28.2.2018 | cryptocurrency , 3 min read

How the Lightning Network has potential to unlock the true possibilities of the blockchain

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In January this year, Cinnober set up a node on the Lightning Network and was one of the first 500 to do so. The Lightning Network is an open source project that could be the most interesting thing that has happened in the cryptocurrency world since Satoshi Nakamoto released the initial Bitcoin whitepaper in 2008.

It paves the way for a new route through the scalability limitations of public blockchains—a problem that has become increasingly evident as the interest in cryptocurrencies has increased massively over the past few months.

Operating on top of blockchains as a second-layer, the Lightning Network could enable “millions to billions of transactions per second across the network.” It’s expected to be much faster and cheaper than the current Bitcoin network while benefiting from the trustless architecture that the blockchain is based on.

Limitations of the Bitcoin network

The Bitcoin network is a peer-to-peer network which can only process around six average-sized transactions per second, or roughly two megabytes of data every ten minutes. This is an intentional limit to ensure that even a computer with limited resources can still be a full participant in the network.

The system is based on economic incentives and cryptographic proofs instead of trust, allowing any two parties to transact directly with each other without the need for a trusted third party. It is based on distributed ledger design, meaning that there is no central administrator or data storage. All transactions are broadcast across to the entire network and are then sorted into blocks. Once recorded, the data in any given block cannot be altered retroactively, making it inherently resistant to modification.

But this also means that capacity cannot trivially be scaled up without compromising security: even though there are thousands of computers that are hooked up to the Bitcoin network, each computer still needs to process every transaction in the network in order to independently validate the activity in the system. For example, if the network would allow 100 megabytes of data per block, it would be unfeasible for many participants to perform a full, trustless validation of the blockchain. Instead, these participants would get pushed into lightweight client (SPV) usage, which is a limited way of validating the blockchain without the same security guarantees as full validation.

So, as the amount of people that want to make bitcoin transactions has increased dramatically, this has often led to long wait times and high transaction fees, making it an unusable means of payment for small, everyday transactions. Depending on the congestion in the network, you might have to pay a high fee to make sure that the transaction gets added into the next block or else it may take weeks to process. Finding a way to scale the system beyond its inherent limitations is what ultimately led to the development of the Lightning Network.

What is the Lightning Network?

The Lightning Network is a decentralized network of bidirectional payment channels that sits on top of the Bitcoin blockchain. It was conceptualized in 2014 and a release candidate for v1.0 of the Lightning protocol was released December 2017.

One of the big differences between the Bitcoin network and the Lightning Network is that whenever a user makes a bitcoin transaction, it is broadcast to the entire Bitcoin network, putting bandwidth, memory, and CPU load on every fully validating node.

The Lightning Network in comparison is made up of multi-hop payment channels allowing its users to make transactions between each other without recording each transaction on the blockchain. A Lightning channel is opened by committing a funding transaction to the blockchain and is closed by broadcasting the final version of the channel state to distribute the channel's funds. This means that users can make hundreds or thousands of transactions between each other and just settle the final balance on the Bitcoin blockchain, and the network load is only shared between the users involved in that specific payment route. 

This opens for the potential to charge microscopic fees for services online – revitalizing the dream of micropayments on the Internet, which could make it possible to monetize new digital business models while also alleviating the scalability issues and transaction fees in bitcoin today.

The Cinnober Lightning node

So why is Cinnober looking into to this? Although the Lightning Network is primarily intended for small transactions and micropayments, Cinnober is currently doing research as to whether it will be possible to use the Lightning Network to facilitate instant deposits and withdrawals for cryptocurrency exchanges, and entirely trustless exchange systems as well.

Cinnober has set up Lightning nodes both on the Bitcoin mainnet and the testnet to perform tests in order to get an understanding of how the Lightning Network is functioning and what the potential possibilities and limitations are.

At the moment, the cryptocurrency exchanges and traders are struggling with the limitations of the Bitcoin network as deposits and withdrawals are slow and expensive, adding unnecessary risk and cost. As such, we believe it’s the right time and place to start learning and experimenting with this new technology.

The Lightning Network is at an early stage — testing and pioneering use has just begun and no one yet knows if and in what manner it will help to address the current scalability issues of the Bitcoin network. If it does, the potential is huge, and we might get closer to making bitcoin functional as the “Internet of money.”

As we have mentioned before, we see a clear opportunity to bring our state-of-the-art products to the emerging cryptocurrency market and help solve some of the challenges that new technology brings. 

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