees dramatically increases when the network is congested. The transaction cost rises as the miners take longer to validate the transactions on the blockchain.

The possible future of solving this issue lies in the Lightning Network. Currently transactions on the BTC network are limited to 7 transactions per second (TPS), which is drastically lower than the 24 000 TPS that Visa handle per second. Furthermore, the cost for using the BTC network can be rather high when the network is congested and with such low TPS the fees naturally go higher. Paying $8 in transaction fees just does not make sense when you are only spending $2 on a coffee, thus people started to look for solutions to this issue. In order to push for mass adoption, the networks must be able to handle large numbers of transactions per second. It should be noted that satoshis are the smallest unit of BTC. They equate to roughly 100,000,000 satoshis per 1 BTC.

The lightning network is a layer that is built upon the BTC or LTC blockchain and is aimed at speedy and cheap transactions. It consists of a system of channels, which can be seen as a direct connection between two parties, that allows people/companies to move money between one another without needing the blockchain to verify the transaction. A similar example of this would be the settlement systems used by Visa & Mastercard, where payment is not instantly settled. This helps to address the scalability issue by allowing for speedy verification of the funds between two parties, with the actual settlement occurring as one single transaction at a later date when the channel is closed.

How does it work though?

Well, the two participants would create a multi-signature wallet (such as Zap, Strike or Phoenix, etc) and an entry on the blockchain ledger which would require them to both input their private keys (passwords) for spending to occur. One or both parties will deposit BTC into this wallet and the funds will be reflected based on their allocated funds. Then both parties can create transactions that will update their individual allocation of the funds in the channel without having to send those transactions to the blockchain. It must be noted that only the most recent entry in the channel is valid and in order to close the channel, the final entry transaction must be sent to the blockchain. This type of transaction is called an off-chain transaction, meaning that the users can transact between each other using a channel.

As one can see from above, the applications of this network are extensive and are helping to pave the future for BTC payment services. As of the 3rd of June 2021, there were roughly 11,698 lightning nodes and over 45,000 channels in operation. Currently there are 1,404 BTC in the network and its use is currently on the rise. We have numerous BTC payment services like BTCPay or Zap Wallet utilizing the speedy network. This is the current utilization of the network but there is an industry poised to take full advantage of this network. 

Current Big Players?

ACINQ

  • This French based start-up is building products focused on the Lightning Network since 2014
  • Created the “Phoneix” wallet
    • This wallet runs natively on the Lighting network
    • Allows for the creation & management of channels
    • Can use QR code scanner to send payments or receive them
  • Mobile based
    • Android
    • IOS (Currently still in closed Beta)

Blockstream

  • This company has been pioneering blockchain technologies since 2014
  • They are aiming their c-lightning (their own version of the lightning network) to be the standard used by enterprises and businesses 
  • Their version is lightweight , offers high performance and is easy to set up/manage

Lightning Labs

  • This American company has been working on lightning network technologies since 2016
  • Lightning Labs Pool technology
    • This is helps to connect Lightning Pool users who need capital to users who have BTC on the lightning network
    • Network participants can earn satoshis by opening new channels to those users who wish to receive funds on lightning for a set period of time
  • Lightning Labs Loop technology 
    • This technology makes it easier to send and receive funds on the lightning network, it serves as an on and off ramp between the Bitcoin blockchain and the Lightning Network. 
  • Lightning Network Daemon
    • First we must understand what a node is
      • A blockchain node is a computer that connects to the cryptocurrency network and it supports the network through validation and relaying transactions to other nodes, etc. 
    • Lightning Network has created their own lightning network node that provides reliable & secure interoperability for global-scale financial applications.
      • Interoperability is when the various systems are able to seamlessly and effortlessly interact with each other 

Future?

ZEBEDEE wallet is a “Bitcoin Gaming Wallet” that utilizes the Lightning Network in order to allow near instantaneous transfers at exceptionally low costs. This wallet is aimed at being integrated into gaming to allow the use and sending of satoshis. Currently, they have created ZEBEDEE Infuse which allows players to play CS:GO for BITCOIN by utilizing the ZEBEDEE wallet one is able to take part in the three following game modes:

  • Deathmatch Mode
    • You pay an entry fee that gets added to the total prize pot, then you play a single match with live BTC transfers and earn a share of the prize pot based on your percentage of the total score.
  • Competitive Mode
    • Two teams fight it out in classic CS:GO style with planting the bomb and no respawns until the round is over. Best of 30 rounds and the winning team gets the entire prize pot at the end.
  • Survival Mode
    • In this game mode your satoshi’s are your life. When you score, you get an extra life. When you die, you lose some life. If you run out of satoshis then you get kicked from the server. There are in-game coins to be collected worth real BTC.

The future is bright and the applications of this network are tremendous. Gaming isn’t the only industry that will be affected by this. One needs to only look as far as Zap. Zap is a wallet that is currently still in beta or alpha version (depending on whether mobile, IOS, Linux or WindowsOS). This wallet is fully utilizing the lightning network and you can turn your fiat into BTC on the network in seconds. This wallet now allows for users to swap fiat for Bitcoin instantaneously without any custodians such as Coinbase, etc. This can help to further reduce fees in diaspora remittances as you can send funds to your family and loved ones instantaneously and at a lower cost.

Another wallet to pay close attention to is the Strike app. One of the big pushers for this app is the fact that you are able to withdraw fiat to your bank as a merchant. So as a merchant that accepts BTC, you will withdraw the value as FIAT. The benefits of this include never being exposed to price volatility or taxes (on the BTC) as you never have custody of the crypto and only of the US dollars. What is even more exciting is the fact that they have partnered with VISA and soon, you will be able to have a Strike card that can earn rewards from partnered merchants when you spend!

It should also be noted that at the 2021 Bitcoin Conference in Miami, Jack Mallers the CEO of Zap & Strike stated that he had worked closely with the El Salvador President to help push legislation to help make BTC be seen as legal tender in El Salvador and have some of the country’s reserves in BTC. This is a bullish indicator for the lightning network applications as I am sure that Jack had shown the president just what the lightning network can do for his country and we really hope to see the implementation and use of the lightning network.  

Finally, we must add that BTCPay, which is a BTC payment service that utilizes the lightning network, in a tweet thanked Tesla for submitting the issues they found which helped to fix certain bugs and issues.I’m sure that you are aware that for a while Tesla was accepting BTC for Tesla cars and they clearly were using the BTCPay services, which meant that they are familiar with the lightning network and the vast applications it can benefit. 

As one can see from this article, the application of the lightning network is extensive. ZEBEDEE’s angle of attack on the gaming sector is a strategic move that will help to further cement the usage and application of the lightning network. We personally are close followers of Lightning Labs technologies as these will help to push mass adoption of this layer 2 solution. We are still early in cryptocurrencies lifespan, there will be numerous upgrades/updates to the various blockchains and the TPS we know of now will eventually be a thought of the past, a mere footnote in the history that will be Cryptocurrency.

You can review our available course materials to learn more about blockchain and cryptocurrency here

By viewing any material or using the information within this publication you understand that this is general education material and you can not hold any person or entity responsible for loss or damages resulting from the content or general advice provided here. Trading cryptocurrency has potential rewards, but also potential risks. You must be aware of the risks and be willing to accept them in order to invest in the markets. Only trade with funds you can afford to lose. This publication is neither a solicitation nor an offer to buy/sell cryptocurrency or other financial assets. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in any material on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.

Written by Alexander Hilton © Crypto University 2021

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