The Lightning Network is an off-chain protocol aiming to solve Bitcoin’s (BTC) scalability issues. Off-chain solutions, sometimes referred to as layer-two solutions, enable users to create peer-to-peer payment channels with one another.
Generally, off-chain payment channels are meant for smaller Bitcoin transactions such as buying a coffee. On a payment channel, transactions do not clog up the mainnet and validators can focus on more significant transactions instead.
The Bitcoin network’s focus on significant transactions is vital, considering that the blockchain can only validate a measly seven transactions per second (TPS). For reference, Visa can manage over 47,000 transactions per second. The Lightning Network can potentially bring Bitcoin’s TPS closer to that of Visas.
The Lightning Network brings along its own issues like requiring specific wallets or its accidental implementation of a transaction scam bug. However, even with such downsides to Lightning Network, the protocol’s use case cannot be denied. Lightning Network is an extra layer of the Bitcoin blockchain that employs two-way payment channels, allowing users to transact with each other for meager fees, and only the initial and last transactions are recorded on the Bitcoin blockchain once the parties have closed the channel. Users in a payment channel can make as many transactions as they desire, and they can do it quickly and for a low price.
The goal of the Lightning Network is to reduce Bitcoin’s blockchain congestion and achieve quick transactions by eliminating the need for users to wait for transactions to be completed. Participants on the Lightning Network can conduct transactions without knowing or trusting each other.
Keeping smaller transactions off of the mainnet ensures a higher number of TPS and saves users from paying exorbitant fees for a small Bitcoin transaction.
Although the Lightning Network was created to address Bitcoin's scalability issue, it is being considered by several other cryptocurrencies and altcoins to improve their own scalability. Some projects like Litecoin (LTC) have a specialized version of Bitcoin’s Lightning Network. Others like Ethereum have unique solutions inspired by the Lightning Network with a few key differences.
A brief history of the Lightning Network
Thaddeus Dryja and Joseph Poon, two researchers looking to solve Bitcoin’s scalability issues, proposed the Lightning Network in 2015. In a paper titled “The Bitcoin Lightning Network,” the researchers delved into a concept called payment channels initially discussed by Bitcoin’s anonymous founder, Satoshi Nakamoto.
Payment channels are off-chain peer-to-peer (P2P) tunnels enabling two untrusted parties to send money back and forth without congesting the mainchain. Channels are aimed at smaller transactions such as paying for a coffee with Bitcoin. Upon opening a channel, for example, between a customer and a supermarket, the two parties can instantly send unlimited amounts of Bitcoin between one another with minimal transaction fees.
Hosting small transactions off-chain leaves room for more significant transactions on the main chain, as Bitcoin miners tend to validate more important transactions to earn bigger rewards. Before payment channels, smaller transactions would take hours to validate, as they serve little value to miners.
Opening a channel is represented by one transaction on the mainchain. All transactions within the channel are held off-chain until one party decides to close the channel, consolidating all of its transactions into one and committing to the mainchain.
While the Lightning Network seemed like an ideal implementation upon its proposal in 2015, the Bitcoin network couldn’t handle the upgrade until the implementation of Segregated Witness (SegWit) via a soft fork, which wasn’t until 2017. SegWit was an upgrade to the Bitcoin network that provided more space for transactions in each Bitcoin block and removed a bug that enabled users to fake transactions.
To push the development of Lightning Network forward, Dryja and Poon founded Lightning Labs in 2016. However, it was not until 2018 when Lightning Labs launched a beta version of the Lightning Network on Bitcoin’s main chain. Other Bitcoin enthusiasts such as Twitter founder Jack Dorsey dedicated resources toward the Lightning Network as well.
The importance of the Lightning Network to Bitcoin
While Bitcoin is meant to be a global instant payment facilitator, the network struggles with slow transaction times and high fees. The Lightning Network, while not a perfect remedy, is a step toward Bitcoin’s initial vision.
Lightning Labs’ implementation of the Lightning Network is paving the way for a world where anyone can easily use Bitcoin for everyday transactions. Despite existing off-chain, the Lightning Network can harness Bitcoin’s security protocols, so users don’t have to sacrifice protection for utility.
Since the Lightning Network’s launch, developers have released gambling applications and wallets that specifically harness the power of faster and cheaper transactions. Cryptocurrency exchanges integrate Lightning Network support, ensuring that users can withdraw and transfer smaller amounts of Bitcoin without paying exorbitant fees. Moreover, $110 million worth of Bitcoin is locked into the Lightning Network, according to DappRadar, meaning that people are utilizing the network to a great degree. Users are bound to lock even more money into the Lightning Network as the technology develops.
