One of today’s hot-button topics in finance is cryptocurrency. From promises of wild wealth for early investors to the concepts of fair and free decentralized currency, cryptocurrency is considered by many to be the next big thing in finance.
However, the problem with cryptocurrency is that the majority of average consumers do not understand it well. From coins to blockchains, the concepts are abstract, difficult to grasp fully, and sometimes convoluted.
One element of cryptocurrency that is still shrouded in mystery is the idea of a “lightning network,” a network whose primary goal is to facilitate cheap and efficient transactions between participating nodes.
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What Is the Purpose of the Lightning Network?
In a broad sense, the lightning network allows users to exchange bitcoin or other coins without incurring any costs using their digital wallets.
Payment channels are established between the two parties so that they may conduct business with each other — that is, off-chain transactions.
The goal is speed and savings. Since transactions are processed off-chain, the lightning network makes for quick and prompt business that reduces fees.
How Does the Lightning Network Work?
Understanding the lightning network is not easy because it’s a relatively new concept in cryptocurrency. There is very little information on its mechanics. However, some fundamental concepts can help you understand how it works.
1. Payment Channels: Payment channels are a network that allows for a direct, yet totally private, exchange of funds between two users on a node. Payments can be exchanged using payment channels off the main blockchain. This is how lightning networks allow for fast, anonymous, and secure payments.
2. Hash Time-Locked Contracts (HTLCs): This smart contract between specific parties acts as an intermediary of sorts that will validate all transactions or payments. This ensures that all transactions are validated and encouraged so that the two parties involved can easily conduct business.
In other words, when X party sends Y coins to Z party, the contract ensures that both parties will come out with their goods for a valid transaction. If one side does not live up to its end of the bargain, the exchange is null and void.
The signatures are not exchanged in the case of a lightning node. This is done to avoid the main blockchain from recognizing the spending transactions. Instead, the two parties share a single key, which is used to validate spending transactions (also known as commitment transactions) between them.
Are There Any Issues with the Lightning Network?
The most apparent issue with lightning networks, which are designed to be decentralized, is that they might replicate a similar architecture in financial systems with banks and financial companies serving as key intermediaries throughout all transactions.
This may lead to a repeat of the very problem that Defi is working to solve. A breakdown at one of these centers might easily bring down a large portion of a network.
The future of cryptocurrency looks strong, and in time, the technology powering it will become more accessible to users. However, there are some growing pains that need to be worked out of its systems before they can take full effect.
