n 2009, Bitcoin released, and the evolution of digitalization began. Bitcoin's creator Nakamoto wanted Bitcoin to become the new medium of exchange. Nakamoto wants Bitcoin to replace cash and credit cards the same way it replaced gold.

With how the Bitcoin network operates, it currently handles 7 transactions per second. To put it into perspective, Visa handles 1,700 transactions per second. And Visa also has a peak capacity of 65,000 transactions per second.

Compared to Visa, scalability is Bitcoin’s biggest limitation towards becoming the new medium of exchange. Scalability is the ability to handle a growing amount of demand/work within a system.

If we were to start paying for everything in Bitcoin, the wait times for every transaction would be too long. This would be a major inconvenience for everyday use. Developers are looking for ways to upgrade the Bitcoin network to handle more transactions.

Some suggested altering the code to create forks in the network like Bitcoin to Bitcoin Cash. These ideas haven’t been well received by the majority of those in the Bitcoin community.  They believe changing the code of the network goes against the purpose of the network itself.

There has been a new solution suggested that works as an add-on to the network. The solution is the Bitcoin's Lightning Network.

What is the Bitcoin Lightning Network

The Lightning Network was first described by Joseph Poon and Thaddeus Dryja in 2015. It enables fast and cheap transactions on the current bitcoin blockchain. Blockstream, Lightning Labs, and ACINQ are the three teams working on the network. They are developing the network in three programming languages: C, Golang, and Scala.

The Lightning Network is a “Layer 2” payment protocol that works on top of the Bitcoin network. It is a network that connects various users together that agree to transact with each other. The Lightning Network itself does not alter the original code of the Bitcoin Network. It is used in conjunction with the original code thus the naming “Layer 2”.

The Lightning Networks solves the scalability issue like a person buying drinks at a bar. When someone buys many drinks, they can choose to pay for them separately, which leads to many small transactions.

This is the reason why the Bitcoin Network is so slow. Every single payment or transaction is being validated by the network. Continuing off of this analogy, instead of paying for each drink separately, you can open a tab and pay for all the drinks once you finish.

This is the type of solution the Lightning Network proposes. Many payments consolidated into one transaction to lighten the load on the Bitcoin Network.

How does Bitcoin lightning network

To go in-depth with the specifics of the Lightning Network, let’s imagine its use between two people. To use it, both users must create a multi-signature wallet they can access with their private keys.

After that, a certain amount of Bitcoin gets deposited into the wallet by either user. This is the “funding transaction”. This interaction between the two users is what’s called a “Payment Channel”.

Within a Payment Channel, any number of transactions can occur. And those transactions are not broadcasted to the Bitcoin Network. Either party can close the payment channel by issuing a “closing transaction”. Once the channel closes, all the transactions within the channel get consolidated into an initial and final balance. Then, it is broadcasted onto the Bitcoin Network.

Once Lightning Network adopts, users won’t have to set up a dedicated channel every time they want to send funds. Instead, it can send payments using channels with people the user is already connected with. By using “shortest path optimization”, the Lightning Network will use existing channels to connect new users to each other.

The implementation of the Lightning Network will solve the problem with scalability. Everyday transactions will no longer slow down the Bitcoin network.

Because transactions on the Lightning Network aren’t validated until the channel closes. They aren’t as secure as the transactions done on the normal Bitcoin Network. Small everyday transactions are great on the Lightning Network. Transactions with larger amounts should continue to use the regular Bitcoin network.  

Lightning network's applications

The Lightning Network also introduces atomic swaps and micropayments. Atomic swaps refer to the ability to transfer tokens between different blockchains. In other words, the Lightning Network allows for a person to switch their cryptocurrency (ie: Bitcoin) for another cryptocurrency (ie: Ether) without relying on a cryptocurrency exchange. This feature would be very beneficial for those who invest in many cryptocurrencies.

Micropayments are a feature that is more applicable to the average person. With the implementation of the Lightning Network, it will allow for users to send extremely small amounts of money over a consistent amount of time (ex: sending $0.01 per second) this type of payment is not possible with modern-day payment options (Visa, Paypal, etc.).

This could lead to innovative subscription models such as charging per time spent, instead of a monthly rate.

Content providers such as Netflix and YouTube can use it to charge their users. This can also allow musical artists to monetize their music via streaming in a more convenient way. The Lightning Network opens the way on how payments can be made over digital content.

The concepts proposed in The Lightning Network White Paper are very exciting. But due to the technology being new, there is no way to determine how effective it will be until it is adopted. Currently, there is no reliable bitcoin lightning network roadmap.

At the moment, any usage of the Lightning Network is only between testing teams. The Bitcoin Lightning Network release date is not announced as of now. Until the Lightning Network is operational, there is no convenient way to use it.

If Bitcoin does become a new medium of exchange, the Lightning Network could be the solution. It will allow for the mass adoption of Bitcoin and cryptocurrency. Any average person will be able to transact with Bitcoin.