Perhaps the most exciting element is developers harnessing Bitcoin’s Lightning Network implementation and integrating it into other blockchain projects, known as altcoins. Crypto experts argue that implementation of the Lightning Network in altcoins is unnecessary, as many are designed to be faster and cheaper than Bitcoin in the first place. On the other hand, a Lightning Network-powered Bitcoin could render various altcoins obsolete. After all, if Bitcoin is suddenly faster and cheaper than competing assets, adding the Lightning Network to altcoins could be useless. Regardless, altcoin projects are working hard to implement the Lightning Network or some variation of it.
Lightning Network’s expansion to other blockchain networks
Altcoins are any other cryptocurrency that is not Bitcoin. In general, altcoins are substitutes to Bitcoin that cover up the faults or limitations of the Bitcoin blockchain. Ethereum, Litecoin, Dogecoin and every other cryptocurrency is an altcoin. Many altcoins have adapted Bitcoin’s Lightning Network technology into their own networks, with Lightning Labs having implemented the Lightning Network in some projects themselves.
When Lightning Labs launched Lightning Network on Bitcoin, the group also launched it on Litecoin. Launching the Lightning Network on Litecoin was a relatively simple expansion for Lightning Labs, considering Litecoin is a fork of Bitcoin, meaning that they share a similar infrastructure. Litecoin integrated SegWit in 2017, which provided it with larger block sizes. Larger Bitcoin block sizes mean more transactions can fit within each block. More transactions in each Bitcoin block result in more transactions getting validated at once and a higher TPS overall.
Crypto enthusiasts argued that Litecoin’s implementation of the Lightning Network was useless, considering that the blockchain already facilitated cheaper and faster transactions than Bitcoin.
However, the expansion of the Lightning Network did not stop with Litecoin. Lightning Network’s off-chain payment channels have proven to be incredibly useful, with multiple other blockchains adopting the protocol in their own way.
Altcoins with Lightning Network support
Before discussing Lightning Network implementations with altcoins, it is essential to understand the crypto industry’s reliance on alternative assets compared to Bitcoin.
Thousands of altcoins exist in the cryptocurrency market. Many alternatives aim to solve Bitcoin’s scalability problems through larger block sizes or a different consensus method like proof-of-stake (PoS). Other altcoins enable blockchain experimentation without altering Bitcoin’s core code.
Blockchain-based games, gambling platforms, governance systems and supply chain platforms exist due to altcoins, among other use cases. Ethereum, for example, has thousands of developers experimenting with altcoins by building decentralized applications (DApps) that replace traditional financial activities like using a bank to lend money. Lending money to banks means the institution will take a cut of any earned interest. DApps cut out the bank, meaning loaners earn more interest on their money.
Many DApps are not possible on Bitcoin due to scalability limitations and lack of modern crypto technology like smart contracts. Developers introduced networks like Ethereum to make up for Bitcoin’s lack of smart contract capabilities.
Now, alternative networks are borrowing Bitcoin’s Lightning Network concept as well. Each altcoin on this list has either Lightning Labs’ Lightning Network implementation or its own iteration of similar technology.
Litecoin’s 2017 SegWit upgrade paved the way for Lightning Network implementation. Since Lightning Labs launched the protocol on Litecoin, the blockchain network has experienced even faster transaction speeds and lower fees than before.
Lightning Network implementation in both Bitcoin and Litecoin also enables swapping cryptocurrencies between the two networks. Implementing Lightning Network into Litecoin follows a similar process to Bitcoin. Litecoin and Bitcoin share identical architecture as the former is a fork of the latter.
Lightning Network implementation also introduced atomic swaps, allowing traders to swap their Bitcoin to the equivalent amount of Litecoin. Two blockchain networks interacting in such a way is called interoperability. With the Lightning Network, a modified version of atomic swaps allow users to swap cryptocurrencies between off-chain payment channels rather than on the mainnet. Payment channel swaps are faster and cheaper than traditional atomic swaps, improving the cryptocurrency interoperability concept.
Zcash and Bolt
Zcash is a privacy-focused cryptocurrency enabling users to trade cryptocurrencies anonymously. Anonymity on the network is due to Zcash’s unique zk-SNARKS feature, which facilitates transactions between users without the need to reveal wallet addresses.
That said, if Zcash were to adopt the Lightning Network in its traditional form, the network would ruin the anonymity aspect due to the way the Lightning Network publicly validates payment channels. A company called Bolt Labs then created Blind Off-chain Lightweight Transactions (BOLT), a privacy-focused off-chain payments protocol inspired by the Lightning Network. Bolt implements zk-SNARKS into every payment channel, ensuring users can transfer value without necessarily seeing each other’s wallet addresses.
