If you have ever used cash, you know it has a powerful property: no one needs to know who paid whom. No login, no registration, no history tied to your identity. That is what Cashu brings to the digital world. The most interesting part is that it does this without giving up integration with Bitcoin.

In this article, you will understand what Cashu is, who developed the protocol, how it works in practice, the difference between Cashu and eCash, which wallets and apps already use this technology, and why it may be so important for the future of Bitcoin payments.

Let’s dive in.

What is Cashu?

Cashu is an open-source protocol that turns bitcoin into private digital cash. Simple as that.

Think about paying for a coffee with a $10 bill. Nobody knows where that bill came from, how many hands it passed through, or where it goes next. Cashu does exactly that, but with bitcoin. It creates a privacy layer that makes transactions impossible to trace.

In practice, it works like this: you deposit bitcoin (usually via the Lightning Network) into a server called a mint. The mint then creates tokens equivalent to the value you deposited and gives those tokens to you. They are stored on your phone or computer, like digital bills in your pocket.

From there, you can send those tokens to anyone instantly and with no meaningful cost. You can keep them or redeem them back into bitcoin at any time. It is real money, just digital and private.

And here is the most interesting part: the mint does not know who you are. It cannot see who owns each token or track who it was sent to. This is possible thanks to a cryptographic technique called blind signatures, created by cryptographer David Chaum in the 1980s. It is like a bank stamping a bill inside a sealed envelope without ever seeing the serial number.

In short, Cashu takes bitcoin, which has all transactions publicly recorded on the blockchain, and adds a real privacy layer. The result: fast, cheap transactions that no one can trace.

Who created Cashu?

Cashu was created by Calle, known on X as @callebtc, an open-source developer with a PhD in Physics. Calle is also co-creator of Bitchat, the offline messaging app built on Bluetooth and mesh networking.

The first commit in the Cashu project was made in September 2022, when Calle published Nutshell, the first wallet and mint implementation of the protocol, written in Python. Since then, the ecosystem has grown quickly, with implementations in TypeScript, Rust, and multiple wallets for iOS, Android, and web.

Calle also created the OpenCash Association, a nonprofit focused on supporting the sustainable development of open-source digital cash projects using the Cashu protocol.

How does this protocol work?

To understand Cashu, let’s use a simple analogy.

Imagine you go to a currency exchange and swap $100 for casino chips. Those chips represent value. You can use them, give them to a friend, or exchange them back for money. The difference is that, in Cashu, the exchange house (mint) does not know which chips are yours.

Technically, the process works in three steps:

1. Deposit (Minting)

You send bitcoin to the mint via the Lightning Network. The mint receives the payment and creates eCash tokens signed with its private key. Before signing, tokens go through a blinding process, where the mint signs without knowing the exact token content.

2. Transfer

With eCash tokens on your device, you can send them to anyone. The transfer is peer-to-peer: copy and paste the token string or scan a QR code. No internet is required at the moment of transfer. The receiver gets the token and redeems it at the mint, which verifies the signature, invalidates the old token, and issues a new one.

3. Redemption (Melting)

When you want to convert tokens back to bitcoin, you do the reverse. You present the tokens to the mint, it verifies the signature, destroys the tokens, and sends the equivalent bitcoin to your Lightning wallet.

The cryptography behind it

Cashu uses BDHKE (Blind Diffie-Hellman Key Exchange). In simple terms:

• The mint publishes its public key.
• The user (for example, Alice) chooses a random secret and blinds it mathematically before sending it to the mint.
• The mint signs the blinded token and returns it.
• The user removes the blinding and gets a valid signature that the mint cannot trace.
• When Alice sends the token to Carol, Carol presents it to the mint for verification, and the mint confirms it without knowing the token came from Alice.

Result: instant transactions, no significant fees, and full privacy.

What is the difference between Cashu and eCash?

This is a common question.

eCash (or Chaumian eCash) is the concept of electronic money invented by David Chaum in the 1980s. It is the theoretical idea of using blind signatures to create anonymous digital tokens that behave like physical cash.

Cashu is a modern implementation of that concept, integrated with Bitcoin. In other words, Cashu is eCash in practice, built on Bitcoin and the Lightning Network.

The big difference is historical: in the 1990s, Chaum’s eCash depended on centralized banks (like DigiCash). It failed because it required a trusted issuer and demand for digital payments was still low.

Cashu addresses this in two ways:

1. Anyone can run a mint, so it does not depend on banks or companies.
2. Tokens are backed by Bitcoin, not by government-controlled fiat.

eCash vs Cashu (quick comparison)

The table below makes the differences easier to visualize:

Cashu vs Fedimint: what is the difference?

