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Lightning Network - Indodax Academy

The guide to getting to know the Bitcoin Lightning Network below will be something important for you to know as a crypto asset trader or for beginners who are entering the blockchain world.

Basically, this Lightning Network will allow users to send or receive Bitcoins quickly and cheaply. The trick is to move transactions off the main blockchain—you can think of this as a High Occupancy Vehicle or HOV lane on a highway.

This new technology is also designed to make Bitcoin transactions as fast and inexpensive as possible. The Lightning Network is part of a newer class of crypto technologies, known as “layer 2” blockchains.

It is important to note that by moving some of the transaction “traffic” to the Lightning Network “layer 2” blockchain the Bitcoin core (“layer 1”) blockchain can move faster.

Some Examples of Bitcoin Lightning Network Use Cases

Below are a number of cases that you can consider regarding the use of this latest crypto technology, including the following:

  1. The popular social media application platform, Twitter, allows its users to send and receive Bitcoin “tips” via the Lightning Network. Through a Lightning Network compatible payment app called Strike, out of 360 million monthly active Twitter users, many of its users can send Bitcoin payments to other Twitter accounts instantly and for free. (Actually, Twitter isn’t the first content-driven social platform to incorporate the Lightning Network. That’s because the Substack platform has already allowed this BTC payment, since late August 2021 to be exact.)
  2. As is known, El Salvador was the first country to make Bitcoin a legal tender. Partly because of the desire to save Salvadorans about $400 million a year in money transfer fees. For your information, Chivo—a wallet made by the government of El Salvador, is Lightning compatible and designed to allow for seamless cross-border payments. Chivo itself in October last year consistently became one of the most downloaded applications in the Central American country.
  3. Paxful, a peer-to-peer Bitcoin exchange, which processes billions of dollars worth of Bitcoin transactions in emerging markets and claims to have as many as 1.5 million users in Africa alone, has also recently announced that it will be enabling Lightning payments. That integration could later make Bitcoin payments fast and cheap for millions of users.
Why Is This Bitcoin Lightning Network Important?

The next question that needs to be answered from all of this is, “What is the importance of this Lightning Network?”

Meanwhile, when Satoshi Nakamoto first described Bitcoin in a 2008 white paper, the pseudonymous creator used the phrase “peer-to-peer electronic money”. He proposed that cryptocurrencies might one day become a popular way for people to pay for goods and services online.

However, given that Bitcoin’s value has grown over the years, the narrative is shifting too. Now, everyone tends to think of Bitcoin as more like “digital gold”—some also refer to BTC as an inflation-resistant way to store wealth over time.

That’s partly because of the way the Bitcoin network is designed. As is well known, Bitcoin allows two strangers anywhere to securely send or receive value—without the need for a credit card company or payment processor to be in between.

As for it is done using a network of decentralized computers around the world, all of which need to reach a consensus (or agreement) regarding the current state of Bitcoin’s “digital ledger”. For that problem, the solution that Nakamoto offers is mining, which can be a time-consuming process.

While the main Bitcoin blockchain (layer 1) can generally handle less than 10 transactions per second, the Lightning Network (layer 2) can theoretically handle millions of transactions per second.

How Does the Lightning Network Work?

The Bitcoin Lightning Network is known to use smart contracts to create payment channels outside the blockchain between pairs of users. Later, once those payment channels were created, funds could be transferred between them almost instantly.

The smartest of all is that the network does not need to pair between all users. For example, if User A has a channel with User B, and User C has a channel with User B, but not with User A then funds can still be transferred freely between all parties in the network.

The Lightning address looks like a normal Bitcoin address and the payment process is very similar for users. Users can also close their payment channels at any time and settle their final balance on the core blockchain.

Since only the opening and closing of payment channels is recorded on the core blockchain, the entire Bitcoin network can move much faster. Also, Lightning Network transactions can be more private than those done on the main blockchain (that’s because all layer 1 transactions appear on a public and transparent ledger).

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