The Lightning Network is probably the most highly anticipated technological innovation that will be deployed on top of Bitcoin. The payment layer, first proposed by Joseph Poon and Tadge Dryja about a year ago, promises to support a virtually unlimited number of off-chain transactions among users, at nearly no cost – while leveraging the security offered by Bitcoin.
At least three companies – Poon and Dryja’s Lightning , Blockstream and Blockchain – are currently working on implementations of the technology. But few outside this small technological frontline fully grasp how the “future of micropayments” is set to boost Bitcoin’s capabilities.
In this three-part series, Bitcoin Magazine lays out the basic building blocks of the Lightning Network, and shows how they fit together to realize this upcoming protocol layer.
The first part of this series covered basic building blocks, and explained how these are used to establish bidirectional payment channels. The second part explained how a network is formed, and how Hash Timelock Contracts (HTLCs) link different channels in the network together. This third and final part of the series explains how HTLCs are placed inside bidirectional payment channels to ensure transactions can occur fully off-chain.
The Lightning Network
So far, Alice and Bob opened a bidirectional payment channel, which they both funded with five bitcoins. They’ve made two transactions back and forth, and at the current channel state, both Alice and Bob can claim five bitcoins for themselves by “dropping the channel” on the blockchain.
Now, they want to include an HTLC in the channel. This is to ensure that if Carol claims a bitcoin from Bob in return for her value, Bob is guaranteed a bitcoin from Alice in return.
Like the previous step, Alice and Bob start by creating a new commitment transaction each. In many ways, these commitment transactions are very […]
