The Lightning Network Explained

For bitcoin today i’m going to explain to you what lightning network is and why
it’s such a big deal.

Okay let’s start with a metaphor to understand how Bitcoin works and set up understanding lightning network.

I’m going to explain to you this analogy using cargo ships so let’s imagine that we have a hundred cargo ships in the world dedicated to moving gold around the
planet.

Each cargo ship has a bunch of vaults on it these vaults are secured to each cargo ship and they protect the gold from weather and all the elements.

So let’s imagine that we have these 100 cargo ships and the only way that you can send gold across the world to a different counterparties by putting it on one of these ships.

This is the analogy to understand bitcoin where the bitcoin miners are the operators of these 100 cargo ships.

Why are there only 100 in this analogy?

Because we have to understand that in Bitcoin there is a limited amount of
blockspace that means there’s only so many transactions that can be active in Bitcoin at one time that’s why we have only 100 cargo ships in this analogy also it costs money to use these cargo ships and to put gold onto them.

People that want to transport their gold around the world they have to pay the fees to these cargo ship owners and operators.

In bitcoin it’s similar to use the blockchain to use this mining network and put a transaction onto one of these cargo ships you have to spend money and these are called transaction fees.

lightning network explained

We pay the transaction fees to miners so we can
think of these miners as owners and
operators of this cargo ship network
around the world you’ve heard the
criticism that bitcoin is slow and
limited in the number of transactions
that it can accomplish this is actually
a fair criticism of bitcoin
bitcoin processes transactions
once every 10 minutes on average and
each one of those blocks that occurs
every 10 minutes can only fit
approximately 2 000 transactions into it
so in reality there are only 2 000
transactions that can confirm on bitcoin
every 10 minutes
this seems like actually a few
transactions when thinking about how the
global economy operates why because visa
can process millions of transactions per
second so when people compare bitcoin to
visa
they are comparing apples and oranges
they’re not actually comparing the same
thing
visa doesn’t use its own currency visa
uses the dollar so we think about money
in a layered sort of way
visa is a second layer of the dollar
visa is in its own currency
bitcoin is its own currency so we can’t
expect bitcoin itself to process
millions of transactions per second
bitcoin needs to be slow
and needs to keep only 2 000
transactions on average per block every
10 minutes because bitcoin’s most
valuable characteristic is its
decentralization and the guarantee
of it as neutral money anybody with a
laptop anywhere in the world with an
internet connection
can operate
bitcoin and view bitcoin at the same
level as anybody else just think of
somebody trying to view the bitcoin
ledger updating every 10 minutes 2 000
transactions at a time
anybody with a laptop can do this but
what if there were millions of
transactions happening on bitcoin every
second
the average person with a laptop would
not be able to keep up with the bitcoin
network
this is why bitcoin is slow
and small in data size relative to
super computers because
we need
bitcoin to stay
neutral we need to keep the average
person with a laptop at the same level
as somebody with a super computer in
terms of being able to view the net do
we want a faster cryptocurrency to
process millions of transactions a
second no we need a second layer of
bitcoin just like visa uses the dollar
we need a second layer of bitcoin and to
process millions of transactions per
second this is where the lightning
network enters
let’s go back to the gold bars metaphor
how do we make so that
a gold bar on a cargo ship can process
millions of transactions per second
this is where the technology of the
lightning network is so exciting visa
uses a credit system so
visa is a way of saying i owe you this
much money and you owe me that much
money and will settle up later that’s
how we can bring millions of
transactions per second to the dollar
because it’s an iou system
lightning network is fascinating in that
it does not use credit it uses smart
contracts so let me explain that
lightning network is layered money but
without using credit imagine a scenario
in which
you can prove to another person that you
have ownership over one of those gold
bars on those cargo on one of those 100
cargo ships around the world
if i can prove to you that i own one
gold bar on the cargo ship and you can
prove to me that you own one gold bar on
one of those cargo ships we can transact
millions of times without having to
use
the 10 minute process of confirming
transactions to the bitcoin network
here’s another way to think of it if you
have bitcoin and i have bitcoin we can
use an app called lightning network to
prove to each other that we have money
in the network that way we don’t have to
spend the 10 minutes waiting
for our transaction to confirm why
because we’ve already proven that we
have money
in the bitcoin network using this
lightning network smart contract using
this lightning network app it’s
basically an app that we use to confirm
with each other that we both have real
bitcoin and we can transact that bitcoin
with each other now using the lightning
network instantly without using this
2000 transaction limit and 10 minute
transaction limit
and most importantly without using a
credit system this is not an iou
this is
i prove to you that i have the money in
advance
now we can use the money
at lightning speed now let’s tie it all
together
why does all of this make lightning
networks so important for bitcoin
lightning network enables bitcoin to be
both this slow moving commodity
like we have on cargo ships and a
network for transactions that we can use
instantly with each other in an internet
enabled way it combines this slow
digital gold metaphor that we’ve known
bitcoin for for many years
with the instant transactions that we
think about with paypal venmo the
internet and it combines all of these
without using a credit system without
using an iou system so lightning network
actually enables bitcoin to become an
entire monetary and financial system all
in one network all decentralized all
without using counterparty risk and a
credit system and a central issuer so
lightning network preserves the
decentralization of bitcoin it preserves
its identity as a neutral money and it
preserves the ability for people to be
able to use their smartphones and
laptops to become equal players with
everybody else in bitcoin equal players
in a way that no other currency enables
the dollar is not something that you and
i can become equal players with the
federal reserve all we need is a node a
wallet
a laptop a phone to be on the same page
and to be on the same level as everybody
else in bitcoin and that’s what makes
lightning network so exciting and so
essential for bitcoin to become a world
reserve currency a monetary system and a
financial system all in one
network i want to thank my sponsors zbd
and voltage
zbd providing payment solutions for the
gaming industry powered by bitcoin’s
lightning network download the zbd
wallet for a great first lightning
network wallet
voltage providing enterprise grade
bitcoin and lightning network
infrastructure go check out voltage if
you want to spin up a node with
bitcoin and lightning network for your
business


The Lightning Network Explained

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