Lightning: Bitcoin’s Second Layer
You probably don’t think about this, but credit cards take even longer to reach final settlement. When you buy a cup of coffee with a credit card, you don’t really have final settlement until you pay your credit card bill a couple of months later. Compared to that, an hour looks fast. Of course, credit cards benefit from a bunch of laws and legal precedents that make that coffee purchase look final. That legal and regulatory infrastructure is still being worked out with cryptocurrencies.
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The Bitcoin Lightning Network is a second layer solution—just like credit cards are a second layer on top of the underlying banking system. Lightning is decentralized—it is not run by a company and is not hosted on a server, so it cannot be shutdown. Lightning uses peer-to-peer “payment channels” to pay for small purchases like a cup of coffee. Like your credit card transaction, you appear to have final settlement when the lightning payment goes through; however, the funds are not settled to the Bitcoin blockchain until a later date. Basically, the funds in your Lightning node*** decrease, while the funds in the coffee shop’s Lightning wallet increase. That all happens instantaneously; however, unlike a credit card transaction, there’s no debt. Lightning transactions are more like faster and less expensive Fedwire (wire transfers), ACH, or SWIFT transactions.
Third Layer Applications
* It takes about 10 minutes for each new block to be added to the blockchain, so your transaction should appear within that time if you included a high enough transaction fee. Miner’s tend to defer transactions with low fees; however, some fees are better than no fees, so eventually even transactions with low fees will be included in a block—it just might take a few days. After your transaction is included in a block, it’s generally not considered finalized until a few more blocks have been mined. In rare cases, a block that’s been recently mined is later rejected by the network. An hour is usually enough time for five or six blocks to be mined insuring your transaction is finalized.
** The relatively small block size of the Bitcoin blockchain ultimately led the the “Blocksize War” of 2017. Shorter: after a couple of hard forks (Bitcoin Cash (BCH) and Bitcoin Satoshi’s Vision (BSV)), small block sizes—good ol’ fashioned BTC Bitcoin—won. This continues to be important because it means the current BTC blockchain is less than 500Gb (about 360Gb as of this writing), which means that you can run a Bitcoin node on relatively modest hardware with a 1Tb SSD and rely on that node for years to come. You could even use a 1Tb HD, but instead of taking about 3 days to sync the blockchain on the SSD, it will take about 30 on older hard disk technology. Once initially sync’d, performance will be comparable regardless of whether you’re using an SSD or HD.