What Is The Lightning Network?
The Lightning Network is a layer 2 scaling solution for the Bitcoin mainnet. The Bitcoin Lightning Network seeks to improve the scalability of small-value transactions by moving them off-chain, improving speed, and drastically lowering fees.
As you have found what is a Lightning Network, let’s see how it works. LN consists of a network of interconnected payment channels. Each channel is opened when two or more parties enter a transaction on the Bitcoin mainnet and deposit funds. When the channel is open, participants can sign as many transactions as they wish without exceeding the deposited amount. These transactions are recorded and signed off-chain. When the channels close, the most recent state of the off-chain protocol is published to the mainnet, where the Bitcoin balance of the participants is uploaded.
Since Lightning Network nodes or channels are interconnected, they do not always need to open a direct channel with everyone who wants to transact. Payments can be routed via other channels if a path with enough liquidity exists between the two transacting nodes.
Existing Use Cases for The Lightning Network
One of the most notable use cases for Bitcoin Lightning Network is Twitter, the microblogging social media site. ON the site, users can send and receive BTC tips via LN. These payments are sent via an LN-compatible payments app called Strike. Those who have used this solution on Twitter can send BTC to others instantly.
El Salvador was the first nation in the world to declare Bitcoin as legal tender. One reason for this declaration was to deal with the massive $400 million transaction fees that citizens incur. The government came up with a wallet called Chivo, which is LN-compatible. It enables users to perform seamless cross-border transactions. Since its launch, it has been one of the most downloaded apps in El Salvador.
Another example is Paxful, which is a P2P exchange. There is a Lightning Payments capability on the platform, which processes millions of dollars in Bitcoin transactions. The integration enables fast and cheap BTC payments for millions of users.
Why Use LN?
The most obvious reason to use LN is that transactions are faster and cheaper, making micropayments possible. Without it, users must pay a high transaction fee to conduct a small transaction in BTC. Such a transaction can take up to an hour to process. Small transactions take longer to validate since miners pick large transactions that pay bigger rewards.
Another benefit of Bitcoin Lightning Network is that it is connected to the Bitcoin mainnet and thus, enjoys the security of the BTC mainnet. Users can use the primary network for large transactions and move to LN for small transactions without worrying about security issues.
Crypto enthusiasts have also been testing atomic swaps on LN, which entails swapping one coin for another without going through an exchange. Atomic swaps have advantages over using an exchange since they enjoy near-instant swaps that involve little to no fees during transfers.
The Future of LN
As of May 31, 2022, there is a total locked value (TLV) of over $115 million. This amount is being used to fulfill small transactions all around the world. Interestingly, the TLV on LN has been growing steadily since its launch over three years ago. As it grows, it could make it feasible to use BTC for its original purpose of facilitating P2P transactions instead of as a store of value and speculative investment as it is used today.