Another protocol often compared to Cashu is Fedimint. Both implement Chaumian eCash for Bitcoin, but with different custody models:

• Cashu uses a single mint. One entity operates the mint, signs tokens, and holds the corresponding bitcoin. It is simpler and faster to set up.
• Fedimint uses a federated model. Multiple independent parties operate the mint together using multisig. No single entity controls funds.

In practice, Cashu is ideal for smaller applications, experiments, app integrations, and personal use, while Fedimint is better suited for communities and groups that want stronger collaborative custody.

They are not direct competitors. They complement each other and solve different problems within the Bitcoin ecosystem.

Cashu and the Lightning Network

Cashu and the Lightning Network work together in a complementary way.

Lightning is Bitcoin’s fast payment layer, allowing near-instant transactions with low fees. Cashu uses Lightning as the bridge between on-chain Bitcoin and private eCash.

It works like this:

• To enter Cashu: you pay a Lightning invoice and receive eCash tokens.
• To leave Cashu: you present tokens and receive a Lightning payment.
• Between mints: if someone from one mint pays someone on another mint, payment is routed via Lightning automatically.

This solves one of eCash’s biggest challenges: interoperability. Even with many different mints, they can transact with each other through Lightning, forming a global network of private payments.

Cashu also adds something Lightning alone does not provide: real privacy. On Lightning, routing nodes can observe amounts and route details. In Cashu, transactions between users of the same mint are opaque.

Wallets and apps that use Cashu

The Cashu ecosystem has grown quickly since 2022. Today, many wallets and apps support the protocol across mobile and web.

Mobile wallets

• Macadamia (iOS, Swift)
• Sovran (iOS)
• Minibits (Android)
• eNuts (Android and iOS, community-built)

Web wallets (PWA)

• Cashu.me (official web wallet by Calle; supports Bitcoin and USD, seed backup, offline send/receive, animated QR codes, mint discovery via Nostr)
• Nutstash (web wallet with multi-mint support and token transfer via Nostr)

On-chain/Lightning wallets with Cashu integration

• Blitz
• Coinos
• Voltz
• Zeus

CLI tools

• Nutshell (reference Python implementation; wallet and mint via command line)
• CDK Wallet (Rust CLI wallet)

Projects integrating Cashu

• Bitchat (offline Bluetooth messenger with native Cashu wallet integration)
• BTCNutServer (BTCPay Server plugin for Cashu token payments)
• npub.cash (receive funds via Lightning addresses on Nostr using Cashu mints)
• Numo (Point-of-Sale app that accepts Cashu and Lightning)
• hashpool (mining pool using eCash for share representation without account signup)
• Athenut (privacy-preserving search with Cashu payments)
• TollGate (turns WiFi routers into decentralized internet providers using Bitcoin and eCash)
• routstr (LLM API marketplace using Cashu tokens)

Cashu and Nostr

Cashu has a natural relationship with Nostr, the decentralized communication protocol. Several Cashu wallets support sending and receiving tokens via Nostr, and npub.cash allows Nostr users to receive Lightning payments through a Cashu mint.

This pairing makes sense: Nostr already uses Lightning for zaps, and Cashu adds a privacy layer that Lightning alone does not provide. Wallets like Nutstash and Cashu.me already support mint discovery and token exchange directly through Nostr.

Cashu advantages

Cashu offers several advantages compared to traditional payment systems and even on-chain Bitcoin transactions:

1. Real privacy

The mint does not keep account databases or transaction history. Thanks to blind signatures, it cannot link a deposit to a spend. This is fundamentally different from banks, exchanges, or Bitcoin’s public blockchain.

2. Instant transactions

eCash payments are final and instant. No blocks to wait for, no pending confirmations.

3. Near-zero fees

Transactions between users of the same mint have no fee. The only fees are Lightning fees when depositing or redeeming bitcoin, and those are usually very low.

4. Works offline

eCash tokens are bearer tokens. They can be transferred offline via QR code, NFC, Bluetooth, or even paper. The receiver only needs to be online to verify or redeem at the mint.

5. Open source and interoperable

Cashu is fully open source and its specs are public. The specifications are called NUTs (Notation, Usage, and Terminology). Any developer can build a compatible wallet or mint.

6. Programmable

Cashu tokens support advanced spending conditions such as P2PK and HTLCs, enabling conditional payments and simple smart contracts.

Limitations and trade-offs

Like any technology, Cashu has limitations:

1. Trust in the mint

This is the main trade-off. When you deposit bitcoin into a Cashu mint, you trust that mint to honor token redemption. If it disappears or acts maliciously, you may lose funds. For that reason, do not store large amounts in eCash. Use it for everyday transactional value, like cash in a physical wallet.

