**What is the lightning network?**
The Lightning Network is a network that sits on top of Bitcoin‘s blockchain that enables faster and cheaper payments. The Lightning Network allows for faster and cheaper transactions because it doesn’t get processed on the blockchain immediately. By users transacting on the Lightning Network instead of Bitcoin‘s main blockchain, it takes some of the traffic off of the Bitcoin network. Remember, Bitcoin‘s blockchain and the Lightning Network are two different networks that interact with each other.
**Why does Bitcoin need the Lightning Network?**
Currently, Bitcoin can only process roughly 7 transactions per second. When you compare this to Visa, which can handle 24,000 transactions per second, it looks very small. This wasn’t a problem in Bitcoin‘s early days when there weren’t many people using the network. Now that millions of people are using and transacting with Bitcoin this starts to become a problem. The main issue with this is that network fees increase when more people are sending and receiving Bitcoin. At the height of the 2017 bull market, below you can see that the median transaction fee went above $30 USD.
This makes Bitcoin very fragile as a payment system because it makes sending small transactions pointless. No point paying for a $4 coffee if it will cost you $30 in fees as well. This is another reason why Bitcoin is now seen more as a store of value.
**How does the Lightning Network work?**
The Lightning Network can process fast and cheap payments by opening up a “channel”. A channel allows two parties to send and receive Bitcoin between each other. They can do this as many times as they want, and when they are finished they can decide to close the channel. This will then update the main Bitcoin Blockchain with the correct balances of both parties and will record everything as only a single transaction. The best part about these channels is that they operate similarly to a large network. If you want to send Bitcoin to somebody, but don’t have a channel open with them, you can send the Bitcoin and it will travel through existing channels until it reaches its destination. The more channels that are open, the easier it becomes to make transactions with people.
Let’s say you go to the coffee shop every day and you decide to open up a channel on the Lightning Network so that you can pay for your coffee with Bitcoin. The owner of the coffee shop has his own channel set up with the local supermarket so he can use his Bitcoin to pay for groceries. If you went to that supermarket and wanted to pay in Bitcoin, but don’t have a channel with them, your Bitcoin would go through your existing coffee shop channel, and then use the channel the coffee shop has with the supermarket. So long as the network can find a route for the Bitcoin to go through, you don’t necessarily need a channel open with someone to be able to send them Bitcoin.
**Problems with the Lightning Network**
There is the possibility that large intermediaries that people transact with often become large hubs for Lightning Network payments to pass through. This isn’t a problem for facilitating payments, but it means that if a large number of transactions are using the same channels then a large portion of the network could collapse if these channels were to be hacked or crash.
For example, many people shop at Costco. If people wanted to pay for their food at Costco with Bitcoin, this would result in a large number of channels being opened with Costco. Since the lightning network tries to connect people that don’t have open channels, it will use the quickest route. Since Costco has lots of channels open with people, the Lightning Network would be likely to use Costco often to connect payments due to the large number of channels it has with people. If the Costco channel were to collapse or become hacked, then a large amount of the network would be unable to function.
Currently, the Lightning Network isn’t easy or intuitive to use for beginners. Just like Bitcoin early on, this makes adoption slow because it isn’t easily accessible to many people either. You are limited when it comes to using the Lightning Network and because a large system isn’t in place yet, anybody you want to send bitcoin to needs to have an open channel with you. The process of opening a channel is complicated and time-consuming so for most people it isn’t a friendly option.
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