Saturday, July 17, 2021
Decades ago, sending a telegram was the easiest and the quickest way of long distance communication. To do so, you had to go to the nearest post office, fill in a form and pay for your message. Then the message would get telegraphed and a postman would deliver it to its destination. There are a lot of people involved in sending a small message and will also cost a lot of money.
That’s the current state of the Bitcoin network right now.
“The way I understand your proposal, it does not seem to scale to the required size”
~ James A. Donald
Throughout it’s existence, Bitcoin has only been capable of processing around 7 transactions per second compared to a whooping number of 24,000 transactions per second by VISA. Well technically it was not a bug, it was a feature. But now if Bitcoin is to replace the current financial system, it needs to compete with the number of transactions processed per second. Comparing it with the analogy given before, Lightning network is the speed dial, just press ‘0’ on your phone and talk to your friend, as compared to the old age method of sending telegrams. In simpler terms, Lightning Network says that not all the transactions need to go onto the blockchain, some micro transactions can be performed off chain and the final balance sheet can be settled onto the chain.
How does it work?
Two famous names in cryptography, Alice and Bob decide to use bitcoin as an alternative to the fiat currency. In order to facilitate some micro payments, they decide to make use of the Lightning network. Lightning network enables you to create a secure channel between the two parties. In this case, Alice and Bob enable a channel and deposit 5 BTC each in that channel. Now if Alice wants to send 1 BTC to Bob, he will send do this transaction via this secure channel. A transaction here is basically the reallocation of funds that were initially deposited. Once the bitcoin has been sent, both of them will sign the transaction with their private keys (the channel makes use of multisig wallets i.e. transaction is approved only when both the users sign using their keys) to approve it. Hence the final balance sheet will show that Alice has 4 BTC and Bob has 6 BTC. At any point of time, they can decide to close the channel and the final balance sheet will be updated onto the blockchain. Remember that all the transactions that happen via a channel does not happen on-chain (on the blockchain), but rather off-chain (on a different layer which is made on the blockchain). Hence it is not secure for big transactions which require more decentralisation and rather only good for micro payments.
The beauty of the network is that once this technology is widely adopted, you need not establish a channel with everyone you want to transact with. If Alice wants to send money to John, and John has a channel with Bob, Alice does not need to establish a channel with John because he already has a channel with Bob. The network will automatically find the shortest route.
This is how the Lightning Network might eventually provide an answer to the never-ending debate about buying a cup of coffee for bitcoins.
Pros & Cons
Since the transactions happen off-chain, the number of transactions per second increases and the transaction fees goes down. This will allow bitcoin to compete with traditional systems like VISA, PayPal etc. The Lightning Network is said to be able to take the transactions per second figure of Bitcoin and other cryptocurrencies to unprecedented heights of at least 1 million transactions per second. The vast majority of cryptocurrencies out there are not fully anonymous. The transitions can still be traced from one wallet to another. When it comes to the Lightning Network, though, most of the transactions happen outside of the main blockchain, so all the micropayment made via Lightning channels will be almost impossible to trace.
the main disadvantage of the Lightning Network at the moment is the fact that’s it’s not fully operational yet, so there’s no way of fully asserting how good it actually is. Moreover, it’s concept looks great on paper, but as of yet it’s impossible to find out whether it’ll look as great once realised.
What do you think the future holds? Can it be used as an alternative to the traditional payment system or is it only good as a store of value?
Well, doesn’t matter……. WE ARE EVENTUALLY GOING TO THE MOON 🚀🚀🚀🚀
See you next Saturday, until then have a great weekend :)
Cheers!
Some things that you may find interesting-
Article: Hi, Dear
Song I am listening to: Save Your Tears by The Weekend
Thought of the week: “After some deliberate thinking I realise that it's not the people who are at fault. It's the fault of their genes and bad company.”
Thread of the week: The solution to Pollution is….. Pollution?
Here are the last three posts if you were too occupied to read them:
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