Updated: Nov 19, 2018
Cryptocurrency and its blockchain system I believe its hands down one of the most significant technological advances within a few years. Although it's an excellent invention, it has its flaws. One of the biggest problems in this technology is the number of transactions that can be made per second. I learned that there are only a certain amount of transactions that could be added to the blockchain per second, I never really paid mind to it. Recently I was going through a crypto exchange I signed up in and one of the things you could do within this exchange is lightning payments. I had honestly never heard of it… so that's when my exploring with the exchange stopped and I started reading about the Lightning Network. Seems every time I want to focus on the exchange something new pops up.
I believe when people swipe their credit card to make a payment the thought of how many people are doing that same action at the same time all over the world never crosses their mind. The truth is that its more than we imagine. Visa can have 4,000 transactions per second, while bitcoin can handle up to seven per second. Yes, only seven. This is a huge problem, because nowadays, for the most part, cryptocurrency is used as an investment or for traders, people are not buying their everyday products with crypto, and the idea is for this to happen eventually. So how will this happen if only seven transitions can be added to the blockchain per second?
Lightning Network was launched on March 2018, showing a solution to the large scale transaction problems on the blockchain. According to lightning. network “The Lightning Network is dependent upon the underlying technology of the blockchain. By using real Bitcoin/blockchain transactions and using its native smart-contract scripting language, it is possible to create a secure network of participants which are able to transact at high volume and high speed.”
Although this initiative sounds excellent and I believe it's a good first option to deal with this particular problem. Once I started reading how it works I consider that it's still complicated to understand and use, considering that this was made so crypto can be used in large-scale payments.
The Lightning Network runs on smart contracts, where two parties agree on. I watched a youtube video that explained how it worked and they used an example that is also used several times on the web for explaining this method of payments. The network opens up a channel between two people that agree on specific terms.
This is an example from crypto exchange Buda giving almost an exact example that the video gives:
“What is Lightning Network? The best way to explain it is with an example:
Alicia buys coffee every morning in Bernardo's cafeteria.
She likes to pay with Bitcoins, but this is not very convenient:
For each coffee you take, you must generate a transaction to the Bitcoin blockchain, which takes about 10 minutes to confirm the transaction. You must also pay the fees of the miners for each transaction you make with bitcoin, and in some cases, these fees are more expensive than the cost of your coffee.
Lightning Network offers a solution to this problem:
Occupying her Lightning Network app, Alicia establishes a payment channel with Bernardo, her barista and owner of the place where she buys coffee every day. In this payment channel, Alicia reserves the Bitcoins that she will occupy to buy all her coffees of the month where Bernardo, generating a transaction that is registered in the Bitcoin blockchain. Alicia and Bernardo begin the balance of their payment channel indicating that, for now, all the reserved funds belong to Alicia. When Alicia buys a coffee, this balance is updated by delivering part of the funds from Alicia to Bernardo, but without notifying the blockchain. This continues throughout the month, at the end of which Alicia and Bernardo decide to settle accounts, for which they close their payment channel and transmit the last balance to Bitcoin's blockchain.
In this example, Alicia bought coffees for a whole month, making dozens of transactions with Bernardo, but it was only necessary to make two transactions in the Blockchain: the initial reservation transaction and the final closing transaction. Here lies the power of Lightning Network: to make transactions with Bitcoin, but without needing to validate in the Blockchain, which allows scalability almost without limits.”
As soon as I finished reading this it gave me the feeling it was a hassle to this, considering the effort made now when people go buy a coffee. The fact that I would have to open up a tab and put a certain amount of money that I may or may not use in this particular coffee shop. Yes, if I don't purchase anything I can close the tab and wait for the other person to close it as well and my crypto will be given back to me, also considering that the person has 30 days until he can close the tab, if he doesn't close it even though he was asked to cancel the tab all the crypto will be transferred back after the period of time established and that you signed off on.
On the other hand, I'm sure there are people out there that always go to the exact same shop to buy their coffee, but there are others that have many spots. So, imagine having many tabs with all these different shops and they are only for buying coffee. Aside from this, all shops have to be in the Lightning Network. I know it seems I am only focusing on its flaws, but I do consider this a very big step on finding the final way on how this will be solved, it's still in early stages.
The exchange company I'm using is Buda and they are working with Lightning Network. Buda is acting as an intermediate with a few other companies that offer goods and services; I'm looking forward on giving it a try.
Hope you enjoyed it, feel free to comment.