To be able to fully understand the Lightning Network, why it was developed, and what its potential is, we will have to go back to the launch of Bitcoin. When Satoshi Nakamoto initially revealed Bitcoin to the world via a mailing list, one of the first reactions was; ‘great idea but it will not scale’. The first criticasters were immediately concerned with the scalability of Bitcoin transactions on the blockchain.
The reason for this is the way the blockchain works. For it to safely work, every user would have to store loads of transaction details on their hard drive, making it an inefficient system by nature. Another issue to be addressed is the transactions per second [TPS], which greatly affects its usability.
In the past, this situation had not yet resulted in critical situations, but everyone can agree on the fact that for cryptocurrencies to be adopted commercially (for example buying coffee or doing groceries), the amount of transactions per second needs to rival centralized solutions which can handle thousands of transactions per second. Otherwise, merchants cannot accept cryptocurrency payments because the price of the asset fluctuates too often. In Bitcoin’s case, the Lightning Network may help solve this issue.
The Lightning Network creates an extra layer on top of the Bitcoin Blockchain, where it can settle a large number of transactions and subsequently write it to the Blockchain as a single unified transaction. This principle is not new, we have seen it with more conventional currencies as well. Where the Euro and Dollar are linked to the gold reserves, Lightning is linked to Bitcoin as a landmark or, when needed, an arbiter.
Similarly, real-world transactions are also often collated and settled in a single transaction, rather than individually. Since the Lightning network will take many transactions off-chain it will severely reduce the load on the Bitcoin Blockchain, thus allowing it to scale to many more transactions per second, without increasing on-chain load.
For example, Pascal often gets a coffee at Starbucks on his daily commute to work, which he likes to pay for in Bitcoin. Doing so five days a week, you would bump into some hurdles, not necessarily problems, but observations to take into consideration. First, every transaction you make will be stored on the Blockchain. Secondly, the transaction fees you will need to pay for the transactions will sometimes be extraordinarily high in comparison to the actual transaction value. Finally, it will take approximately 10 minutes for your transaction to be confirmed. Very inefficient for a quick coffee to go, don’t you think?
Here’s what Lightning Network can do to help smoothen things out between you and the cashier. In this case, the Lightning network is used as a micro-payments system which leverages off-chain capabilities to settle transactions that are ultimately updated on-chain, reducing the burden on the Bitcoin network.
This basically means that instead of having every coffee noted on the Blockchain, there will only be two messages sent on blockchain (on-chain); One initiating a payment channel between you and Starbucks and another to close it when the day is over for example. Final balance is updated on-chain.
It is like going to a bar and giving the waitress a hundred dollars in advance, so you will not have to take out your wallet every time you order a beer. Afterwards, just before heading home, you ask for an update on your status and will receive your change back. The channel is now closed. Using this principle, we can scale payments on the blockchain to millions of TPS, making Bitcoin a viable option for mainstream payments.
However, for all the future benefits of a scaling solution like the Lightning Network, there are still some downsides that need to be addressed. Unlike a blockchain, the Lightning Network does require both parties to be connected permanently while the channel is open. This can lead to more centralized hubs because transactions have to be routed.
Transactions can begin to revolve around certain hubs to reach a larger group in the network. Additionally, the Lightning Network only works for Bitcoin, and would not interoperate to promote scalability and adoption of other cryptocurrencies.
There are many players in the blockchain space attempting to solve scalability, however, it is still unclear what the dominant solutions will be. Often solutions do not allow for interoperability, meaning that even if a single player solves the problem, it might persist on many other blockchain networks. This opens a whole new opportunity to solve problems on all platforms.
OPEN is building an easy solution which allows for cryptocurrency transaction integration into existing applications. It does so by linking the OPEN API to regular software, in a manner familiar to most developers. This way solutions can be shared easily using development capability that is much more available than core blockchain development knowledge.
The OPEN platform doesn’t rely on one solution’s success to enable wide consumer adoption of Blockchain technology. Instead, it encourages the use of many cryptocurrencies through the OMG SDK. Leveraging our unique API economy will allow us to connect to any scalable blockchain solution, guaranteeing interoperability and scaling. If the Lightning Network is a success, then OPEN’s API economy will leverage this, however, OPEN will capitalize on any benefit created by any other cryptocurrency as well.
The blockchain revolution will unlock trillions of dollars’ worth of potential and scalability will play a huge role on the consumer and business side alike. OPEN Protocol drastically reduces the complexity of cryptocurrency payments integration and can thus give blockchain technology a significant adoption boost.
Using OmiseGo’s SDK, OPEN will bring scalability together with interoperability of payments. OPEN Platform is very excited to see the Lightning Network and other scalability solutions develop, and are rooting for a rich and useful blockchain ecosystem.
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