2. Not externally auditable

Because of privacy, you cannot externally audit how much eCash a mint issued. In theory, a mint could issue more tokens than it has in bitcoin reserves. This is an inherent challenge in any eCash system.

3. Not full self-custody

Cashu is delegated custody, not full self-custody. Your tokens are bearer tokens, but the underlying bitcoin is held by the mint. For larger amounts, use self-custody wallets.

4. Mints can face regulation

Depending on jurisdiction, running a mint may attract regulatory attention, since it involves custody of third-party bitcoin. The ecosystem is still working through this challenge.

How to use Cashu in practice (step by step)

Want to try Cashu? The easiest way is the Cashu.me web wallet.

Step 1: Access the wallet

Open cashu.me on your phone or computer browser. It works as a PWA, so you can install it on your home screen like a native app.

Step 2: Choose a mint

The wallet comes with a default mint. You can add others or discover new ones through Nostr. Remember: your chosen mint is the one custodying your bitcoin, so choose one you trust.

Step 3: Deposit bitcoin

Click Receive and choose Lightning. The wallet generates an invoice you can pay from any Lightning wallet. Once confirmed, your eCash tokens appear in balance.

Step 4: Send eCash

Click Send, enter amount, and choose method. The receiver can redeem in any compatible Cashu wallet.

Step 5: Redeem to Lightning

To convert back to bitcoin, paste a Lightning invoice into your Cashu wallet. It pays using your eCash tokens.

NUTs: Cashu protocol specifications

Cashu’s technical specs are called NUTs (Notation, Usage, and Terminology). They describe all key parts of the protocol: token creation, transfer, verification, and redemption.

NUTs are public GitHub documents and ensure compatibility across implementations in Python, TypeScript, Rust, and more.

Development libraries include:

• Nutshell (Python, original reference)
• cashu-ts (TypeScript)
• CDK, Cashu Development Kit (Rust)

If you are a developer, you can build your own wallet or mint using these libraries.

Cashu mints: how they work

A mint is the core of the Cashu system. It is the server that custodies bitcoin and issues eCash tokens. The three main mint implementations today are:

• Nutshell (Python, supports PostgreSQL and SQLite)
• mintd (Rust, part of CDK)
• Nutmix (Go)

Anyone can run their own mint with a server, a Lightning node, and the software. Mints are independent, and users choose which one to trust, with one key difference from traditional banks: the mint does not know who you are.

Cashu and privacy: why it matters

We live in an era where every digital transaction leaves a trace. Banks, fintechs, exchanges, and even Bitcoin’s blockchain record activity. Tools like Silent Payments and CoinJoin help, but they have limits.

Cashu takes a different approach: instead of trying to hide transactions on a public ledger, it records nothing at the user-account level. The mint has no account database, no stored transaction history, and no knowledge of who paid whom.

This is especially relevant for:

• Micropayments: paying for an article, search, or coffee without creating a permanent data trail.
• Protection against hacks: if user data is not stored, there is less data to leak.
• Censorship resistance: in authoritarian contexts, private transactions may be critical.

As cypherpunks say: privacy is not about having something to hide, it is about having the right to choose what to reveal.

The future of Cashu

The Cashu ecosystem is growing quickly. Since its first commit in 2022, the project now has many repositories, multi-language libraries, wallets on major platforms, and a growing open-source community.

Developments worth watching:

• Cashu in Bitchat: native eCash wallet integration for phone-to-phone bitcoin transfer over Bluetooth, without internet.
• eCash for AI: projects like routstr already use Cashu for API micropayments without registration.
• Web payment standard: Cashu tokens embedded in HTTP requests as a potential new micropayment pattern.
• Mining without accounts: hashpool uses eCash to represent mining shares without pool accounts.

Cashu is not trying to replace on-chain Bitcoin or Lightning. It is an additional layer focused on a specific need: fast, cheap, truly private digital payments.

Frequently Asked Questions

What is Cashu?

Cashu is a free, open-source eCash protocol built for Bitcoin. It enables instant, private, and near-free transactions with blind-signature cryptography. Tokens stay on your device and can be sent to anyone.

Is Cashu secure?

Cashu’s cryptography is solid and based on decades of research. The main risk is custody: tokens depend on the mint honoring redemption. Use Cashu for small day-to-day amounts, and use self-custody cold storage for larger holdings.

What is the difference between Cashu and Bitcoin?

Bitcoin is a decentralized digital money network with a public blockchain and full self-custody. Cashu is a privacy layer on top of Bitcoin that uses eCash for fast, private payments. Cashu complements Bitcoin rather than replacing it.

Who created Cashu?

