It is a second layer protocol on top of Bitcoin that defines rules and contracts which enable the fast, secure, private, trustless and permissionless transfer of Bitcoin.
Like a standard Bitcoin transaction, a payment on the Lightning Network can only be refunded by the recipient.
While all Bitcoin transactions are stored in the blockchain where they can be tracked, the payments on the Lightning Network are off-chain and offer more privacy than Bitcoin payments.
Due to the use of onion routing, which is also used in Tor, even the nodes that are involved in forwarding the payment from the sender to the recipient do not know for whom they deliver the payment.
// The following is working draft and suggested mile stones in the history of the Lightning Network.
The history of the Lightning Network could be considered to be as old as the history of Bitcoin.
The first response to Satoshi Nakamotos initial publication of the Bitcoin whitepaper on the metzdowd cryptography mailing list discussed the issue of scale.
[quote, James A. Donald, https://www.metzdowd.com/pipermail/cryptography/2008-November/014814.html ]
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We very, very much need such a system, but the way I understand your proposal, it does not seem to scale to the required size.
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While it seemed as if James A. Donald just refered to keeping the set of unspend transaction outputs (UTXOs) it quickly became clear that also verifying and storing that many transactions would become infeasible for any blockchain.
A key requirement for a second layer protocol such as lightning (and as will be decribed in greater depth later in this book) is the ability to sequence transactions external to the blockchain. In the first verisons of Bitcoin, Satoshi Nakamoto recognised this and introduced a data field called `nSequence` into the input transaction data.
The `nSequence` was intended to allow users to transmit updated versions of a transaction to the network, changing the outputs of a transaction, effectively creating a payment channel.
Such a payment channel would then be valid as long as the transaction was not mined.
Satoshi Nakamoto envisioned this construction for the case of high frequency trading.(ref)
There were however some weaknesses in this initial formulation, which limited its potential. Firstly, the 'payment channel' would only be open until the transaction was mined by the miners, either limiting the duration the payment channel or handing control of the payment channel to the miners. Secondly, there was no economic incentive for miners to respect the `nSequence` number, making this mechanism effectivley useless.
The revocable Sequence maturity contracts which form the payment channels in the first version of the Lightning Network have taken part of their name from their property of fixing the nSequence field and making the latest version of the sequence of updates in the payment channel enforcable.
During the first couple of years, the Bitcoin network was growing and the focus of many enthusiasts was on adoption, rather than the blocksize and scaling. However, in 2012 Gavin Andresen proposed the Ultra Transaction server on his blog.
The Ultra Transaction server was proposed to be a trusted partner of a 2-2 multisig wallet that could not steal funds but allowed signing transactions from a 2-2 multisig wallet.
Andresen observed that with such a mechanism, payments would effectively take place offchain, allowing the number of transacations which could be handled by the system to be increased.
Andresen noted that there might be a better construction which would require less trust in the Ultra Server, and while his proposal was a step in the right direction, a few issues remained to be solved before the design of fully trustless payment channels was complete.
Andresen's work led to many discussions on Bitcointalk forum, and later on the bitcoin-development mailing list. These discussions resulted in the first construction of the first unidirectional payment channels.
John is a 9 year old boy from Australia, who wanted a games console just like his friends. However he was told by his dad that in order to buy it, he had to earn the money by himself. Now John is an aspiring artist so he knows that while he is still learning, he can't charge much for his artwork. After learning about Bitcoin, he managed to setup a website to sell his drawings across the internet. By using the Lightning Network, John was able to charge as little as $1 for one of his drawings. By being able to set a fair price, which would normally be considered a micropayment and as such not possible with other payment methods, and by using a global currency such as Bitcoin, John was able to sell his art work to customers all over the world and in the end buy the games console he so very much wanted.
A person who wants to earn interest on their bitcoin without the risk of lending them to other people could decide to set up routing nodes on the lightning network.
By providing liquidity to the Lightning Network the routing capacities will be increased offering the chance to earn routing fees on the owned bitcoin.
Silke runs a small coffee shop in an upmarket street in Berlin.
She knows about Bitcoin and wants to accept it in her shop, but has been reluctant to do so because she knows that Bitcoin payments take approx. 10 minutes to be confirmed into her account.
However with the Lightning Network, she knows that her regular clients, such as Joerg can pay for their coffee at her shop, quickly and with negligible fees.
Additionally, by using the Lightning Network, Silke has all funds deposited instantly to her wallet and with usually smaller fees on her side as well.
Ultimately this allows her to provide a better service or to offer better pricing for her products.
