The Lightning Network (LN) is a "layer 2" payment protocol designed to be layered on top of a blockchain-based cryptocurrency such as bitcoin or litecoin.It is intended to enable fast transactions among participating nodes and has been proposed as a solution to the bitcoin scalability problem. It features a peer-to-peer system for making micropayments of cryptocurrency through a network of bidirectional payment channels without delegating custody of funds.
Normal use of the Lightning Network consists of opening a payment channel by committing a funding transaction to the relevant base blockchain (layer 1), followed by making any number of Lightning Network transactions that update the tentative distribution of the channel's funds without broadcasting those to the blockchain, optionally followed by closing the payment channel by broadcasting the final version of the settlement transaction to distribute the channel's funds.
To settle the payments the channel must be closed. To initiate this process one node broadcasts the most up to date settlement transaction to the network. The next events can broadly be thought of in two ways, a cooperative closure in which both parties confirm a distribution and funds are immediately settled and an uncooperative closure. Uncooperative closes may be legitimate for example if one node is no longer part of the network or fraudulent with one node broadcasting an incorrect distribution (likely an outdated one). In uncooperative closures the funds are not settled instantly but there is a dispute period within which nodes may contest the broadcast distribution. If the second node broadcasts a more up to date distribution then the funds are transferred entirely to them. This punitive act, known as the breach remedy transaction, prevents nodes from attempting to defraud the network by broadcasting out of date transactions.
Joseph Poon and Thaddeus Dryja published a draft of the Lightning Network white paper in February 2015.
Lightning Network has been endorsed by mobile payment entrepreneur Jack Dorsey.
On January 19, 2019, pseudonymous Twitter user hodlonaut began a game-like promotional test of the Lightning Network by sending 100,000 satoshis (0.001 bitcoin) to a trusted recipient where each recipient added 10,000 satoshis ($0.34 at the time) to send to the next trusted recipient. The "lightning torch" payment reached notable personalities including Twitter CEO Jack Dorsey, Lightning Labs CEO Elizabeth Stark, and Binance CEO "CZ" Changpeng Zhao, among others.The lightning torch was passed 292 times before reaching the formerly hard-coded limit of 4,390,000 satoshis. The final payment of the lightning torch was sent on April 13, 2019 as a donation of 4,290,000 satoshis ($217.78 at the time) to Bitcoin Venezuela, a non-profit that promotes bitcoin in Venezuela.
In June 2021, the Legislative Assembly of El Salvador voted legislation to make Bitcoin legal tender in El Salvador.The decision was based on the success of the Bitcoin Beach ecosystem in El Zonte that used a LN based wallet. The government has introduced a wallet utilising the Lightning Network protocol while giving the freedom for citizens to use other Bitcoin Lightning wallets.
Andreas Antonopoulos has referred to the Lightning Network as a second layer routing network.The payment channels allow participants to transfer money to each other without having to make all their transactions public on the blockchain. This is done by penalizing uncooperative participants. When opening a channel, participants must commit an amount (in a funding transaction, which is on the blockchain). Time-based script extensions like CheckSequenceVerify and CheckLockTimeVerify make the penalties possible.
"If we presume a large network of channels on the Bitcoin blockchain, and all Bitcoin users are participating on this graph by having at least one channel open on the Bitcoin blockchain, it is possible to create a near-infinite amount of transactions inside this network. The only transactions that are broadcast on the Bitcoin blockchain prematurely are with uncooperative channel counterparties."
The CheckSequenceVerify (CSV) Bitcoin Improvement Proposal details how Hash Time-Locked Contracts are implemented with CSV and used in Lightning: BIP 0112.
There are several claimed future benefits to using the Lightning Network compared to on-chain transactions:
The Lightning Network is made up of bidirectional payment channels between two nodes which combined create smart contracts. If at any time either party drops the channel, the channel will close and be settled on the blockchain.
Due to the nature of the Lightning Network's dispute mechanism, which requires all users to watch the blockchain constantly for fraud, the concept of a "watchtower" has been developed, where trust can be outsourced to watchtower nodes to monitor for fraud.
In the event that a bi-directional payment channel is not open between the transacting parties, the payment must be routed through the network. This is done using an onion routing technique similar to Tor, and it requires that the sender and receiver of the payment have enough established peers in common to find a path for the payment. In effect, a simple route would look like this:
The original whitepaper in reference to routing suggests that "eventually, with optimizations, the network will look a lot like Tier-1 ISPs".
BOLT (Basis of Lightning Technology) specifications were drafted in late 2016.Several implementations were made:
Cryptocurrency exchanges such as Bitfinex use it to enable deposits and withdrawals.Laszlo Hanyecz, who gained fame in the cryptocurrency community for paying 10,000 BTC for two pizzas in 2010, bought two more pizzas in 2018 using Lightning Network and paid 0.00649 BTC.
Zion,The Bitcoin Social Network, utilizes the Lightning Network running LND to send content peer-to-peer through channels.
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