The Most Efficient Payment System In The World: Bitcoin And The Lightning Network

Nasdaq | Siby Suriyan  | Oct 15, 2021

The Lightning Network makes Bitcoin the most efficient payment system in the world. But, in basic terms, how does it work?

The Lightning Network is a second layer that operates on top of the Bitcoin blockchain, and anchors directly into it. And it can handle millions of transactions per second cheaply and efficiently.

We’re going to illustrate the Lightning Networking by comparing it to opening a tab at your local bar.

Instead of swiping your card and settling the balance each time you order a beer…

Settling for each transaction

… it makes sense to save time, energy and fees by tallying all of your drinks together at the end of the night and making the final settlement in one payment.

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This is similar to how the Lightning Network operates.  Now, let’s say that your bar was operating on the Lightning Network.

When you want to start a transaction, you would open a payment channel with the bar. This payment channel is similar to a running tab. So, when you start buying drinks, those transactions would get recorded on the payment channel, the same way that they would get tallied on a bar tab. Now, it’s important to remember that it’s not just IOUs that are being transferred on the payment channel as they would be on a bar tab. Bitcoin is being transferred, so you are paying the bar in real time for your drinks. Those transactions are just not being recorded on the blockchain. Rather, Bitcoin is just bouncing between you and your bar via the payment channel.

This is similar to how the Lightning Network operates.

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But by conducting those potentially infinite transactions on the Lightning Network rather than on the blockchain, we lessen the burden on the blockchain, improve transaction rates for everyday purchases and keep transaction fees low.

Now, you may be thinking that setting up a payment channel with the hundreds of businesses that you patronize could be tedious. But this is where the Lightning Network really shines. You don’t need a direct payment channel with someone in order to pay them. You can pay people and businesses through intermediary channels on the network.

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