Bitcoin's blockchain can only process an average of 7 transactions per second. That's not enough to make Bitcoin a suitable platform for processing the millions of transactions that people make every day. And yet it was intentionally designed that way. The reason for this lies in the so-called blockchain trilemma. A blockchain can only credibly achieve 2 of the 3 goals below. Since Bitcoin is supposed to be a global monetary system, the focus is clearly on decentralization and security, at the expense of scalability. Accordingly, Bitcoin has a relatively low transaction throughput.
So if Bitcoin is to become a medium of exchange, payment systems must be developed that enable users to transfer Bitcoin quickly and cost-effectively. The Lightning Network is one such payment system. It is already able to keep up with the well-known industry giants of payment service providers in terms of transaction volumes.
Super-fast transactions and low fees — the Lightning Network potentially makes Bitcoin a means of payment for everyday use. It is a decentralized system in which transactions are processed via payment channels outside the Bitcoin blockchain. As mentioned, Bitcoin focuses on decentralization and security in order to be able to represent a monetary system that is as unalterable as possible, which is why scalability and transaction speed had to come at the back of the protocol. The Lightning Network is trying to solve this exact problem with Bitcoin.
In the Bitcoin blockchain, every transaction is stored for eternity. Bitcoin is slowly scaling, and that's a good thing. This is the only way to guarantee the necessary safety. Each block can only store a limited number of transactions. This limitation keeps the storage space required by the individual nodes low, which prevents centralization of the network. This is what makes decentralization and security possible in the first place.
The Lightning Network is a second-layer protocol developed to enable off-chain Bitcoin transactions that are not recorded on the blockchain. Since they are not recorded on the blockchain and therefore do not require mining, Lightning payments are extremely fast and cheap.
With Lightning, two parties open a payment channel with each other. The Bitcoin it contains is fixed in this channel until settlement, which is why an enormous number of and fast transactions can be made in it. Think of it like a beer mat: a line is made with every drink, but you only get billed at the end of the evening.
Alice and Bob can make as many transactions back and forth as long as they don't exceed their channel's capacity. But even more exciting: When Alice wants to send a transaction to Charlie, Bob can serve as a communicator because he has opened a payment channel with both parties. In the spirit of Bitcoin's architecture, this is also possible without the two having to trust it. The Lightning transaction finds the best route through the entire network.
A Lightning channel is therefore a bidirectional payment channel with a specific maximum Bitcoin capacity. The basic building blocks of the Lightning Network are nodes, i.e. network nodes and the mentioned payment channels, which enable the nodes to communicate with each other. Of course, not every node is connected to the exact node to which it wants to send a payment.
So-called routing makes it possible for transactions between two unconnected parties to be processed via a series of pre-existing channels.
Work is being done on a daily basis to further simplify access in everyday life.
In our blog article “Lightning Deep Dive” Learn more about Lightning nodes and Lightning addresses. You can also find a more detailed explanation in this video on the Blocktrainer channel.
Anyone who has observed the fees for on-chain transactions in recent weeks in particular will quickly realize that the Bitcoin blockchain is not designed to record all microtransactions worldwide. Bitcoin is a digital money system that carries out international value transfers.
It is understandable that not every purchase of morning coffee has to be stored in a decentralized cash book used worldwide. The Lightning Network can be understood here as a payment system that is based on the Bitcoin digital money system. Lightning transactions are usually:
The Lightning Network is still at a very early stage, so we recommend that you don't use your Lightning wallet for all of your Bitcoin savings, as they amount to a larger amount. Think of it like a piggy bank: At some point, the piggy bank is full and the amount is higher, so you bring the money to the bank.
This is exactly how you buy Bitcoin via Lightning from time to time in the future, and as soon as you have reached a certain amount, you carry out a normal on-chain transaction and send the Bitcoin to your (usually more secure) hardware wallet.
Still have questions about the Lightning Network? Just contact our Support, or join our Telegram Community in which we discuss all sorts of Bitcoin topics.
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