Categories: Money

Bitcoin Lightning Network: Enabling Microtransactions And Scalability

The Bitcoin Lightning Network is a layer-2 scaling solution on the Bitcoin network. It is a significant innovation as it helps to support more utility on the Bitcoin blockchain. Bitcoin was created to establish a peer-to-peer digital transaction system where users could send money without an intermediary. Bitcoin creators successfully created a peer-to-peer digital cash system but experienced issues such as transaction throughput and scalability. Joseph Poon and Thaddeus Dryja created the lightning network in 2016 to solve these issues.

How does the Bitcoin Lightning Network work?

You need to understand the problems faced by the Bitcoin network first to know how the lightning network enables microtransactions and solves scalability issues. Adding a transaction block on the Bitcoin blockchain would take around ten minutes, and there is a hard limit to the number of transactions possible without changing the protocol. The lightning network is a layer-2 and not a new blockchain, meaning the Bitcoin network remains unchanged but receives the benefits that an upgrade would bring.

The Bitcoin Lightning Network works by setting up a payment channel between two users. The first and last transactions are recorded on the blockchains, and all the transactions between the first and last occur off-chain; hence, transactions are not limited by the protocol. Both users must invest and commit an amount of Bitcoin to start the payment channel. They cannot be released as long as the payment channel is open. The limit on transfers through this payment channel is the total amount committed.

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Lightning network scalability

One of the major issues with the Bitcoin network is the lack of scalability, and the addition of each block for every transaction drastically hampers the scale of the protocol. The lightning network solves this problem by moving transactions off the blockchain without compromising network security or decentralization. Transactions on layer-2 blocks are quicker and more efficient.

The Lightning Network enables quick microtransactions

Quick microtransactions are the future of the Web3 landscape, and achieving this is vital to the future of the Bitcoin blockchain. The lightning network enables microtransactions to unlock new use cases. For example, you go to a local supermarket and want to pay in BTC for each purchase from the shop. Transactions can take over an hour to validate due to the scalability issues of Bitcoin, and you may also have to pay high fees even though you are making a small transaction.

Microtransactions with traditional payment methods like credit cards are faster because they process more than 24,000 transactions per second, but Bitcoin can only process about seven. You can open a payment channel with a supermarket with the Lightning Network with each purchase recorded on it. You can either close the channel or top up when your BTC deposit runs out in the payment channel. All the transactions are automatically recorded on the Bitcoin blockchain once you close the payment channel.

Conclusion

The Bitcoin Lightning Network helps to solve the scalability issue and enables fast microtransactions on the Bitcoin network. The creators of the lightning network have expanded the toolkit over the years to help users and developers on the Bitcoin network. It has led to the creation of more applications, such as in DeFi, NFTs, and gaming, and has helped users become liquidity providers. Crypto exchanges have also started implementing this scalability solution to bring more investors and traders to their platforms. There are some challenges faced by the Bitcoin Lightning Network, such as closure issues and privacy. Its creators are working to solve these issues and make it more robust and scalable for wider user adoption.