Bitcoin Layer 2 Solutions Part I: The Lightning Network

Bitcoin has scalling issues like many layer 1 blockchains and one way to solve this problem are Layer 2 solutions.

One of the most well known layer 2 solutions made for Bitcoin and the most adopted is the lightning network. Lightning is normally used to make small payments or to transfer Bitcoin quickly between people. It is mostly used in business that deal with Bitcoin.

The Lightning Network works by using payment channels that connect the sender and the receiver, bypassing the main blockchain. This payment channel works off-chain and the only time they touch Bitcoins mainnet is when they are opened and when they are closed. They can be used for doing many transactions while they are open.

When a payment channel is closed it batches every transaction made while it was opened and makes a single one in Bitcoin's mainnet, confirming every transaction that was made off-chain in the most secure blockchain in the world, making it irreversable.

This is what makes the lightning network so fast and so cheap, by doing every transaction off-chain, fees are reduced, because users only have to pay a fee, divided by everyone who participated, when the batched transaction is settled in the main chain. The transactions being off-chain means that these transactions don't have to deal with Bitcoin's 10 minutes block time, making lightning transactions nearly instant.

Lightning is Bitcoin's most adopted layer 2 with Strike being an example of a digital payments company that adopted this solution and is using it.

Lightning isn't perfect and it's possible for malicious groups to congest a network and make some nodes unusable, there's also a possibility that a poorly configured watchtower allows the double spend of the same funds, this is critical for a blockchain, a double spend can never happen.

Layer 2 solutions come with real advantages to the main chain but they also have their flaws, although it's not perfect, the lightning network solves some of the most important problems of Bitcoin.