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Bitcoin Lightning Network — 7 Things You Should Know

Written by: Lukas Schor of The Argon Group

1) What’s going on here?

The transaction fees on the Bitcoin network have skyrocketed to new all-time highs of over $30 in the past couple of months, but a new scaling solution might save the day for the digital currency in 2018.

2) What is the Bitcoin Lightning Network?

The Lightning Network is a proposed system built on top of Bitcoin that would let people instantaneously send/receive payments and reduce transaction fees by keeping them off the main network. It helps Bitcoin be more useful as a day to day currency.

3) How does it work?

The Lightning Network is a system of smart contracts built on top of the base Bitcoin blockchain that allows for fast, cheap payments directly between two parties. In order to achieve these fast and cheap transactions, the following steps are taken:

  • multi-signature wallet which holds some amount of bitcoin (provided by at least one of both parties) is set up
  • The wallet address is then saved to the public Bitcoin blockchain including a balance sheet (smart contract) that proves how much of this bitcoin deposits belongs to whom
  • After this payment channel is set up once, it is possible for these two parties to conduct an unlimited amount of transactions without ever touching the information stored on the blockchain
  • With each transaction, both parties sign an updated balance sheet in order to always reflect how much of the bitcoin stored in the multi-sig wallet belongs to whom
  • The updated balance sheet is not uploaded to the blockchain but rather both parties keep a copy of it
  • Whenever there is a dispute or the payment channel is closed, both parties can use the most recent mutually signed balance sheet to pay out their share of the multi-sig wallet

This all sounds very cumbersome, but in fact for the end-user hardly any additional effort is needed to conduct Lightning payments, all of the above will happen automatically in the background.

The Lightning Network’s use of payment channels effectively allows users to transact with each other directly rather than broadcasting their business to the entire world (aka public blockchain). By tracking their payments between each other on their own, the two parties are able to avoid expensive and time-consuming interactions with the blockchain. If there is some sort of dispute regarding balances on the Lightning Network, the most recent balance sheet provided by either of the two parties will decide how the funds in the multi-sig wallet are split up.


4) Do I need to open new payment channels for every new party I want to transact with?

No, the Lightning Network is (thus its name), constructed as a network. Meaning although Alice might not yet have an open payment channel with Dave, Alice is indirectly connected with Dave via Bob, or even using multiple steps in between. With the Lightning Network, users are able to transact with anyone who is connected to their network of payment channels through multiple hops. In theory, everyone should be connected to everyone else through the network via only few nodes. People are also incentivised running these connecting nodes through (small) fees that are paid out every time a transaction uses one of their connections. Early results from the testnet implementation of the Lightning Network confirm that a sufficiently decentralized network indeed can be created.

The architecture of the Lightning network is still trustless (because it is based on smart contracts) and will always make sure that the funds will reach their destination through intermediaries, or issue a refund if there is no indirect path to the destination possible.

Source: https://coincenter.org/entry/what-is-the-lightning-network

Bob and Carol function as “nodes” on the network. Nodes on the Lightning Network are in some ways analogous to miners on the Bitcoin network. They function as the servers that process the transactions on the network in a decentralized manner. Like miners, they do not have control over the funds they help move. Bob cannot steal Alice’s funds, as he will only receive the sender’s incoming payment if he has already sent the outgoing payment to the recipient.

5) Benefits

  • Tiny payments are possible: Since fees are proportional to the payment amount, you can pay a fraction of a cent; accounting is even done in thousandths of a satoshi.
  • Payments are settled instantly: The money is sent in the time it takes to cross the network to your destination and back, typically a fraction of a second.
  • Improved privacy: Not every transaction is stored on the public blockchain, only once when the payment chanel is eventually closed and the balance is paid out to both parties

6) Shortcomings

  • Peer failures: If one of the peers is unresponsive, users might have to wait for hours to close a payment channel and resend the funds via an alternative route
  • No Offline Payments: Users can’t pay someone who is not online
  • Not ideal for large payments: Even though a route via various payment channels might exist, the funds in the peers multi-sig wallets might not be sufficient to transfer large funds
  • Centralization: The Lightning Network might encourages centralization in payment hubs (similar to miner centralization)

7) When will Lightning Network be launched?

Currently, there is a Proof-of-Concept implementation running on the Bitcoin Testnet. So everybody can try out the Lightning Network and even set up their own Lightning Node. A date when the Lightning Network will be launched on the Bitcoin mainnet is not yet set, but chances are high it will be sometime this year.

What do you think?

