What is Lightning Network and how the project solves bitcoin's main problem

What is Lightning Network and how the project solves bitcoin's main problem
Lightning Network protocol allows you to make cryptocurrency payments almost instantly and without commissions. Here's how it works, who supports it, and why it's not yet on the market

When memcoins in the BRC-20 token format flooded the bitcoin blockchain in early May, the cryptocurrency faced congestion and prohibitively high fees. The world's largest cryptocurrency exchange, Binance, was forced to shut down the ability to withdraw user bitcoins twice a day until an acceptable level of network load returned. The exchange announced that its development team is working to integrate transfers through a solution called Lightning Network, which they say "helps well in these situations."

The Lightning Network (LN) protocol is a bitcoin scaling system that acts as one solution to the problem of its limited bandwidth. It can be used to make almost instantaneous coin transfers with minimal fees.

The protocol concept was first introduced in a technical paper titled "Lightning Network for Bitcoin: Scalable Off-Chain Instant Payments" (The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments) in 2015. It was authored by developers Joseph Poon and Thaddeus Drija. Since the emergence of the Lightning Network, the developer community has been working collectively to improve both the protocol itself and the applications and tools that support LN transactions.

How it works
If you think of bitcoin as a huge highway where countless vehicles (transactions) compete for limited space, the Lightning Network protocol acts as a dedicated lane that allows you to bypass a congested main road. This is achieved by creating dedicated payment channels in which transactions can take place instantly, with minimal fees and without the need to write each transaction to the bitcoin blockchain.

To open such a channel, participants in a coin transfer create a common address and fund it with a certain amount in bitcoins. They can then transfer funds to each other, and the balance data on their addresses will be updated within the channel. When they close the channel, the final balance will already be written to the bitcoin blockchain as a separate transaction.

Payment channels can be created using wallets or other Lightning Network enabled software. You can use someone else's channel as an intermediary for transfers, in which case the one who opened it will receive a small commission. Since the transactions take place outside the blockchain, it is impossible to isolate a specific identifier for a particular transfer or to see the data about it in the blockchain browser.

What prevents proliferation
Despite the existing way of solving one of bitcoin's major problems, the Lightning Network protocol is still a long way from mass adoption, both for individuals and businesses. The technical complexities involved in creating and managing the channels act as a significant barrier for ordinary users. LN-enabled cryptocurrencies tend to be non-commercial developments that suffer greatly in interface design and user experience (UX).

In addition, the lack of standards for protocols hinders the interoperability of LN-enabled software developed by different teams. This makes it difficult to connect new users and integrate the protocol into large platforms whose owners are obviously interested in cheaper and faster coin transfers. Another problem is the limitation of liquidity in channels. Participants are forced to block a certain amount of bitcoin in the channel, which in itself limits the amount of funds available for transfer and reduces the usefulness of the protocol as a whole.

The relative newness and limited acceptance of the Lightning Network creates a certain paradox: few people trust the protocol without its widespread adoption, and its adoption, in turn, is constrained by the relatively small number of interested parties willing to use it.

This is largely due to the fact that the Lightning Network is itself a nonprofit project, with infrastructure development being done by volunteers. The opposite is true of Ethereum: networks scaling projects like Polygon, Arbitrum, Optimism, zkSync, and others have already formed an entire industry and are worth billions of dollars.

Projects and investments
Still, investors are backing projects that integrate Lightning Network into their payment solutions. In August 2022, Lightning Labs raised $80 million to fund the development of the Taro protocol, which allows transactions with stablecoins using Lightning Network. Investors in the project include former Twitter (blocked in Russia) CEO Jack Dorsey and Robinhood payment company CEO Vlad Tenyev.

In the same period, Strike conducted an investment round. It managed to raise $80 million, which it will use to partner with major retailers to connect its own wallet and acquire LN-based merchants. Investors have cumulatively invested about $10 million in Amboss and Mash platforms - both of which also create LN-based payment solutions.

Bitcoin scaling is one of the cryptocurrency's biggest challenges. As fees and network load increase, solutions to optimize transfers will become more and more relevant. The Lightning Network protocol is quite well known in the community, but there are still many obstacles to its diffusion.

Simplifying user interfaces, promoting interoperability, and improving the overall user experience are important steps toward making Lightning Network technology more accessible. Improved liquidity management and security measures are equally important to instill confidence in users of the protocol.

What is Lightning Network and how the project solves bitcoin's main problem

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