Through smart contracts (a concept utilized in Ethereum coin) the Litecoin and Bitcoin markets are working on a project called the Lightning Network. A lightning network is an instant delivery of cryptocurrency that scales enormously.
In theory, a Lightning Network could handle upwards of billions of transactions a second. These transactions are decentralized and as such can be sent without incurring 3rd party fees.
Explanation of the Lightning Network
The following video details (from a high level) how the Lightning Networks will work.
In the case of two parties (Brian and Mark), if Brian sends Mark money it will consist of a request from Mark with a signed receipt for the funds Brian is sending. So Mark sends a signed refund request to Brian.
Brian then has a specified amount of time to deposit the funds (i.e. 10 days.) This allows for an auto refund (to Brian) in the case of a problem on the other end of the transaction.
Up to this point, the transaction is not part of the blockchain.
Brian can now send the deposit over. It may be in an increment, or the total agreed upon value (sent as a receipt.) So for example, if Brian wanted to send Mark 300 Litecoins, Mark would send a receipt to Brian for the amount of 300. Brian then could send all 300 in one transaction, or in multiple transactions. There are no fees for any of these transactions.
When Mark signs the transactions (verifying that the transaction was complete), this transaction is now committed to the blockchain. This closes the channel.
In the Multi-Party flow, Brian wants to send money to Mark – but they don’t know each other. However, they both know a 3rd party named Jazz. The process above is done with Jazz being in the middle.
The middleman, you might wonder, could simply hold the funds and not pass them on, right? This is where HTLC comes in.
HTLC (Hashed Time-Locked Contracts) is … well… complicated and it makes my brain hurt thinking about it. The video above does a great job explaining it visually. What HTLC does is set about by making a secret that is hashed and passed around… like so:
Same scenario: Brian -> Jazz -> Mark
Mark creates a string used to sign all future transactions. This string is then hashed. The hashed string goes to Brian. Brian & Jazz don’t know the real string, only has the hash.
Brian passes the hash (cough cough) to Jazz. They create a HTLC between them (between Brian and Jazz) that agrees that Jazz will get funds from Brian, as long as he can produce the original unhashed string. The agreement also comes with an end-lock in days for which this transaction must be completed by.
Jazz now proves he has the hash to Mark. Mark and Jazz now create an HTLC between them. The secret (established by Mark) is passed to Jazz and Jazz passes this to Brian. This establishes an agreement between all parties.
If Brian doesn’t pay Jazz – Jazz can broadcast to the blockchain and the agreed upon payment will automatically transfer to Jazz to Mark.
So Complex, but Not Really
While what occurs under the hood is very complex, for the users it will seem like business as usal.
Early Adopters of Lightning Networks
Early adopters of the Lightning Network projects will be Litecoin and Bitcoin. Last night, Charlie Lee was asked in an interview, with the current Litecoin roadmap what is being worked on right now. Charlie Lee stated that the Lightning Network capabilities of Litecoin were at the top focus.
Bitcoin will also be jumping into the Lightning Network fray as well. Lightning Network concepts are close to the core of the original Bitcoin intent – a decentralized currency system, offering instant transfer without 3rd party involvement or fees.
Demo of Lightning Networks
In the following video, we have a demo on an Alpha clint of the Lightning Network.
In this demo the currency being traded is Vertcoin, but the Lightning Network will be Lit (a Lightning Coin based Lightning Network.)