What is lightning network and How it works

The Lightning Network is a second layer added to Bitcoin’s (BTC) blockchain that allows off-chain transactions, i.e. transactions between parties not on the blockchain network. Multiple payment channels between parties or Bitcoin users make up the second layer. A Lightning Network channel is a two-party transaction method in which parties can make or receive payments from each other. Layer two enhances the scalability of blockchain applications by managing transactions outside the blockchain mainnet (layer one), while still benefiting from the mainnet’s powerful decentralized security paradigm. 

Scalability is a significant barrier that restricts the widespread adoption of cryptocurrencies. If scaled properly, a blockchain network can handle millions to billions of transactions per second (TPS). In this context, the Lightning Network charges low fees by transacting and settling off-chain, allowing for new use cases like instant micropayments that can solve the traditional “can you buy coffee with crypto” conundrum, speeding up the processing times and reducing the expenses (energy costs) associated with Bitcoin’s blockchain.

However, while the intent is there, the Lightning Network still struggles to solve the issue and even introduces various problems like low routing fees and malicious attacks. For example, there’s a small fee required to both open and close a payment channel. On top of these small fees are routing fees that go toward nodes that are validating transactions. 

Now, the question arises: If the routing fee is so low, why would a node want to validate said transaction?

The clear answer is that miners do not often validate smaller transactions, as they will earn lower fees for validating insignificant transactions. As a result, traders pay a routing fee and may have to wait long before the transaction is validated. Regarding malicious attacks, a bad actor could start various payment channels and close them all at once. Those channels then need to be validated which get in the way of legitimate ones, congesting the network. During congestion, the attacker could pull funds before legitimate parties become aware of the situation.