Will Lightning Network restore Bitcoins functionality of being a fast and efficient medium of exchange? When will we see a full implementation of Lightning Network on the Bitcoin mainnet? What other second-layer scaling solutions are you looking forward to? Let us know in the comments below!

Source: medium.com

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DAGlabs Ltd. is a company dedicated to the research and development of DAG protocols for blockchain based projects and platforms. Blockchains today are difficult to scale securely. The main task of DAGlabs is scaling up Layer One of blockchain in terms of transaction throughput and confirmation times. Our focus is first and foremost on the implementation of the SPECTRE and PHANTOM protocols for retrieving consistency in DAG based systems of transactions. These protocols were developed by a research team in The Hebrew University of Jerusalem.

DAGlabs is currently building development teams both in Israel and in the Silicon Valley. We are looking for high qualified and experienced devs and software engineers.


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The concept of blockchain as a standalone technology started gaining popularity in 2015. Prior to that, it was just known as a data structure underlying Bitcoin technology. In Satoshi Nakamoto’s white paper, the two words “block” and “chain” appeared together. It was only called “a chain of blocks.”

Bitcoin’s rise into popularity resulted in it being categorized as Blockchain 1.0. With Ethereum making waves as a decentralized platform for applications that run exactly as programmed, more and more people began to categorize Ethereum as Blockchain 2.0. Now the market is battling to see who will be named Blockchain 3.0. Direct Acyclic Graph or DAG may be it.

What is DAG?

DAG is a directed graph data structure that uses a topological ordering. The sequence can only go from earlier to later. DAG is often applied to problems related to data processing, scheduling, finding the best route in navigation, and data compression.

Bitcoin has always been inefficient due to the proof-of-work (POW) system. Blocks can’t be created simultaneously. The linked storage structure allows for only one chain on the whole network. All the transactions occurring around the same time are kept in the same block. Miners then compete for the block validation. One single block is created about every 10 minutes.

The first community to come up with the idea of changing the chain-like storage structure into a DAG of blocks was NXT. If the time of mining remains unchanged, the storage could be extended by X times with X blocks on the network at the same time.

The blockchain combination with DAG still comes from the idea of side-chains. Different types of transactions are running on different chains simultaneously. DAG of blocks still relies on the concept of blocks.

IoT Chain (ITC), IOTA, and Byteball are the blockless projects currently shining in the market. With Bitcoin or Ethereum, the block creation speed is a bottleneck. Bitcoin generates a new block every 10 minutes. Ethereum is better, but it takes around 15-20 seconds for block validation.

But why do we even need a block? On the bitcoin network, many transactions are mined into blocks and the transaction sequence is maintained by the prehashes between blocks. What if you combine blocks and transactions together? Make every transaction directly involved in maintaining the sequences. After the transaction is placed, you can skip the process of mining. This makes it blockless and more efficient.

Concepts in the DAG Blockchain

The Double-Spending Issue, from a Probabilistic Perspective

The Bitcoin network uses the UTXO (Unspent Transaction Output) model. Users are only allowed to have one transaction placement under their UTXO. There might be more than one miner who solves the hash function at the same time to acquire the right of block validation. This might develop forks temporarily. The validation of a certain transaction is decided by the number of transactions behind it. The rate of transactions coming back into the network is lower with more transactions behind it, which makes the transaction safer.

The Width of the Network

When each transaction is validated, it needs to be linked to an existing and relatively new transaction on the DAG network. If it links to earlier transactions every time, it would make the network too wide to validate the new transactions. Ideally, the DAG network chooses an existing later transaction to link to when a new transaction happens. The goal is to keep the network width within a certain range that can support quick transaction validation. IOTA also proposed its own algorithm controlling the width on the tangle network.

Quick Transactions

Due to its blockless nature, the transactions run directly into the DAG networks. The whole process is much faster than those of blockchains based on PoW and PoS.

No Mining Involved

There are no miners on DAG networks. The validation of transactions goes directly to the transactions themselves. For users, this means transactions go through almost instantly.

Friendly to Small Payments

With the advancement of DAG, we’re looking at a future where high functioning and minimum transaction fee chains are possible. That means users can send micro-payments without heavy fees like Bitcoin or Ethereum.

One project in China looks to be taking a serious swing at being the leader in this space. IoT Chain (ITC) is built on DAG and can handle over 10,000 transactions per second. It has a strong vision, strong community, and is backed by leading blockchain funds like ChainFunder and FBG. IoT Chain has a solid shot at becoming categorized as Blockchain 3.0.

