Bitcoin is the first decentralized digital currency, as the system works without a central bank or single administrator. The network is peer-to-peer and transactions take place between users directly, without any intermediary such as banks. Bitcoin was invented by an unknown person or group of people under the Name of Satoshi Nakamoto in 2009 and published in the famous essay “Bitcoin: A Peer-to-Peer electronic Cash System”. Bitcoin is not relying on trust like usual currencies do, instead it is based on the concept proof-of-work. It runs with the blockchain technology, which is the public ledger of all transactions.
In January 2009, the bitcoin network started to exist after Satoshi Nakamoto mined the first block on the chain, known as the genesis block. Since that day people all around the world are mining Bitcoins. The first fully international currency. However, Bitcoin is having a scalability problem as in the current system every transaction gets written down in the blockchain. In order to solve this problem, we, Coinfinity, are working and experimenting with different solution approaches, such as the Lightning Network.
The Lightning Network is a technology which is seen as a very promising solution for the scalability problem of bitcoin, although it is still in an early stage of development. It could potentially process millions of transactions each second, fast and almost without a fee. Usually each bitcoin-transaction gets written directly in the blockchain. The Lightning Network works as a second-layer solution, participants are connected through payment channels and routes via multiple hops can be established on the lightning network.
The payment channels allow participants to transfer money to each other without having to make all their transactions public on the blockchain. This is done by penalizing uncooperative participants. When opening a channel, participants must commit an amount in a funding transaction, which is on the blockchain. Time-based script extensions like CheckSequenceVerify and CheckLockTimeVerify make the penalties possible.
If Person A and Person B have a payment channel, both of them have a so called commitment transaction. A commitment transaction divides the funds from the funding transaction according to the correct allocation between A and B. For example, if A owns 1 BTC and B owns 1 BTC in the channel, the commitment transactions divide the total channel funds in that way. Commitment transactions allow multiple users to participate in a single transaction, using a multi-key system. Determination of congestion falls primarily on the miners, so this network rests on the assumption that honest miners will not organize a 51% attack. Because commitment transactions spend the funding transaction, they must be signed by both participants. Person A´s commitment transaction contains two outcomes: one which pays B directly, and another which is a timelocked, revocable output that eventually pays A. The revocable output may be revoked by Person B if B knows the revocation key. Person B´s commitment transaction is the reverse: it pays outright to A, but pays B share under a timelocked, revocable output; if Person A knows the revocation key to Person B´s commitment transaction, she can revoke it.
The Lightning Network is made up of bidirectional payment channels between two nodes which combined create a smart contract. If at anytime either party drops the payment channel, the channel will close and be settled on the blockchain.
To get in touch with this new and promising technology, our CTO Daniel Weigl launched in the beginning of 2018 one of the first lightning full nodes. There currently are only a couple of hundred lightning full nodes, which are essential for the functionality of the network. The following video shows how this first lightning transaction has been executed at a Lamassu Bitcoin ATM:
To establish a connection to the lightning network, a payment channel was funded through this transaction. For this early demonstration, we purposely set a fixed amount of 50 Satoshi as the actual payment. Even though the lightning network still is in an experimental stage, we made a big step towards mass suitability of bitcoin. We are looking forward to the following months and the development of the Lightning Network.
Coinfinity has been dealing with digital currencies since 2011 and is familiar with various aspects through the implementation of numerous Bitcoin projects. We are constantly working on new technologies such as the Lightning Network to improve our services and simplify the use of cryptocurrencies.
We believe that Bitcoin and blockchain technology will essentially change how society interacts in the years to come. It will bring decentralization and within that democratization of currencies into our societies and political systems. Our mission is to make Bitcoin graspable and offer easy access to this technology, for everybody. With our Walk-In-Office, Bitcoin ATM and the Bitcoinbon we provide services for average people who want to get in touch with cryptocurrencies. We aim to simplify the complex technology of Bitcoin for our customers and provide easy access all over Austria, no matter where they are.