The Lightning Network is a layer2 solution for Bitcoin that utilizes micropayment channels to enhance the blockchain’s capabilities and ensure efficient and cheap transactions. It introduced on-chain transactions to solve glitches on the Bitcoin blockchain. Its channel connects two transacting parties, allowing each to send or receive payments.
Bitcoin joined the financial space as a decentralized payment system, ensuring user anonymity. However, that dented scalability as the leading crypto gained popularity, and a solution was essential. Developers introduced crypto layers to counter the problem of excessive energy utilization and slow transactions – with the primary blockchain as layer1. Any additional layer adds functionality and accolades the layer above. The Lightning Network can also help handle different on-chain transfers involving cryptos.
As mentioned, Bitcoin’s creator didn’t design the asset to handle multiple transactions. However, that has changed as the blockchain sees transactions daily. That had Thaddeus Dryja and Joseph Poon proposing the Lighting Network (in 2016) to address the following issues:
- Sluggishness in Completing Transactions
Many transactions made it time-consuming and expensive to use Bitcoin, and mining difficulty surged with time. The increased transactions required a new way to finalize the transfers.
- High Energy Costs
The energy needed to compute Bitcoin transactions is massive. That made maintaining the BTC network expensive.
- Ensuring Recipients Receive their Money
The Lightning Network uses multi-signatures and smart contracts to ensure users receive funds entitled to them.
Challenges Associated with the Lightning Network
One challenge associated with the Lightning Network is logging off (closing the channel). For instance, if one of the transacting parties has fraud motives, he might use the fraudulent channel close tactics to scam the other participant.
That makes it essential to have 3rd-parties (watchtowers) running the nodes to avoid scam activities within the network. Watchtowers oversee transactions and help prevent channel close.
Utilizing the Lightning Network attracts transaction fees. They include routing fees for routing payment info between Lightning nodes, BTC’s usual transaction charges, and opening & closing channels. Moreover, watchtowers mean more service fees.
The transacting parties should record closing transactions after settling the bill. That includes charges for forwarding transactions – which can be a percentage of the transfer or a base fee.
The Lightning Network remains vulnerable to hacking since fraudsters can attack APIs (application programming interfaces), wallets, and payment channels.
The network can also suffer malicious attacks amid congestion. Users can hardly retrieve money quickly from these attacks due to congestion. Moreover, attackers can freeze the channel through denial-of-service attacks. The attacker capitalized on network congestion to steal from individuals that failed to withdraw due to network freeze.
The Lightning Network is a layer2 blockchain solution for Bitcoin, and it uses micropayment channels to enhance the blockchain’s capabilities and ensure efficient and cheap transactions. The technological solution solves issues from interacting with Bitcoin through off-chain transactions. However, the Lightning network is not invincible and might suffer schemes like closed-channel fraud, malicious attacks, hacks, and the hub & spoke model.