Lightning Network

A lightning network is a way to increase the remittance speed of Bitcoin and realize an inexpensive way to have micropayments with smaller fees by having transactions performed off of the blockchain (off-chain).

Payment channels

Lightning networks use a payment channel system to make off-chain transactions between two parties. Payment channels can also use multisig technology, managing Bitcoin transactions with multiple private keys, to make off-chain transactions.

For example, Alice and Bob set up a payment channel to manage 10 BTC, consisting of 5 BTC from each of them and using their own private keys. If Alice sends 3 BTC to Bob, the 10 BTC between them will become 2 BTC for Alice and 8 BTC for Bob. The transfer requires two people with management rights to approve it, and either one can reject the off-chain transaction. Similar off-chain transactions can be performed for as long as they wish to continue. When they finally close the payment channel, only the final amount held by each one is recorded on the blockchain.

This means that multiple transactions can be performed in the payment channel without recording it on the blockchain, which saves money and time.

Structure

While off-chain transactions can see a substantial improvement in remittance speed and fees, but a new channel must be created to include another person since transactions are limited to only two parties. This means that it is difficult to spread its use.

Due to this, a new type of lightning network is being developed that will allow the ability to add new people by combining existing payment channels to perform off-chain transactions.

For example, if Alice and Carol do not have a shared payment channel but each have a payment channel with Bob, they could make payments using Bob as an intermediary.

While there is a possibility that Bob could abscond with the funds under his care, the use of cryptographic technology could solve this problem and make transactions with unreliable partners possible.

By creating a network of multiple payment channels, crypto assets could be transferred instantly with almost no fees.

The future

Using lightning networks for transactions can increase their speed and affordability, making micropayments of crypto assets which do not even reach a value of 1 JPY possible.

This could allow for a wider range of transactions; making it possible to develop new products and services.