The rise of cryptocurrencies has driven fundamental changes in our understanding of networking. Traditional currencies are based upon a centralized system in which a “bank” controls the integrity of the money and the legitimacy of transactions. Cryptocurrency flips that model on its head, decentralizing the monetary system and putting the control in the hands of individuals.
To make cryptocurrency to work, you must have a method of verifying and recording transactions in a way that cannot be changed. Blockchain was developed in 2008 as a tamper-proof system for digitally storing records, or blocks, on a distributed ledger in chronological order. A block of data cannot be changed once it’s added to the blockchain. It can only be complemented by new blocks, which are added sequentially and time-stamped.
Another aspect involves connecting individuals who know nothing about one another so that they can engage in these transactions. In the cryptocurrency realm, peer-to-peer (P2P) networking is the solution. Block chains do not have centralized management; instead they operate on P2P networks comprising millions of nodes. The ledger is replicated in real time across this global network, providing a transparent view of the entire ledger history and significantly reducing the risk of data loss or corruption.
A New Approach to P2P Networks
However, the P2P networking model on the other hand, lacks the scale and stability to support massive amounts of crypto transactions across an ever-increasing number of nodes. Each block is limited to 1MB, which equates to about 4,000 transactions. On average, a block is added to the ledger every 10 minutes, which equates to about seven transactions per second. That is one of the factors that contributes to the high cost of crypto mining in terms of time and energy.
The solution was to build a lightning network on top of the original P2P network to handle “off-chain” transactions. The lightning network still depends upon the underlying blockchain technology, but works on the principle that transactions do not have to be recorded individually in the master ledger. A “payment channel” based upon an enforceable blockchain “smart contract” is established between parties, who can deposit as much as they want in the pool but can only withdraw funds if all parties agree.
Any party can close out the payment channel at any time and broadcast the final balance to the blockchain network. “Watchtowers” (third-party monitors) help reduce the risk of a channel being closed fraudulently.
Speed, Throughput and Privacy
The primary benefits of the lightning network are its speed and throughput. Transactions can be completed in less than a minute and often in milliseconds. The transactions are not data-intensive — only headers are sent across the network in most cases and a few Kbps of bandwidth is sufficient. It is estimated that the lightning network could ultimately support millions of transactions per second, making micro transactions feasible.
The lightning network also affords greater privacy to users. It uses the “onion routing” techniques of the Tor network, which encapsulates messages in layers of encryption. Additionally, the details of individual payments are not recorded in the blockchain, and individual nodes cannot trace the source or destination of funds unless they are directly involved in the transaction.
Purpose-built P2P crypto networks have useful applications in mobile computing, decentralized payment systems, crowd sensing, distributed storage and more. The need to solve the scalability problem with cryptocurrency is redefining networking to enable highly efficient transactions across millions of distributed nodes.