A Simple Explanation of the Lightning Network

Network scalability has been a key topic of discussion in the bitcoin community over the past few years, and there are already many different solutions in the works from a variety of bitcoin developers. Although the block size debate has taken center stage in 2015, another proposal, the Lightning Network, could be just as useful in scaling bitcoin to hundreds of millions of users over the next few years.

Joseph Poon and Thaddeus Dryja (the two authors behind the Lightning Network paper) were recently invited onto the Epicenter Bitcoin podcast to discuss everything having to do with bitcoin’s scalability issues. Along the way, Poon and Dryja provided a simple explanation of their proposal.

What are payment channels?

At the core of the Lightning Network proposal is the usage of bitcoin micropayment channels. The micropayment protocol allows two parties to open a channel for multiple payments, and the payments that are made through that channel do not hit the blockchain until the channel is closed.

An example of payment channels in action can be found with Streamium. Streamium allows viewers to send a micropayment to a broadcaster for every second of video that they watch. Instead of sending sixty payments for watching sixty seconds of video via the blockchain, there are only two transactions that show up on the blockchain after the user has finished watching a stream.

Payments channels are made possible through a combination of a multisignature bitcoin address with nLockTime.

Creating a general network for payment channels

The Lightning Network takes this idea of payment channels to the next level by creating a general network, which anyone can use to make off-blockchain transactions. As Joseph Poon described on the Epicenter Bitcoin podcast:

“What the Lightning Network is creating [is] a system where you can create a payment channel on a general network, and by participating on this network, you can send bitcoin off-chain to anyone — and it never hits the blockchain until you close out the channel.”

Another way of looking at this is to think about the relationships between different users who have payment channels open with each other. Poon explained:

“Through somebody else, you can reach anybody else. So, maybe it’s Alice, Bob, Carol, and Dave — Alice has a relationship with Bob, Bob has a relationship with Carol, [and] Carol has a relationship with Dave. Alice can send money to Dave through Bob and Carol.”

Epicenter Bitcoin Co-Host Brian Fabian Crain followed-up Poon’s explanation with a comparison to Ripple. Poon seemed to acknowledge that the systems are somewhat similar, but he added, “I would argue that it is similar to the way financial systems work, and Ripple is similar to the way financial systems work.”

A minimal amount of trust is involved

Without getting into the details of how the Lightning Network works on a low, technical level, it’s important to note that there is a small bit of trust involved with the system. Having said that, the worst thing that another party on the network can do is lock up your funds for a day or so. When a new payment channel is initiated, the nLockTime parameter (mentioned above) is essentially a refund that will be executed in a situation where the party receiving payments in the channel disappears or becomes unresponsive.

If you’d like more technical details on how the Lightning Network works, make sure to read the paper or watch the entire interview courtesy of Epicenter Bitcoin.

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