{"id":5231,"date":"2024-01-01T12:00:48","date_gmt":"2024-01-01T17:00:48","guid":{"rendered":"https:\/\/coincentral.com\/?p=5231"},"modified":"2024-01-02T12:15:57","modified_gmt":"2024-01-02T17:15:57","slug":"lightning-network-beginners-guide","status":"publish","type":"post","link":"https:\/\/coincentral.com\/lightning-network-beginners-guide\/","title":{"rendered":"What is the Lightning Network? \u00a0A Beginner\u2019s Guide"},"content":{"rendered":"

If you\u2019ve ever dealt in Bitcoin, you may have suffered through hour-long (or at worst, day-long) transaction times. \u00a0It\u2019s becoming commonplace for Bitcoin to have <\/span>backlogs of 150k+ unconfirmed transactions<\/span><\/a> at times of high transaction volume, and when we couple this with its exorbitant fees, it\u2019s a wonder how you\u2019re ever gonna use it to pay for that 5 piece meal at KFC<\/a>.<\/span><\/p>\n

The lightning network is here to help with that. \u00a0This concept is the brainchild of Thaddeus Dryja and Joseph Poon, and the duo presented it with a <\/span>whitepaper<\/span><\/a>\u00a0back in 2015. If you\u2019re not too keen on reading the lengthy paper chock-full of tech jargon, we\u2019re gonna lay it out for you in layman\u2019s terms here.<\/span><\/p>\n

What is the Lightning Network?<\/h2>\n

On its most basic level, the lightning network is a method for Bitcoin<\/a> users to exchange currency value off the Bitcoin blockchain. \u00a0This is accomplished using a few complex algorithms that interact with Bitcoin\u2019s base script, and it allows for, that\u2019s right, lightning quick payments at a fraction of the transaction fees. As such, it\u2019s been presented as a necessary scalability tool, one that Bitcoin will need if it wants to be a viable payment option in the future. \u00a0This practice can extend to cross-chain atomic swaps. \u00a0These swaps are the same in practice, except that they take place between two different currencies\/blockchains. We go over atomic swaps in more detail here<\/a>.<\/span><\/p>\n

Now that we\u2019ve covered the much-too-simple explanation, it\u2019s time for a lengthier one.<\/span><\/p>\n

Lightning Network: How it Works<\/h2>\n

Opening a Bilateral Payment Channel<\/h3>\n

To get started using the lightning network, you\u2019d want to set up a payment channel. \u00a0Payment channels are the transaction avenues through which the lightning network transfers value. To establish one, you have to open a transaction for this channel directly on the blockchain.<\/span><\/p>\n

“But I thought you said all of this takes place off-chain?”\u00a0 Don\u2019t worry–it still does, but you first have to let the Bitcoin network know that you\u2019re opening a transaction. \u00a0Once you\u2019ve done this, you and the other party you\u2019re transacting with will keep your own balance sheet of the exchanges you make on the channel. \u00a0Transactions and updated account balances will be recorded on this ledger every time funds are moved, and after you\u2019ve conducted your business on the channel, you\u2019ll broadcast the final result to the blockchain to close the account.<\/span><\/p>\n

Multi-signature Wallets<\/h3>\n

“So if payment channels take place off-chain, where\/how are the funds managed until they\u2019re recorded onto the blockchain?”\u00a0 What a good-looking question. \u00a0In order to use a payment channel, both parties need to send their funds to a multi-signature wallet address.<\/span><\/p>\n

Let\u2019s say Molly and Steve have placed bets on the outcome of the Super Bowl. \u00a0They each wager 1 BTC and want to make sure that the other holds his\/her end of the bargain, so they deposit both of their funds into a multi-signature wallet. \u00a0This wallet functions like a safe for deposits, while a set of private keys for the transactions functions like combinations that allow either party to access the funds. \u00a0The funds will remain locked in the wallet until:<\/span><\/p>\n