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Lightning Network and Layer 2 Solutions

The Blockchain Scalability Problem​

Early blockchain systems, including Bitcoin, were originally designed with a priority on security and decentralization. This led to limited network throughput and relatively high transaction confirmation delays.

As blockchain popularity grew, it became clear that mass adoption requires additional solutions to increase speed and reduce transaction costs.

The Lightning Network Concept​

Lightning Network is a layer 2 payment protocol proposed in 2015 that operates on top of the Bitcoin blockchain. Its main idea is to move most transactions off the main blockchain while preserving its security.

Lightning Network does not replace the blockchain but complements it, reducing the load on the main network.

Payment Channels​

The main element of Lightning Network is bilateral payment channels. To open a channel, parties create a special transaction in the Bitcoin blockchain and lock a certain amount of funds in it.

After opening the channel, participants can conduct unlimited transactions between themselves without recording each operation on the blockchain.

How the Payment Channel Network Works​

Payment channels form a network in which users can send funds even to participants with whom they do not have a direct channel. The payment passes through a chain of intermediate nodes if a route with sufficient liquidity exists in the network.

Lightning Network nodes perform the function of payment intermediaries and provide transaction routing.

Channel Closing and Finalization​

A payment channel can be closed at any time. Upon closing, only the final state of the channel is broadcast to the blockchain, reflecting all previous operations.

Thus, multiple transactions are aggregated into a single blockchain record.

Advantages and Limitations of Lightning Network​

Advantages:

  • high transaction speed,
  • low fees,
  • reduced blockchain load.

Limitations:

  • need for recipient online access,
  • limited channel liquidity,
  • infrastructure complexity.

Brief Summary​

Lightning Network is an important stage in the development of the Bitcoin blockchain, demonstrating the possibility of scaling without changing the base protocol. Despite limitations, the concept of layer 2 solutions has had a significant impact on the development of the entire crypto industry.