Furthermore, Bolt ensures that payments made over the same payment channel cannot be linked, even by transacting parties, through the use of two technologies: blind signatures and commitments. Users can hide the value of transactions using commitments. Signatures then require users to sign for an unknown transaction, so there’s no way to trace it back to a wallet address.
However, a critical Zcash problem carries over to Bolt. Due to Zcash’s anonymity, a recipient does not know if they legally acquired the money they’re receiving. On Bitcoin’s Lightning Network, if one party sees the other’s wallet address and looks it up, they could find associated criminal activity and close the channel immediately. With Bolt, one party cannot discover the other party’s identity.
The Raiden Network is Ethereum’s answer to Bitcoin’s Lightning Network. While the Raiden Network is not the same technology as the Lightning Network, it’s quite close.
Raiden Network is a layer two off-chain protocol enabling two parties to create a payment channel. However, the Raiden Network is currently in development and nowhere near as far as the Lightning Network.
That said, developers can easily plug into the Raiden Network via its application programming interface (API). APIs are used to easily integrate one project into another. Developers can easily integrate the Raiden Network thanks to its API, as the protocol supports all ERC-20 tokens developed on Ethereum’s blockchain. Also, the Raiden Network can facilitate payments between two parties even if they don’t have a channel set up. As long as a set of channels connects the two parties, they can transact with each other. For example, if two people have spent money at the same coffee shop, they can transact without a direct payment channel.
It’s possible that third-party customers running a Raiden Network channel, like a coffee shop, will charge minuscule fees for using the channel. Otherwise, transferring money between a peer-to-peer payment channel won’t cost a fee.
Unfortunately, the Raiden Network requires users to lock up a small amount of their funds to create a payment channel, a similar problem that the Lightning Network shares. This fee is essentially the lifetime cost of running a payment channel.
Similar to Litecoin, the Decred platform is a version of the Lightning Network protocol adopted by Bitcoin. Decred’s protocol is based on a Decred-specific code fork of the Lightning Network referred to as the Decred Lightning Network Daemon, or dcrlnd.
Decred began as a source code fork of btcd, an alternative full-node Bitcoin implementation. The Decred code fork included various adjustments to the traditional Bitcoin process such as adjustments to consensus rules, a Proof-of-Stake (PoS) layer to enable a new hashing algorithm, on-chain governance and more.
Decred is a code fork, not a hard fork, because it launched from its own first block, the genesis block, rather than copying the state of the Bitcoin network. Launching from a genesis block meant the Decred blockchain started at a block height of zero, as block heights are determined by the number of blocks preceding it. A blockchain’s current block height is measured based on its current size.
The Decred fork did not gain access to Lightning Network until mid-2019, a year after Bitcoin and Litecoin integrated the protocol. Because of the integration delay, Decred’s version of Lightning Network isn’t as developed as Bitcoin and Litecoin.
Official Decred documentation states that while its Lightning Network is operational on the Decred testnet, it is recommended to keep a minimum amount of funds in a Lightning Network channel until the network improves. The Decred Lightning Network is not available on the mainnet as well.
Pros and cons of Lightning Network implementation in altcoins
Despite the various implementations of off-chain, layer-two protocols in altcoins, many of them suffer the same issues as Bitcoin’s Lightning Network.
For example, locking up funds in a payment channel is not a viable long-term solution. Payment channels are meant for smaller payments. Charging a lock-up fee to create a channel could turn off potential users of the Lightning Network.
Anonymity is both an advantage and a disadvantage with Lightning Network-based blockchains, especially in Zcash and Bolt. In Zcash’s case, anonymity means it’s impossible to know if funds are coming from an illegal source or not. While that anonymity is a big selling point for Zcash, it could cause regulatory issues and prevent widespread adoption, considering governments would have no way to track transactions.
As for other Lightning Network-based blockchains, the opening and closing of a payment channel are the only activities recorded on the mainnet. Transactions made within payment channels are entirely anonymous. Users will appreciate the Lightning Network’s limited anonymity, as most people want their transactions hidden from the rest of the world just like in the traditional finance space.
Moreover, there are the apparent benefits of Lightning Network implementation. Off-chain payment channels prevent smaller transactions from clogging up mainnets, solving a key scalability issue most networks face. Thanks to the peer-to-peer nature of payment channels, transactions are also instant and relatively cheap compared to mainnet transactions.
In cases like the Raiden Network, payment channels also enable swapping between different ERC-20 type tokens. This kind of interoperability means an entire ecosystem can take advantage of payment channels. Users can take a currency from one decentralized application and convert it to another. Conversions are cheap and instant within payment channels as well.
Nevertheless, off-chain protocol development still has a ways to go. While layer-two protocols present a possible solution to blockchain scalability, implementing off-chain networks introduces new problems and security risks.