Prior to the development of Lightning Network, blockchains had one major problem. They were slow and transaction fees were high. They were slow because all or most of the transactions were carried out on the main blockchains thus making it slow. All transactions were recorded on blocks on the chain, and for each block to be recorded, it takes about 10 minutes. Meaning that it could take about an hour before a large amount of transaction is processed. This slow speed in block processing made people pay for their transactions to be processed as quickly as possible. These payments were not fixed, it depended on what each user is willing and able to pay to speed up the block processing.
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These problems were why a new technology that will ensure that blockchains are fast was needed. In July 2015, Lightning Network was launched to solve these blockchain problems.
Lightning Network
Like mentioned earlier, this technology was designed to solve the problem of scalability for Bitcoin and other Altcoins. To make the blockchain faster, this technology makes use of a two-directional payment system that is called; Payment Channels. These channels are created by two users who seek to transfer funds regularly to each other. To explain better, Lightning Network is like a fund-pool where two participants or users decide to keep an agreed sum in a place called "common box'. For instance, let's say Peter and Alex decide to pool funds together, they each decide to raise about $15 to be kept in the common box. What Lightning Network does is that it ensures that each transaction that is made by Peter and Alex is not recorded on the main blockchain. Also, since these transactions are just between Peter and Alex it will not be broadcasted on the blockchain.
How Does the Lightning Network Work?
First of all, if Peter and Alex decide to pool funds together, they have to register with a wallet that has the Multiple-Signature technology. This technology will ensure that one individual will not carry out the transaction without the knowledge of the other. After registering, the address of the wallet will then be saved on the blockchain. This immediately opens a channel. Once this is open, these users can carry out transactions without touching the saved information on the blockchain. To transfer or send funds through this payment channel, these users will have to issue a promise of ownership. For example, if Peter wants to send about $5 worth of Bitcoins to Alex, he will have to send a $5 promise of ownership, this will allow Alex to withdraw the sent funds.
Payment Channels can also be used to send and transfer funds to users that you have not yet created a channel with. For example, if Peter wants to transfer funds to Jim who he does not have a channel with, he can ask Alex (if Alex has a channel with Jim) to transfer a specific amount to Jim, then he will reimburse Alex later through their already existing payment channel.