Joseph Poon and Thaddeus Dryja came up with an innovative idea in their whitepaper The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments. They proposed a way to make Bitcoin highly scalable from 8 transactions per second(TPS) to about million TPS.
Since then, it has caught a lot of attention and development work in going to make lightning networks a reality. In this article, we will discover behind scenes of the lightning network.
Problem with current Bitcoin system-TPS is very low: Currently, Bitcoin blockchain can handle 7 to 10 transactions per second. Other payment systems like Visa can handle up to 65000 transactions per second. That hinders the scalability and adaptability of Bitcoin. Mining fees: The mining fee can go high, which makes micro-payment economically infeasible. Also Read: A Candid Explanation of Bitcoin
Let’s try to understand it with a real-life example. Consider a situation where you are in a grocery shop. You buy some groceries, and then you made a payment in bitcoin. Because of the mining fee, you paid an additional amount to mine your transaction in about 10 minutes(it is the time interval in which blocks are produced in Bitcoin). You finished your shopping, and when you were returning, you remembered you forgot to buy some stuff. Therefore, you went back to the shop to get them, and then you have to repeat the whole process once again. You were compelled to spend more Bitcoins and more time for a simple task of buying groceries.So how Lightning Network solves this?
Lightning network is a layer two solution built on top of Bitcoin blockchain to facilitate speedy micro-payments with almost negligible using payment channels technology.
In our example, if we use the Lightning network, the process will be completely different and faster. Initially, the shop keeper and you would deposit a certain amount of Bitcoins called Funding Transaction to open a payment channel. The amount ...