When Bitcoin emerged, there were no density or latency problems since there were not too many transactions on the blockchain to slow down the network. However, as Bitcoin gained popularity and transaction volume increased, problems with transaction fees and latency started to occur. The reason behind these problems is called scalability. Scalability means that transaction requests exceed the capacity of the blockchain, causing transaction delays and high transaction fees. Many solutions have emerged to solve the scalability issue, one of them being the Lightning Network.
Proposed by Joseph Poon and Thaddeus Dryja in 2015, the Lightning Network is an application running on the Bitcoin blockchain, instead of recording all transactions on the blockchain. Just like websites built on the HTTP Protocol, the Lightning Network is an application built on the blockchain. In the 2nd layer of this application, payment channels are created between parties. These channels are valid until all transactions are performed. Only the initial balances uploaded to the network and the final balances resulting from all transactions are processed into the blockchain network. The transactions performed on the Lightning Network payment channel during the contact period are not processed into the blockchain network. And that decreases the density of the network and ensures its smooth operation.
The Lightning Network allows users to create their own payment channels. For example, if there are two users who frequently perform payments between them, they can create a Lightning Network contract to have their own payment channel and use that channel for their transfers. Users can make an unlimited number of transactions with small amounts. These transactions are called micropayments, and these payments are performed instantaneously. Users must agree on all transactions in the payment channel. None of these transactions performed during the contact period are processed into the blockchain network. However, balances at the end of the contact period are processed into the blockchain network. Thus, users can perform many transactions between each other at low fees during the contact period and are not affected by the delays caused by the density in the network. In this way, the Lightning Network users can perform transactions outside of the main chain and then have them recorded as a single transaction.
