Lightning for Your Grandma ⚡

 Lightning Network: Explained in Simple Terms

Have you ever come across the saying, "You don't truly know something if you can't explain it to your grandmother"? Inspired by this adage, I've decided to explain how the Lightning Network (LN) works in a way that even your grandmother can understand. But before we delve into that, let me share a true story.

The Story of the Bakery

In the past, my father had an account at a local bakery. It was a ledger that stayed with the cashier, who would jot down everything my father consumed each day. My father and the bakery owner had an arrangement, similar to having a tab. He could eat whatever he wanted, and the cashier would record the items and their respective prices in the ledger. My father would then sign the ledger to confirm his expenses.

At the end of the month, on a specific date, the cashier would close the account, and my father would pay the accumulated amount. So, every month, there was a list of items and their values (toasted bread, coffee, juice, etc.) with his signature at the bottom and the total amount owed.

Why did They do it This way?

There were advantages for both my father and the bakery owner. Firstly, my father could eat, quickly sign the ledger, and defer the payment until the end of the month. For the bakery owner, it was a good deal too.

Besides "loyalizing" the customer, it streamlined the checkout process (which could get busy during certain hours) and consolidated the payment into a single transaction at the end of the month, thereby avoiding the fees associated with credit card transactions.

The Lightning Network operates on a similar principle. When my father and the bakery owner agreed to use the ledger, they established a faster channel for small transactions that would only be settled later in a larger transaction.

As most people already know, confirming a transaction on the Bitcoin network can be relatively expensive, especially for transactions involving small amounts of satoshis (1 BTC = 100,000,000 satoshis).

When a channel is opened on the Lightning Network, it's as if a ledger is opened, but instead of just involving my father and the bakery owner, an LN channel involves many unrelated people paying each other.

But the principle remains the same: a second layer acts as a means to expedite small transactions and settle them on the main Bitcoin network only when they reach a considerable volume. For Bitcoin to function not only as a strong, confiscation-resistant currency but also as a global payment network, several other second-layer solutions will be necessary.

The Lightning Network is the most famous among them. However, there are other promising projects like RSK, Liquid Network, Drivechains/Statechains, and RGB smart contracts.

You might think that the need for multiple layers to operate a monetary system is something new and exclusive to Bitcoin, but that's not true. The centralized system of fiat currencies also has multiple layers with different levels of security.

For instance, Visa processes around 4,000 transactions per second, and at maximum, it can handle up to 65,000 transactions per second. However, these transactions are credit operations that are eventually passed on to the banking system, similar to an electronic ledger system between Visa's clients and the banks.

Often, a simple coffee purchase is only settled weeks later in a large transaction between banks. The settlement between banks is another part of the problem, with the final confirmation being done through the central bank, the central node of the Brazilian system.

The Bitcoin network is decentralized, with various nodes needing to validate final transactions, which limits the number of transactions per second on its main layer. As each block can hold only one megabyte, confirming a transaction there is expensive for small purchases.

However, the main network is the most reliable: the number of bitcoins won't change, the transaction history cannot be altered, and you don't need anyone's authorization to transact. These characteristics embody Bitcoin's core values: absolute scarcity, decentralization, and transactional freedom.

In contrast, the centralized system of fiat currencies is the opposite: inflationary, centralized, and highly censorable. The central bank can create as many units of the local currency as it sees fit, alter transaction records retroactively, and even censor individuals from participating in the network.

It's terrible for the citizens but excellent for the banks and the government, who manipulate the money supply and maintain the oligopoly of the system.

Fortunately, we have Bitcoin as an alternative. In the coming years, we'll witness an explosion of second-layer solutions, allowing people to pay for their coffees using the strongest and freest currency ever invented.

We'll quickly pay for our toasted bread with satoshis by scanning the bakery owner's QR code using our mobile phones, all via sidechains.

Conclusion

The Lightning Network provides a solution to Bitcoin's scalability issue by allowing faster and cheaper transactions for smaller amounts.

Similar to the ledger system used in the story of the bakery, the Lightning Network establishes channels between participants, enabling them to transact without the need for every transaction to be recorded on the main Bitcoin blockchain.

As the adoption of Bitcoin and other cryptocurrencies continues to grow, second-layer solutions like the Lightning Network will play a crucial role in enabling seamless and efficient peer-to-peer transactions.

FAQs

1: What is the Lightning Network?

• The Lightning Network is a second-layer solution built on top of the Bitcoin blockchain that enables faster and cheaper transactions by establishing payment channels between participants.

2: How does the Lightning Network work?

• The Lightning Network uses smart contracts to create payment channels between participants. Transactions can occur off-chain, and only the final settlement is recorded on the Bitcoin blockchain.

3: What are the benefits of using the Lightning Network?

• The Lightning Network offers several advantages, including reduced transaction fees, near-instant transactions, and increased scalability for the Bitcoin network.

4: Are there any risks associated with using the Lightning Network?

• While the Lightning Network provides benefits, it's still a developing technology. There may be risks associated with channel liquidity, routing issues, and security vulnerabilities. It's essential to stay informed and use trusted implementations.

5: Are there alternatives to the Lightning Network?

• Yes, there are alternative second-layer solutions being developed, such as RSK, Liquid Network, Drivechains/Statechains, and RGB smart contracts. These solutions aim to address different use cases and provide additional functionality to the Bitcoin network.

This article was republished on the Portal do Bitcoin.