So you want to learn more about layer 2 blockchain - understanding Bitcoin's Lightening Network is a good place to start.
in the transaction to the receiver. The only way that the receiver can spend it is if they provide the original data that matches the hash. And the only way they can provide that data is if the sender gives it to them.
A timelock is a condition that prevents you from spending funds before a certain time. It’s specified either as an actual time, or a specifiedHTLCs are created by combining hashlocks and timelocks. In practice, HTLCs can be used to create conditional payments – the receiver has to provide a secret before a certain time, or the sender can reclaim the funds. This next part is probably better explained with an example, so let’s get back to Alice and Bob.We gave the example of Alice and Bob having just created transactions that fund the multisignature address they’ll share. But those transactions aren’t published to the blockchain yet! We need to do one more thing first.Remember, the only way those coins can move out of the multisig is if both Alice and Bob jointly sign a transaction. If Alice wanted to send all the six coins to an external address, she would need Bob’s approval. She’d first put together a transaction and add her own signature. She could try to broadcast the transaction right away, but it would be invalid because Bob hasn’t included his signature. Alice must give the incomplete transaction to him first. Once he adds his signature, it becomes valid. We still haven’t put a mechanism in place to keep everyone playing honestly. As we said earlier, if your counterparty refuses to cooperate, your funds are effectively trapped. Let’s get into the mechanism that prevents this. There are a few different moving pieces, so bear with us. Each party needs to come up with a secret – let’s just call those As and Bs. They’d be terrible secrets if Alice and Bob revealed them, so they’ll keep them hidden for now. The pair will generate the respective secrets’ hashes – h and h. So instead of sharing their secrets, they share those hashes with each other.Alice and Bob also need to create a set ofbefore they publish their first transactions to the multisignature address. This will give them a remedy in case the other decides to keep funds hostage. If you think about a channel like the mini-ledger we referenced earlier, then commitment transactions are the updates that you make to the ledger. Any time you create a new pair of commitment transactions, you’re rebalancing the funds between the two participants. Alice’s one will have two outputs – one that pays an address she owns, and another that’s locked into aAlice’s transaction with two outputs – one to her own address, and one to a new multisig. She still needs Bob’s signature to make it valid. Bob does the same – one output pays himself, the other pays another multisig address. He signs it and gives it to Alice.Normally, Alice could add a signature to Bob’s transaction to make it valid. But you’ll note that these funds are being spent from the 2-of-2 multisig that. It’s a bit like trying to spend a cheque from an account that has zero balance for now. Therefore, these partially-signed transactions will only be usable once the multisig is up and running. The new multisignature addresses have some peculiar properties. Let’s take a look at the incomplete transaction that Alice signed and gave to Bob. The multisig output can be spent under the following conditions:Alice can spend it if she knows Bob’s secretAlice can spend itBear in mind that neither party knows the other’s secret, so 3) isn’t a possibility yet. Another thing to note is that, if you sign a transaction, your counterparty can spend immediately because there are no special conditions on their output. You can either wait for the timelock to expire to spend the funds by yourself, or you can cooperate with the other party to spend them outright. Okay! Now you can publish the transactions into the original 2-of-2 multisignature address. It’s finally safe to do so because you can retrieve your funds if your counterparty abandons the channel. Once the transactions confirm, the channel is up and running. That first pair of transactions shows us the current state of the mini-ledger. Currently, it will pay out 3 BTC to Bob, and 3 BTC to Alice. When Alice wants to make a new payment to Bob, the pair create two new transactions to replace the first set. The drill is the same – they’re only half-signed. However, Alice and Bob first give up their old secrets and trade new hashes for the next round of transactions. If Alice wanted to pay 1 BTC to Bob, for example, the two new transactions would credit 2 BTC to Alice, and 4 BTC to Bob. In this way, the balance is updated. Either party can sign and broadcast one of the most recent transactions at any time to “settle” it on the blockchain. But whichever party does so will need to wait until the timelock has expired, while the other can spend immediately. Remember, if Bob signs and broadcasts Alice’s transaction, she now has an output with no conditions on it. Both parties can agree to close the channel together . This is probably the easiest and quickest way to get your funds back onto the chain. However, even if one party becomes unresponsive or refuses to cooperate, the other can still reclaim their funds by waiting out the timelock.here. If Bob currently has a 1 BTC balance, what’s to stop him from broadcasting an older transaction where he had more? He’s already got the half-signed transaction from Alice, he just needs to add his signature and broadcast it, right?. Let’s say he goes through with it and broadcasts an old transaction that pays one coin to Alice and five to that multisig address we mentioned earlier. Alice receives her coin immediately. Bob, on the other hand, must wait until the timelock expires to spend from the