Lightning Network and Blockchain Scalability
Tired of waiting hours for your transactions to confirm? Instead of having transactions clog up the blockchain, ever wonder what would happen if there were payment channels done off of the blockchain? Well that’s exactly what the Lightning Network is!
“If a tree falls in the forest and no one is around to hear it, does it make a sound?”
This great analogy was used in the whitepaper to describe why the lightning network is a necessity. If two parties participate in a transaction, does every other node need to know about the transaction that occurred? The answer is no. You can have every transaction between the two parties in a seperate channel. The coins that are being moved around in that channel can only be transacted if both of you sign off on it. This is known as a Multisignature Address or multisig address for short. Multisignature addresses are addresses that require multiple keys to unlock and spend coins.
To open a payment channel, both parties must first determine how many coins are deposited into the channel. Let’s use Alice and Bob as the two parties and BTC as the coin they’re transacting. Both Alice and Bob will both send funds into the shared multisig address. Let’s say they both agree to send 5 BTC each into the address. They will each then create a second transaction that will pay out 5 BTC to each other. However, both of these transactions are only signed by one side of the party. These funds are locked until the each party signs each others’ transactions. Now say Alice want to pay Bob 1 BTC, there would be a new payment transaction that states that Bob will get paid 6 BTC and Alice will get paid 4 BTC (instead of Bob getting paid 5 BTC and Alice getting paid 5 BTC).
This process can be continued between channels that haven’t established connections yet through network payments. Say there’s a third party called Jim, and Alice wants to pay Jim but doesn’t have a payment channel with him. However, Bob has an open channel with Jim. Instead of opening a new channel between Alice and Jim, each payment channel gets updated with the new balance that Alice wants to transact. This allows transactions to be quick, off chain, and low on fees.
The following examples above are demonstrations on how the Lightning Network would work. Parties would have the ability to send each other cryptocurrencies off chain and through private channels. This is useful for corporations who do not want information about their transactions out on the public digital ledger. To close out a channel, one side can request to have a channel closed, and when both parties agree a final payout transaction is made to prevent any locked funds. That’s the gist of how Lightning Network works! If you’re interested in diving deeper into the Lightning Network, search up anti-cheat transaction and hash locks within the lightning network!
Cheers,
The Blockchain Musketeers