Lightning Network is a layer-2 protocol, primarily for Bitcoin. Litecoin will also support it. Ethereum will not support Lightning, but will do some other things that I know less about.
- Bitcoin transactions today cost about $20 each and take at least 10 minutes (usually more) to confirm. Lightning Network solves the scalability limitations of Bitcoin by lowering costs, reducing latency, and increasing transaction volume.
- It acts kind of like a bar tab (called "payment channels"). "Opening" a tab and "Closing" a tab will still have delays & fees on the main Bitcoin blockchain, but any transactions in between are going to be instant and low-cost.
- The main innovation is that, a transaction can jump across multiple channels. Example:
- I have one channel open with Starbucks
- I have another channel open with Tommy.
- Tommy has a channel open with Chris
- If Chris wants to buy a coffee from Starbucks,
- Chris pays Tommy
- Tommy pays me
- I pay Starbucks
all on Chris' behalf. Everyone involved gets a small fee as reward.
How you get in
To partake in the Lightning Network, the only requirement is to open a payment channel with another well-connected node on the Bitcoin network. Once you have your channel open, all payments will be routed worldwide automatically.
Checking Account vs. Savings Account
Since you can only spend your Bitcoin on the Lightning Network if you have enough BTC secured in a payment channel, your channels essentially act as your Checking accounts, and your main Bitcoin wallet acts as your Savings account.
It would be reasonable to keep some spending money locked up in channels at all times, and occasionally top it up (maybe once a month).
Purchasing coffee by scanning a QR code on your smartphone, which contains your Bitcoin wallet & lightning client, will finally be feasible.
The video below shows the project's lead developer demonstrating a small transaction. And since he already had a payment channel open with a peer, the transaction gets confirmed instantly, and costs about $0.07 (546 Satoshis).
Websites & apps will be able to easily ask for micro-payments with risk-free, instant confirmations, without having to exchange sensitive information (a.k.a credit card numbers).
Getting paid online
Websites & apps will also be able to pay users directly, securely & easily. This is currently not possible (at least in Canada) without each user having their own merchant account. Compensating users for content contribution or any other services will be trivial for online businesses.
A new type of payment format will be feasible, where payments can stream continuously, such as watching an online video that costs $0.001 per second. In this model, the payment would be committed and confirmed throughout the video, not just counted and paid at the end.
We often forget how much we pay banks to let us open Checking accounts (I've seen ranges from $4/mo - $30/mo), transfer funds from Savings accounts (I've seen $5/transfer), and how much Credit Card companies charge businesses (Ranges from %1.26 to %2.79).
Lightning Network will be fully competitive with the existing financial system in terms of cost, and is as fast as Credit Card transactions.
Lightning Network can currently be used in production, however it is not advisable.
There are a few people running it on the Bitcoin mainnet, but they are risking losing their money since the software is not mature enough to be considered stable & trustworthy yet.
Most people are running it on the testnet for testing & development purposes. There are currently about 740 nodes online, with 2500 payment channels on testnet.
To see Lightning Network gain adoption, we will have to be patient as we watch users join the network one by one. Each time there is a new node & a new channel, payments will have a new path to route through, making the network faster & more resilient.
It will grow in a very similar fashion to how the Internet was born. Initially there were several servers online in the whole world, sending emails directly by IP number. Over the years, adoption saw an exponential curve and the Internet became a massively connected, reliable, life-changing system that no single entity owns or controls.
- Can I have more than one channel?
Yes, you may want to have multiple channels open for redundancy.
- What happens if my peer closes the channel before I am done?
You get your unspent BTC refunded back to you, and you open a new channel with someone else.
- What happens when payments get dropped by a node on the route?
Payments are rerouted/retried when a payment attempt fails.
- Is it possible to cheat the system?
No. However bugs may exist and will be fixed as they are discovered.
- Does it require mining?
Mining is only used to open and close channels on the Bitcoin blockchain. Any transaction made from the Lightning channel will NOT rely on mining, and is fully energy efficient.
- Is it possible to make money by running a massive Lightning Node to route payments?
Barely... Since the computational requirements are so low, there is expected to be huge competition over handling transactions, and the fees will likely always be very low. Volunteers could even run zero-fee nodes out of good will, which would instantly attract the traffic.
- Should I do anything yet?
No, it is not time to use it with real money yet. But watch closely.
Please post your questions below if you have any, I'd be happy to answer them.