![]() The first version of the Lightning Network was launched on Bitcoin in March 2018. It was initially funded via a $2.5 million seed round, which included notable investor Jack Dorsey (whose company Square has since funded several grants for Bitcoin and Lightning Network projects). ![]() Lightning Labs, a blockchain engineering lab, helped to launch a beta version of the Lightning Network in March 2018-alongside a host of individuals and other companies including ACINQ and Blockstream. They argued that a network of micropayment channels could fix the scalability issues of the Bitcoin network, rather than changing the Bitcoin network itself to allow more transactions. The Lightning Network has its origins in musings by Satoshi Nakamoto, the pseudonymous creator of Bitcoin, but was formalized by researchers Joseph Poon and Thaddeus Dryja, who published a white paper about the Lightning Network on January 14, 2016. The bottom line is, payments are faster and cheaper. In theory, it could allow thousands, or even hundreds of thousands, of transactions to take place instantly, making small transactions economical. The Lightning Network is run by a network of nodes that process payments, and transactions are commonly made using QR codes-instead of complex public keys. The actual settlement of funds happens later-in some cases, days or weeks. Instead, there’s a quick verification of funds from the buyer and the request from the seller-giving the green light for a transaction to take place. When you pay for something, it’s not instantly settled. It bears similarities to the current settlement system used by companies like Visa and Mastercard. ![]() It’s made up of a system of channels that allows people or companies to move money between one another without needing to use the blockchain to verify the transaction. The Lightning Network is a layer-2 built on top of the Bitcoin network, meaning that it's built separately from the Bitcoin network but interacts with it. (We've got a whole article explaining more about Bitcoin's limitations.) What is the Lightning Network? And that’s where the Lightning Network comes in. That made Bitcoin largely uneconomical as a currency. ![]() At its peak in December 2017, the average cost to process one transaction on the Bitcoin blockchain-whether the amount was $1 or $1,000-was $37. As a result, transactions with the highest fees are prioritized for processing when the system faces high usage.īitcoin's scalability challenge became apparent toward the end of 2017 when millions of people jumped on the Bitcoin bandwagon and it struggled to cope with the number of transactions. As the network grows, however, so do transaction fees, since there is limited space in each newly mined block. When the system is small, and the number of transactions that need verifying is few and far between, the network works well and transaction costs are low. To help offset the cost of equipment and energy used in that calculation, miners charge transaction fees. This is where miners expend energy trying to solve a difficult puzzle. Bitcoin’s network, and others, are built upon a consensus protocol called proof-of-work. ![]()
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