{"id":6847,"date":"2023-02-02T16:08:00","date_gmt":"2023-02-02T15:08:00","guid":{"rendered":"https:\/\/affidaty.io\/blog\/?p=6847"},"modified":"2023-08-07T17:00:46","modified_gmt":"2023-08-07T15:00:46","slug":"lightning-network-transactions","status":"publish","type":"post","link":"https:\/\/affidaty.io\/blog\/en\/2023\/02\/lightning-network-transactions\/","title":{"rendered":"Lightning Network: decentralized disintermediation of payments"},"content":{"rendered":"\n

<\/p>\n\n\n\n

“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”<\/p>\n\n\n\n

This is what is stated in the original Bitcoin whitepaper created by Satoshi Nakamoto. In other words, Bitcoin was originally designed to be a digital cash system that guarantees irreversible transactions<\/strong> without going through financial institutions.<\/p>\n\n\n\n

However, despite the fact that part of the original abstract has been fully respected (today, BTC is censorship-resistant), it cannot be said to be a widespread, convenient, and usable payment form.<\/p>\n\n\n\n

The problem with the Bitcoin protocol is that it is not scalable. The block time (the time to “mine” a block) is approximately 10 minutes, and the maximum block size is 1 megabyte. As a result, on average, the Bitcoin network can handle only 3.7 tps (transactions<\/strong> per second), which is significantly “poor” for a system that originally hoped to be a global payment system.<\/p>\n\n\n\n

Enter the “Lightning Network<\/strong>,” a scalability solution that allows bitcoin to be transferred at instant speed and with virtually no commission costs – ideal for using bitcoin as a payment system.<\/p>\n\n\n\n

But what is the Lightning Network<\/strong> in practice?<\/p>\n\n\n\n

The Lightning Network<\/strong> is nothing more than an application of Bitcoin, a decentralized messaging system (broadcasting) where instead of sending messages, value is exchanged.<\/p>\n\n\n\n

It is formed by a network of Bitcoin payment channels between nodes; the larger the network, the greater the number of transactions<\/strong>, so more channels and nodes mean more success in transaction events.<\/p>\n\n\n\n

Unlike the Bitcoin protocol, on the Lightning Network<\/strong>, only two transactions<\/strong> are written on the blockchain: the funding transaction and the settlement transaction. All other transactions<\/strong> take place without touching the blockchain (commitment transaction).<\/p>\n\n\n\n

With Bitcoin’s off-chain transactions<\/strong> (Lightning), node operators on both sides of the channel keep track of the balance with the so-called “Channel State.”<\/p>\n\n\n\n

Simplifying to the extreme, it is a peer-to-peer protocol for making off-chain transactions<\/strong> between a private channel between us and the recipient; this channel must first be opened and effectively funded with funds from both parties (funding transaction), which will then exchange value for the desired number of transactions<\/strong>, at zero cost, unlimitedly and instantly (commitment transaction).<\/p>\n\n\n\n

Once the operations are completed, and it is decided to close the channel, the balance is finalized on-chain and officially updated, taking into account all the transactions<\/strong> carried out (settlement transaction). In summary, it is a sort of accounting ledger where at the end of the operations, the balances of the two operators are counted and updated, writing the final result of their balance net of the transactions<\/strong> carried out.<\/p>\n\n\n\n

Let’s see how it works:<\/p>\n\n\n\n

Alice wants to open a 1M satoshi channel to Bob’s node (0.01 BTC).<\/p>\n\n\n\n

She needs to know Bob’s node URI (The URI is a unique parameter like a web URL). URI = PubKey Node @ IP (or onion address)<\/p>\n\n\n\n

Example: 02e74c09ca720c891221164424651f62176a4737a4b2fd4f75a5befee127e90b9e@170.75.160.17:9735<\/p>\n\n\n\n

Alice creates a pair of private\/public keys using her Bitcoin node and informs Bob’s node that she wants to open a channel via the open_channel message (message in the LN protocol).<\/p>\n\n\n\n

In turn, Bob also creates a new pair of private\/public keys and gives consent to the channel that Alice is creating, sending his public key to Alice via the accept_channel message.<\/p>\n\n\n\n

Alice now creates a funding transaction (from her Bitcoin wallet) that sends 1M satoshi to the multisig address obtained from the two public keys (on-chain multisig transaction).<\/p>\n\n\n\n

Alice does not yet transmit this transaction to the Bitcoin network but sends the transaction ID to Bob in an LN message (funding_created), along with her signature to allow Bob to create his commitment transaction.<\/p>\n\n\n\n

Both create their commitment transaction. This transaction uses the funds of the Funding transaction: in Alice’s case, it will return all the funds, in Bob’s case, it will return zero satoshi.<\/p>\n\n\n\n

Alice and Bob do not exchange the transactions<\/strong> because each of them can build them independently, using the signature of both; they, therefore, exchange only signatures.<\/p>\n\n\n\n

Bob, therefore, provides a signature for Alice’s commitment transaction and sends this message using funding_signed.<\/p>\n\n\n\n

Now that the signatures have been exchanged, Alice can transmit the funding transaction to the Bitcoin network. The channel between Alice and Bob is open.<\/p>\n\n\n\n

Alice’s funds are now on the channel as a local balance\/outbound capacity.<\/p>\n\n\n\n

Alice can spend but NOT receive.
Bob can receive but NOT spend.<\/p>\n\n\n\n

If Alice wants to receive on that channel, she must spend funds first.<\/p>\n\n\n\n

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