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What is the Lightning Network and Why It's Revolutionizing Bitcoin

29 April 2022
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What is the Lightning Network and Why It's Revolutionizing Bitcoin
What is the Lightning Network? / So How Would This Work for the Average Consumer? / 

LN allows instant transactions between participating nodes on a peer-to-peer network.

What is the Lightning Network?

The Lightning Network (abbreviated LN) is widely regarded as the most promising Bitcoin scaling solution. Built on top of the Bitcoin network, the Lightning Network is a Layer 2 solution that allows for near-instant and virtually free transactions, opening up the potential for Bitcoin to process trillions of transactions daily.

The Lightning Network is a new way to transact online — not just another PayPal. It carries all the properties of Bitcoin. It’s permissionless, borderless, secure, and transparent. Bitcoin possesses all of these traits on a global scale. It adds speed, efficiency, and most of all — scalability.

Lightning Network is an example of a layered protocol stack, a network design pattern where each individual "layer" of the system serves a separate purpose. For comparison, the most well-known layered protocol stack is the Internet. What we use to browse the web, send emails, and watch Netflix is actually built on a series of layered protocols — not just one. There's the physical layer, data link layers, application layers, and more, all stacked on top of one another underpinning the user interface. We don't see the nuts and bolts — just the user interface, or what we interact with on a daily basis.

Digital technologies work best as layered protocols because each level of the protocol stack is optimized for a specific purpose. Each layer does what it does best and lets the other layers in the system handle the rest. Each layer is meant to make the job of the next layer easier. It's kind of like how LEGOs work. Each individual block is a specific type of brick and each has a specific job to do, but they all work together in concert to create something greater.

Lightning's specialized "LEGO" block is its ability to create payment channels. With the Lightning Network, instead of making separate transactions on the Bitcoin blockchain for every purchase you make, you can set up a payment channel with a friend — allowing you to transfer money instantly, as many times back and forth as you see fit.

In the internet protocol stack comparison, Bitcoin is the physical layer, the base layer, the layer that makes everything possible. Lightning would be the layer built on top of it, the one that is more specialized to transmit payments quickly, cheaply, and efficiently. It’s still the same system, just different LEGO blocks.

It’s also similar to a live chat session: users establish a connection, exchange any arbitrary number of messages at light speed — as part of the same “session” — and then close the connection when they’re done.

Once Lightning has been deployed and adopted on the Bitcoin network en-masse, we'll see all sorts of specialized services that take advantage of open payment channels between different organizations.

The nitty-gritty of Lightning can seem daunting, so let's go through a quick example:

Let's say two companies want to use bitcoin on their backend but would rather not deal with long confirmations and high transaction fees. They open a channel and deposit some bitcoin into it. From then on, the two companies can transact with each other as much as they want without ever touching the base layer Bitcoin blockchain. All of their transactions happen rapidly, are trivially cheap, and involve no third parties. When they're done, they close the channel and the final balance is settled on the Bitcoin blockchain — all in one transaction.

Lightning channels can be used to buy coffee, send tips, or even stream live video. The possibilities are endless and only limited by our imagination.

So How Would This Work for the Average Consumer?

The good news is that you don't need to understand the inner workings of Lightning Network to use it. If you're using bitcoin, there's a good chance you're already using Lightning Network without even knowing it. It all happens on the back end, the nuts and bolts, the stuff you don't see. All you need to know is that Bitcoin is now faster, cheaper, and more scalable than ever before.

Let's take a look at a practical example. Let's say NOAH opens a channel with a company like ZEBEDEE. From then on, if a NOAH user wants to send sats to and from ZEBEDEE, she can do so quickly, cheaply, and easily, back and forth as many times as she likes, without ever touching the base layer blockchain. Trying to do this with the base layer Bitcoin blockchain would be slow, expensive, and impractical. Contrast this further with the legacy banking system, which is even slower, more expensive, and more impractical.

The killer feature of Lightning is this — as a user, you can now send sats from NOAH to ZEBEDEE, 3 times, 10 times, 100 times, 1,000 times — as many times as you want... and it would still be cheaper than a single on-chain Bitcoin transaction or legacy banking transaction.

This is not possible with any other payment system on the planet without incurring high fees, slow transactions times, or both. Bitcoin and Lightning is the only system that can offer this combination of speed and efficiency at scale.

For the average user, Lightning is now the fastest, cheapest, and most convenient way to send and receive payments.

Once Lightning has been adopted on the Bitcoin network en-masse, we'll see all sorts of specialized services that take advantage of open payment channels between different organizations. Companies could open channels with one another, companies could open channels with you, you could even open your own channel with a friend. As the Lightning web grows, we'll see an explosion of new services and applications that simply aren't possible with the base layer Bitcoin blockchain or legacy banking system.

The Lightning Network is a better way to transact online — not just another PayPal. It carries all the properties of Bitcoin — permissionlessness, borderlessness, security, transparency — and makes them accessible on a global scale. It adds speed, efficiency, and most of all — scalability.

NOAH believes in the promise of the Lightning Network, and that's why Lightning is at our core. We want people using Lightning because it offers something we all need — a way to transact instantly, safely, securely, and cheaply. Join us in building the future.

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