multisig address. Remember the other condition we mentioned that would allow Alice to spend those same funds immediately? She needs a secret that she didn’t have then. She does now – as soon as the second round of transactions were created, Bob gave that secret away. While Bob sits, unable to do anything as he waits for the timelock to expire, Alice can move those funds. This punishment-based mechanism means that participants are unlikely to even attempt to cheat because the peer will get access to their coins.We touched on this earlier – channels can be connected. The Lightning Network wouldn’t be that useful for payments otherwise. Are you really going to lock up $500 in a channel with a coffee shop just so you can get your daily fix for the next few months? You don’t have to do that. If Alice opens a channel with Bob and Bob already has one with Carol, Bob can route payments between the two. This can work across multiple “hops”, meaning that Alice can effectively pay anyone to whom a path exists. In this scenario, Alice can go through multiple routes to get to Frank. In practice, she’ll always take the easiest one. For their role in routing, the intermediaries might take a small fee . The Lightning Network is still very new, so a fee market has yet to materialize. What many expect to see are fees based on liquidity provided. On the base chain, your fee is based solely on the space your transaction takes up in a block – the value being transmitted doesn’t matter – $1 and $10,000,000 payments cost the same. In contrast, there’s no such thing as block space within the Lightning Network.. The local balance is the amount that you can “push” to the other end of the channel, whereas the remote balance is that which your counterparty can push to you..each have a total capacity of 1 BTC. Alice’s local balance is 0.7 BTC. If they settled on the blockchain now, she would receive 0.7 BTC, and Carol would receive the remote balance . If Alice wants to send 0.3 BTC to Frank, she pushes 0.3 BTC to Carol’s side of the channel. Then Carol pushes 0.3 BTC from her local balance in the channel with Frank. As a result, Carol’s balance remains the same: the +0.3 BTC from Alice and -0.3 BTC to Frank cancel each other out. Carol isn’t losing value from acting as a connection between Frank, but she is making herself less flexible. You see, she can now spend 0.6 BTC in her channel with Alice, but only 0.1 BTC in the channel with Frank. You can imagine a situation where Alice is only connected to Carol, whereas Frank is connected to a much wider network. Carol could previously send a total of 0.4 BTC to others via Frank, but now she can only push 0.1 BTC because that’s all she has on her end of the channel. In this scenario, Alice is effectively eating into Carol’s liquidity. Without any kind of incentive, Carol may not want to weaken her own position. So, instead, she might just say. In this way, the more of her local balances Carol sacrifices in “stronger” paths, the more she profits. As mentioned previously, there’s no de facto requirement to charge a fee. Some might not be concerned with the reduction in liquidity. Others might just open channels directly to the receiver.It would be fantastic if the Lightning Network proved to be the solution to all of Bitcoin’s scalability troubles. Unfortunately, it has its own shortcomings that may get in the way.Bitcoin isn’t the most intuitive system for beginners – addresses, fees, etc. can be confusing to familiarize yourself with. Butcan abstract away the complicated stuff to give users something that vaguely resembles existing payment systems. You can get someone to download a smartphone wallet, send them coins, and they’re good to go. For now, that isn’t possible with the Lightning Network. Options are limited when it comes to smartphone apps – generally, Lightning nodes require access to a Bitcoin node to be fully usable. After a client has been set up, users also need to start opening channels before they can make payments. This can be a time-consuming process, and it could be overwhelming when a newcomer is introduced to concepts like inbound/outbound capacity. That said, improvements are constantly being made to reduce the barriers to entry, and to provide users with a more streamlined experience.One of the biggest criticisms of the Lightning Network is that your ability to transact is constrained. You can’t spend more than you have locked into a channel. If you spend all of your funds so that the remote balance has all of the channel’s funds, you’ll have to close the channel. Alternatively, you can wait until someone pays you through it, but that’s not ideal.example from earlier. If Alice and Carol have a capacity of 5 BTC in their channel, but Carol and Frank only have a capacity of 1 BTC, Alice can never send more than 1 BTC. Even then, the entire balance would need to be on Carol’s side of thechannel for that to work. This can severely limit the amount of funds that can be passed along LN channels, and thus has a knock-on effect on usability.Because of the issue mentioned in the previous section, there’s some concern that the network will facilitate the creation of massive “hubs.” That is, large, heavily-connected entities with a lot of liquidity. Any significant payments would need to be routed through some of these entities. Obviously, that wouldn’t be a great situation. It would weaken the system, as these entities going offline would majorly disrupt relationships between peers. There’s also an increased risk of censorship since there are only a few points through which transactions are flowing.As of March 2022, the Lightning Network looks healthy. It boasts upwards of 35,000 online nodes, 85,000+ active channels, and just over 3,570 BTC in capacity.There are a handful of different node implementations – Blockstream’s
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