Wednesday, 01 April 2020

Why Lightning Coins are Better

Recently several of the older cryptocurrencies are now being upgraded to be faster and more efficient. The technical specifications of these blockchains are basically set in stone- unchangeable without a dreaded “hard fork”.
Indeed, that fact is exactly what gives these currencies their reliability and value.

However, another layer of new software can be programmed to interact above these blockchains. These are generally given names such as “Lightning” or “Plasma” to exemplify the vast improvement in speed that this software grants to the blockchains which exist below the software.

These lightning networks are effectively entirely new payment networks which ground themselves in the reliability of blockchain technology, and yet set themselves free of the burden of the transaction validation processing inherent in the blockchain itself.

These new payment networks set up an escrow account in a cryptocurrency wallet on a blockchains such a Litecoin, Bitcoin or Ethereum. After that, all transactions occur over the Lightning network instead of on the blockchain.

Transactions are settled at the speed of light and no laborious mining or CPU processing is required. If any fraudulent transaction occurs, this is resolved by simply reverting back to the underlying blockchain, and settling the transaction using the funds in the escrow account. This reversion is required only in rare circumstances, and most of the time all transactions are safely and effectively settled using the lightning layer.

Lightning network supports instant swaps between Bitcoin and Litecoin.

A company called Blockstream released the first lightning network in January 2018. It is compatible with Litecoin and Bitcoin, and allows those currencies to be swapped instantaneously. That means that if you are a hardcore Litecoin fan and don’t own any Bitcoin, you can still pay for goods and shops which only accept Bitcoin. The shop simply scans your lightning network QR code on your smartphone screen, and your Litecoin are instantly swapped for Bitcoin and sent to the shop’s account.

The lightning networks of various other blockchains can also be made to interact with each other. Stakenet, for example is new software which enables users to swap one type of cryptocurrency for any other lightning-enabled currency with virtually no fees (0.0001 cents per swap). All swaps are guaranteed algorithmically, and if any fraud occurs then the system simply reverts to the underlying blockchains and refunds the users from the funds held in the escrow accounts on each respective blockchain.

One problem currently faced by Lightning networks is the small amount of funds currently in the escrow accounts. When a user sends money on a lightning network, the funds do not go directly from the payer to the payee. The money actually needs to pass through the accounts of many users, with each user automatically sending the money to the next link in a chain which connects the payer to the payee. This system exists so that the payer and payee do not need to have a direct connection with each other. However the success of this chain of transactions depends on every account in the chain having at least as much money as the payer wants to send to the payee. If even a single account in the chain has insufficient funds, then a different route needs to be found. For very large payments, there may be no valid routes at all.

A possible solution currently gaining traction in the Bitcoin community is for so-called “channel factories”, which are individuals or organizations who contribute a large amount of funding to an escrow account, with the intention of acting as a bridge between parts of the network which would otherwise be isolated. A good analogy would be the road bridges which connect the various small islands of Japan.

Stakenet masternodes provide liquidity bridges between isolated channels.

Stakenet has already implemented this proposal, and the role of bridge is assigned to the masternodes. A masternode is a computer which participates in the payment processing network and holds a record of all transactions that have ever been performed on the network (as well as some other important functions such as voting on major changes to the system).

Because of the overwhelming superiority of lightning networks in terms of speed and flexibility, blockchains which do not have lightning networks are destined to lag behind and eventually drop from relevance completely, whereas upgraded blockchains like Bitcoin and Stakenet are bound to have a promising future.

This article was previously published at Altcoin Magazine
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