In our last post we discussed the subject of regulation and more specifically the introduction of 5 AMLD and what it means for the crypto community. Those that missed the post can read it here. Today almost as a follow up, yet a completely separate topic we want to discuss the Lightning Network.

The Lightning Network is basically a 2nd layer that is being built on top of the Bitcoin Network. The name as suggested means that it aims to solve the scaling issue by allowing instant deposits & withdraws by people participating in the Lightning Network. The idea is very simple yet particularly brilliant as it is basically served as a separate wallet in which you almost top-up money in and anyone who you have ever transacted with before on the LN can use instantly. Here is an excellent explanation by CoinTelegraph (Read the full article here

"....the Lightning Network adds another layer to Bitcoin’s blockchain and enables users to create payment channels between any two parties on that extra layer. These channels can exist for as long as required, and because they’re set up between two people, transactions will be almost instant and the fees will be extremely low or even non-existent.

How does it work?

Enter Danny and Jon. They may be working together, they might be relatives or a couple, the point is they need to send money to each other rather often, quickly and with minimal fees. Thus, they set up a channel on the Lightning Network.

Firstly, they need to create a mulitisignature wallet, which is a wallet that they can both access with their respective private keys. Then, they both deposit a certain amount of Bitcoin - say, 3 BTC each - into that wallet.

From then on, they can perform unlimited transactions between the two of them. Essentially, these transactions are redistributions of the funds stored in the shared wallet. For instance, if Danny wants to send 1 BTC to Jon, she will need to transfer the ownership right of that amount to him. Then, the two of them use their private keys to sign for an updated balance sheet.

The actual distribution of funds happens when the channel gets closed. The algorithm uses the most recently signed balance sheet to determine who gets what. If Danny and Jon would decided to close the channel after that one transaction, Danny will get 2 BTC and Jon will receive 4 BTC.

Only after the channel is closed, the information about it’s initial and final balance is broadcasted to the Bitcoin blockchain. So, the way the Lightning Network works is it enables users to conduct numerous transactions outside of the main blockchain and then record them as a single one."

To put this is even more of a perspective, if anyone of our readers owns a Trezor he knows that moving BTC from sub accounts happens instantly. This is exactly the type of speed we are talking about with LN.

Here is also a great video explaining the Lightning Network :

However, like everything this specific solutions has some serious downfalls:

  • It really isn't good for big payments. There are several reasons for that, first there is the security aspect, that you are putting a large amount of BTC on a 2nd layer solution that will likely be heavily centralised and also subject to easier to do hacks.
  • The LN doesn't support offline transactions. This means that if one of the peers is offline users might be forced to wait for a long time before being able to get ahold of their funds again.
  • There are security concerns about the funds on the LN as already discussed, some of those have already been addressed by the excellent coders working on it.
  • For now the system really isn't user friendly at all, so widespread use seems pretty unlikely for now making naysayers dislike of the concept appear more legitimate every day.
  • There are privacy related concerns because of the fact transactions are not stored on-chain.

However, we do want to point something out here and perhaps this is why we started the post the way that we did. The name doesn't matter, it doesn't even matter if the solution that becomes highly adopted is Lightning Network or something else. What matters is that for us to use BTC on a day-to-day basis for buying coffee and our groceries we need a solution that works similar to cash.

If such a solution becomes adopted it will very likely raise a lot of questions with regards to KYC, specific LN wallets usage and such. However, one has to beg the question yet again, when you purchase coffee, does anyone ask you for what your source of funds is? We think that allowing people to spend up to $1,000/$2,000 without source of funds isn't particularly preposterous nor does it enable criminals in any significant way. We are highly worried that once we have mainstream solution like LN and businesses accepting payments via it, we will see governments actively discouraging businesses to accept such payments.

The LN is an attempt to create a fully functional monetary system that doesn't require fiat transition from your crypto. We are big fans of that and we do hope that perhaps governments and regulators around the world will be reasonable about it and allow innovation to flourish as some of the greatest minds in the world are working constantly to solve these huge issues in an attempt to create a better world and a better, fairer society.

This post has been prepared by XBTFX.

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