What is Lightning Network?

The excellence of the decentralized system is that it enables a real-time, massive network of transactions without the need to trust each other and third parties.

The Bitcoin Lightning Network has gained a lot of notoriety with Joseph Poon, Thaddeus Dryja's January 2016 paper "The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments," or caused a huge response at the time, and has been the first to start deploying it on Litecoin. A prerequisite for Bitcoin to deploy the Lightning Network is the Segregated Witness SegWit soft fork, which has already been implemented and has a foundation for such a deployment.

The Lightning Network provides a scalable network of micro-payment channels. If both parties to a transaction have a preexisting payment channel on the blockchain, they can achieve instantaneous confirmation of micro-payments in multiple, high-frequency, bidirectional ways; if both parties do not have a direct P2P payment channel, the Lightning Network can also use this payment path to achieve reliable transfer of funds between the two parties, as long as there is a payment path in the network that connects both parties and consists of multiple payment channels.

The Lightning Network does not attempt to solve the problem of dealing with silver goods in a single payment. The assumption is that the amount of a single payment is small enough that even if one party defaults the other party's loss is very small and the risk is tolerable. Therefore the premise of 'micropayment' must be borne in mind when using it.

Needless to say, the Lightning Network is a very clever design, and one could even argue that it is the best scaling solution without making massive changes to the underlying Bitcoin architecture (e.g. block scaling, changing the consensus mechanism, etc.), even if it is a disguised scaling.

The core concept of the Lightning Network, or Payment Channel, is that using some sophisticated bitcoin scripting, two parties can create a 'channel' that, once opened, allows them to make countless 'off-chain' transactions that do not require trust. To open the channel, both parties need to create a transaction together, and one or both parties in the transaction need to deposit bitcoin into the channel, which is then transferred to the bitcoin blockchain. When the channel is closed, either party has 1 second to respond, and the bitcoin network's on-chain transactions will pay for the transaction for both parties. However, when the channel is open, both parties can mutually negotiate a change in payment allocation at any time without an on-chain transaction. As originally designed, the Lightning Network will not end up as the "distributed peer-to-peer payment layer" described in the whitepaper, but rather as a quasi-centralized payment network like a bank, and in the best case, will end up as a hub-and-spoke topology.

At the same time, since sufficient funds must be available in the payment channel, that is, the payment relay should deposit advance funds to each channel, and in order to achieve timely and efficient payments, the deposits need to be about 10 times the amount required for the payment. Even if the network is not attacked, the sheer volume of deposited funds can pose serious security and liquidity problems. At the same time, numerical asymmetry is likely to occur frequently when people buy and sell in different channels for different amounts. The path from one node to another is easy to find, but the jumping path to find the correct value every time is the hardest part. If more than 50% of transactions fail to find a path, the Lightning Network will actually facilitate more Bitcoin on-chain transactions than transactions on the Lightning Network.

Regardless, the Lightning Network and technologies like RSMC and HTLC are advanced and revolutionary, and we must give credit to the developers who are contributing to the Lightning Network. However, the Lightning Network, as a blockchain parallel to Bitcoin, and at the same time implementing smart contracts based on the Bitcoin protocol, is a high starting point that inevitably brings very complex technical problems, some of which will not have perfect solutions because they will touch the very essence of Bitcoin.

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