A second-layer protocol that is designed to solve Bitcoin’s scalability problem by allowing transactions to be processed more quickly.
What Is the Lightning Network?
The Lightning Network is a “second layer” payment protocol that operates on top of a blockchain. It is designed to enable fast, scalable transactions between and across participating nodes, and has been touted as a solution to Bitcoin’s scalability problem.
Transactions are normally conducted on the blockchain, but Lightning involves taking transactions off-chain.
The Lightning Network was initially introduced to take the strain off the Bitcoin network and to lower associated transaction fees. Bitcoin’s critics have pointed out that, right now, the world’s biggest cryptocurrency is ill-equipped to play a role similar to fiat — primarily because it can only handle about seven transactions per second. By contrast, payment giants such as Visa can handle tens of thousands.
The Lightning Network is effectively a second layer for Bitcoin’s blockchain — creating payment channels to facilitate transactions.
Transactions are much faster as parties can transact with each other without everything having to be approved by nodes.
By contrast, the standard blockchain ledger does require approval from nodes in the blockchain, each of whom determines the authenticity of the transactions.
There are costs associated with using the Lightning Network, and critics claim that this scaling solution is also prone to hacks. They are also required to constantly be online, something which can prove to be a challenge.
Unfortunately, the Lightning Network does not allow BTC to be placed in cold storage.