Bitcoin’s Lightning Network Explained
Cryptocurrencies such as Bitcoin have risen to fame in the digital currency market thanks to a fast and reliable platform for online trading and investment. A lot of advancements have since been developed to strengthen the viability of cryptocurrencies since its inception back in 2008, with the Lightning Network being a key contributor to their success.
This NitroBetting guide will shed more light into what the Bitcoin Lightning Network is and the benefits that the system brings to the cryptocurrency landscape.
For even more information on cryptocurrencies in general, head over to our bitcoin guide.
What is the Lightning Network?
The Bitcoin Lightning Network is a digital channel wherein cryptocurrency transactions between two parties are processed. Transactions in the Lightning Network operate independently from the Bitcoin blockchain, and the blockchain is only updated when the two parties in a given transaction open and close a channel on the network.
What Does the Lightning Network Mean for Your Bitcoin?
Over the years, more and more Bitcoin users are making deals online simultaneously. In turn, networks became congested given the sheer number of transactions that need to be processed.
The Lightning Network alleviated the issue of network congestion on the main blockchain by opening multiple channels for two parties to conduct cryptocurrency trades without having to interact with the main blockchain, providing a faster turnaround time for both parties involved. For as long as a Lightning Network channel is open between two users, those two users can freely transact between one another without having to inform the main blockchain of their activity outright.
The Lightning Network makes use of what’s called “smart contracts,” with these digital contracts acting as receipts of sorts for transactions made within a particular Lightning Network channel. Fulfilled smart contracts are shortly relayed to the main Bitcoin blockchain to properly document and update the blockchain’s activity as a whole.
Here’s an analogy of how the Lightning Network works in principle:
John opens a Lightning Network channel in ABC Retail’s online store and deposits $200 worth of Bitcoin to it. Transactions between John and ABC Retail are instantaneous since he has a direct channel to the store.
Meanwhile, Jane has an open channel and deposits made with XYZ Grocery. It so happens that XYZ Grocery also transacts business with ABC Retail within the same channel. In turn, Jane can transact freely with both XYZ grocery, ABC Retail and John using her funds placed in XYZ Grocery given that they are all under one open Lightning Network channel. The same could be said for John, who now has Lightning Network access to Jane, XYZ Grocery and ABC Retail for future transactions.
Lightning Network Fees and Other Concerns
Considering that Bitcoin and cryptocurrencies operate using a peer-to-peer scheme, there are still people behind the Lightning Network working round the clock to ensure that transactions made on the network’s channels are hastily and validly processed. As such, there are indeed transaction fees that must be settled when using the Lightning Network in conducting business with another party using Bitcoin.
One concern to be aware of is as time passes, more and more people will be using Bitcoin on a daily basis. In turn, one could expect processing fees for the use of the Lightning Network to gradually increase.
Everybody using the Lightning Network will be charged the same based on the imposed transaction fee rates for the particular transaction they wish to partake in. This, in turn, is still a better solution for the digital trade landscape compared to other third-party financial institutions such as traditional banks and credit cards offering various transaction fee amounts for their respective services.
Another pressing matter that the Lightning Network is susceptible to is the possibility of cryptocurrencies being hacked or stolen given that the network is online 24/7. That being said, it’s never a wise option for Bitcoin traders and investors to keep their coins in cold storage within any and all open networks in the Lightning Network.
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READ MORE: Five Methods to Convert Bitcoin to Cash