DAG will be used for applications that require scalability in the thousands of transactions per second. The launch of CryptoKitties clogged the Ethereum network which resulted in slow transactions and high fees. Ethereum has a solution to this called sharding, but it is 5 years out. Applications will soon, I think, be turning to DAG to scale.

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Blockchain technology emerged in response to the collapse of several banking institutions in 2008. It proposed a new monetary system intended to take away the control of money supply, relying solely on a peer-to-peer electronic cash system, designed specifically for the digital realm. This online currency system was believed to be a better monetary system until some started talking about Hashgraph.

What is Hashgraph

Hashgraph is said to be a more robust system. Its consensus algorithm provides a new platform for distributed consensus. Some of the attributes commonly used to refer or describe Blockchain are distributed, transparent, consensus-based, transactional and flexible. Hashgraph bears all these features. However, it is a data structure and consensus algorithm that is much faster, fairer, and more secure than blockchain. It is described as future of distributed ledger technology. It uses two special techniques to achieve fast, fair and secure consensus.

  1. Gossip about Gossip
  2. Virtual Voting

Gossip about Gossip basically means attaching a small additional amount of information to this Gossip, which are two hashes containing the last two people talked to. Using this information, a Hashgraph can be built and regularly updated when more information is gossiped, on each node.

Once the Hashgraph is ready, it is easy to know what a node would vote, since we are aware of information that each node has and when they knew it. This data can thus be used as an input to the voting algorithm and to find which transactions have reached consensus quickly.

Hashgraph vs Blockchain

Blockchain technology is an incorruptible digital ledger of economic transactions. However, it can be programmed to record not just financial transactions but virtually everything of value. Information held on a blockchain exists as shared and is continually reconciled/updated. This ensures the records/data it holds are identical across the network and not stored in any individual location. As such, the blockchain cannot be controlled by any single entity. Second, it has no single point of failure.

Hashgraph, on the other hand, claims to support a superior data structure capable of solving many of the problems that the Blockchain community has been struggling with for some time like, consensus mechanism.

Until now, consensus technologies were classified into one of two categories:

  1. Public networks (includes Bitcoinand Ethereum)
  2. Private (solutions relying on Leader-based consensus algorithms)

Public networks are expensive to run and have performance constraints resulting from Proof of Work (agreeing to the order in which transaction can occur. This ensures money supply is constant and no one cheats). This narrows down the number of applications where such technologies can be practically employed.

Private networks, unlike, public networks restrict usage to known and trusted participants. This approach brings down the cost and improves performance dramatically, with algorithms capable of achieving 1000 transactions per second compared to seven for Bitcoin. That said, loopholes in the form of relaxed security standards make these networks potential targets to DDoS attacks.

Swirld’s’ Hashgraph algorithm overcomes these shortcomings as it requires neither Proof of Work nor a Leader. Moreover, it promises to deliver low-cost and good performance with no single point of failure.

It is this combination that makes Hashgraph a tool, worth trying.

Other advantages it offers over Blockchain

A new consensus algorithm based on superior distributed ledger technology. This eliminates the requirement for massive computation and unsustainable energy consumption like those of Bitcoin and Ethereum.

As mentioned earlier, Bitcoin is limited to 7 transactions per second. On the other hand, Hashgraph is 50,000 Times Faster: limited only by bandwidth — 250,000+ Transactions Per Second (Pre-Sharding)

More Fair

In the blockchain world, a miner can choose the order for which transactions occur in a block, can delay orders by placing them in future blocks, even stop them entirely from entering the system. Consensus time stamping available with Hashgraph offers a solution to this problem. It prevents an individual from affecting the consensus order of transactions by denying any sort of manipulation of the order of the transactions.

Asynchronous Byzantine Fault Tolerant

Unlike the other systems, Hashgraph is proven to be fully asynchronous Byzantine. This means it makes no assumptions about how fast messages are passed over the internet. This capability makes it resilient against DDoS attacks, botnets, and firewalls. Bitcoin is not Byzantine. It’s not even byzantine under bad assumptions. In Bitcoin, there is never a moment in time where you know that you have consensus.

100% Efficient

No mined block ever becomes stale. Whereas in the blockchain, transactions are put into containers (blocks) that form a single, long chain. If two miners create two blocks at the same time, the community will eventually select one and discard the other, resulting in wastage of efforts. In Hashgraph, every container is used and none are discarded.

So, although Hashgraph appears to be a superior technology than Blockchain it should be remembered things can just move a little too fast. That is, once you begin to learn about something new, something else replaces it before you can successfully adapt.

To understand better how Hashgraph works, see this document. To learn  more visit hashgraph.com

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