The Fundamental Knowledge of Lightning Network is a “Layer 2” Payment Protocol

After CZ has banned the BSV from his Binance due to Craig Wright posted a Twitter message and asked the public to dig out Hodlonaut’s personal information. The news had quickly spread in the crypto community. The incident triggered the curiosity from Lightening Network’s community, and many people become more interested regarding the layer 2 networks.

“WeAreAllHodlonaut”

Lightening Network was proposed by Joseph Poon and Thaddeus Dryja by 2015. The technical principle of Lightning Network itself is complicated, which is one of the main barriers that hinder many people from understanding it. But in fact, as the majority of ordinary users, only needs to understand the basics.

Bitcoin’s Expansion

As we all know, the long confirmation time in Bitcoin’s network confirmation has been criticized by many community members. Under the influence of this factor, Bitcoin’s expansion plan has been moving forward but with controversy. By 2017, due to many reasons, Bitcoin Cash was created.

Well, here comes to the problem. Bitcoin needed the expansion (considering one way to increase its transaction speed), but was hardfork was the only way to enlarge the block size? The answer is no. Compared with the BCH, which it forked from the community, the expansion of the chain has been more acceptable in the entire Bitcoin community, aka the “chain expansion’” of the lightning network.

Fundamental Knowledge of Lightning Network

Off-chain service, a method of putting scattered transaction outside of the bitcoin main chain. This would save the miner’s confirmation time and shorten the payment time to the matter of seconds, but eventually, the final transaction confirmation from both parties will be settled on the main chain. This is like playing Texas Porker, everyone uses the chips to keep the booking, and cash out the chips by the counter.

In order to achieve such a fast transaction, Lightning Networks uses something called a “payment channel.”

Suppose person A wants to transfer a fund to B, there must be a channel created between both parties. However, that is still not enough, both A and B have to deposit some BTC before the transaction. As long as both parties won’t transfer the amount larger than the deposit, the transaction fee can be lowered nearly to 0. It’s like Venmo or Alipay, as long as both hold account, they can freely wire fund.

Unlike Venmo, one payment channel of the Lightning Network can only connect two parties. Assuming that B and C also need to make a direct transfer, then B and C also need to create a separate payment channel. Then you may have to ask, what if A wants to transfer fund to C, do they have to create a channel? The answer is no.

Since among A, B and C have fully built payment channels, A can transfer fund to C by using B as a node. Therefore, B becomes a Lightening Network Node. Naturally, the cost of gas fee on layer 2 chain is much lower than the main chain.

At present, the number of nodes in Bitcoin’s lightning network has reached more than 8,000, and the number of mortgaged bitcoins in the entire network has reached more than 1000 BTC.

Pros and Cons

Through the concept of “not every transaction need to be recorded on the main chain,” Lightning Network actualized the idea of using ultra-low gas fee and short confirming time to transfer Bitcoin. By significantly reducing the gas fee and confirmation time, the technology undoubtedly provides the popular application of Bitcoin usage in real life. Now the Lightning can support small businesses with QR code payment. It’s very similar like Alipay and WeChat pay function.

Through the lightning network node, the individual user only needs to establish a channel with a larger node, and the system will automatically connect the payment party with the shortest path to achieve the fastest transaction without establishing a separate channel with all payers.