The Lightning Network has been subject to controversy since it’s rise to prominence in 2016. Championed as BTC’s solution to scaling, thousands of people in the Bitcoin community voiced their opinions on how it wouldn’t work. Now, nearly a year and a half later, it is still receiving criticism regarding its centralization, routing issues, and poor user experience.
The Lighting What?
If you already understand how the LN works, I suggest skipping to the next section.
During the Bitcoin scaling debate in 2016/2017, the lightning network and other layer-two solutions were considered the best path forward for the network, instead of a minor blocksize increase. The Lightning Network uses routed payment channel technology, something that even Satoshi discussed back in the day.
Instead of broadcasting transactions to the whole network, two users can send money back and forth between each other without ever touching the blockchain. Using cryptography and a hefty helping of game theory, the idea is to be able to pay anyone in the world even if you don’t have a channel directly with them.
Let’s just start with payment channels first. For example, let’s say Alice and Bob want to transact. They each fund their payment channel with 1 BTC. This “funding” just goes into a special type of address. Think of it like beads on a string, they both have an equal number of beads on each of their respective sides. If Alice wants to pay Bob, she can just slide a bead over to his side.
In reality, those “beads” are signed transactions. Both parties sign the transaction, but they don’t broadcast it. If either party wants to end the channel and withdraw their money, they can simply broadcast the last signed transaction and the balances are settled on the blockchain.