Written by: Lukas Schor of The Argon Group
1) What’s going on here?
The transaction fees on the Bitcoin network have skyrocketed to new all-time highs of over $30 in the past couple of months, but a new scaling solution might save the day for the digital currency in 2018.
2) What is the Bitcoin Lightning Network?
The Lightning Network is a proposed system built on top of Bitcoin that would let people instantaneously send/receive payments and reduce transaction fees by keeping them off the main network. It helps Bitcoin be more useful as a day to day currency.
3) How does it work?
The Lightning Network is a system of smart contracts built on top of the base Bitcoin blockchain that allows for fast, cheap payments directly between two parties. In order to achieve these fast and cheap transactions, the following steps are taken:
- A multi-signature wallet which holds some amount of bitcoin (provided by at least one of both parties) is set up
- The wallet address is then saved to the public Bitcoin blockchain including a balance sheet (smart contract) that proves how much of this bitcoin deposits belongs to whom
- After this payment channel is set up once, it is possible for these two parties to conduct an unlimited amount of transactions without ever touching the information stored on the blockchain
- With each transaction, both parties sign an updated balance sheet in order to always reflect how much of the bitcoin stored in the multi-sig wallet belongs to whom
- The updated balance sheet is not uploaded to the blockchain but rather both parties keep a copy of it
- Whenever there is a dispute or the payment channel is closed, both parties can use the most recent mutually signed balance sheet to pay out their share of the multi-sig wallet
This all sounds very cumbersome, but in fact for the end-user hardly any additional effort is needed to conduct Lightning payments, all of the above will happen automatically in the background.
Source/More: Bitcoin Lightning Network — 7 Things You Should Know