Cashu was created by Calle (@callebtc), an open-source developer with a PhD in Physics, co-creator of Bitchat, and founder of OpenCash Association.

What is the difference between Cashu and Fedimint?

Both implement Chaumian eCash for Bitcoin. Cashu usually runs as a single mint model, while Fedimint uses a federated multisig model. Cashu is simpler; Fedimint is generally stronger for shared custody setups.

Can I lose my Cashu tokens?

Yes. If a mint goes offline or disappears, you can lose eCash held there. You can also lose tokens if you lose device access without seed backup. Use Cashu for small balances.

How can I try Cashu?

The easiest way is to open cashu.me in a browser, choose a mint, deposit a small amount of sats via Lightning, and start sending and receiving eCash. No sign-up, email, or personal data required.

Does Cashu work offline?

Partially. eCash tokens can be transferred offline via QR, text, Bluetooth, and similar methods. But depositing, redeeming, and mint-side verification require internet access.

Related reading

• What is Bitcoin?
• eCash: A Game Changer in Fintech
• David Chaum: Meet the Creator of eCash
• Nostr: learn about the censorship-resistant X!
• Silent Payments: A New Era of Privacy in Bitcoin
• Is Bitcoin Anonymous?

Conclusion

At its core, Cashu delivers on a long-standing vision that began in 1983 with David Chaum: digital money that behaves like physical cash. Private, instant, and without intermediaries tracking every transaction.

The difference now is that we have Bitcoin as the reserve asset, Lightning as infrastructure, and a vibrant open-source ecosystem building practical tools.

If you are exploring Bitcoin, understanding Cashu means understanding the next step in digital payment evolution. Try it, test with small amounts, and see how it works in practice.

See you next time. OPT OUT.

The post What Is Cashu? The Private Bitcoin Payment Layer You Should Know appeared first on Area Bitcoin.

On the Lightning Network, several implementations have been made over time (with some still under development) to enhance the user experience and further enable the use of Bitcoin in everyday transactions.

One of the significant improvements to the network is the LNURL protocol.

In this article, we’ll explore what the LNURL protocol is and how it contributes to the development of the Lightning Network.

Let’s dive in!

What is LNURL?

LNURL stands for “Lightning Network URL.” It is a protocol standard created to simplify certain operations on the Lightning Network, a second-layer Bitcoin solution designed to address scalability issues by enabling instant transactions with very low fees.

Similar to the Lightning Network Address, its main goal is to solve UI/UX problems and improve the user experience. In other words, it’s about making the use of Lightning easier and integrating it more seamlessly into daily life.

LNURL enhances four key aspects, which will be detailed below:

1. Payments
2. Withdrawals
3. Channels
4. Authentications

How does LNURL simplify Lightning payments?

Typically, to receive payments on the Lightning Network, an invoice must be generated for the payer to scan. However, Lightning Network URL simplifies this process, allowing for more straightforward and intuitive transactions.

Before LNURL, it wasn’t possible to have a static QR code for Lightning payments, meaning a QR code could not be reused. So, every time it was used, a new one had to be generated, making it impractical for merchants.

This meant that a merchant had to generate a new QR code for each payment, which would be problematic for business.

With Lightning Network URL, the entire payment process on the Lightning Network became easier, allowing for the use of a single QR code valid indefinitely. An example of these LNURL QR codes can be seen in the Wallet of Satoshi, which supports this protocol.

Previously, static QR codes were possible, but they required custodial wallet solutions. However, thanks to LNURL, this is now achievable with non-custodial wallets.

Ah, and as always recommended, the best way to store your Bitcoin is by using non-custodial wallets. Therefore, it’s great to see these advancements in the network.

How does LNURL simplify Bitcoin withdrawals?

A perfect example of LNURL usage is Bitcoin ATMs.

Before the implementation of this protocol, ATMs using Lightning had to be connected to the Internet to generate a new QR code for each withdrawal.

However, with Lightning Network URL, the ATM no longer needs to stay connected to the Internet because it can use a static QR code for the user’s withdrawal.

Much easier, right?!

By adopting LNURL, Bitcoin ATMs not only ensure faster and more efficient transactions but also offer greater flexibility, allowing users to withdraw more conveniently, even in locations where Internet connectivity might be limited.

How does LNURL help with channels?

This subprotocol, though less widespread, is designed for more experienced users due to its complexity.

With LNURL, a user can request the opening of a specific channel with their own node through a specialized service. This functionality provides greater control over channel configuration, catering to advanced users who want to customize the network according to their specific preferences and requirements.

This approach goes beyond conventional solutions, offering a more flexible and targeted way to build and manage channels on the Lightning Network.

By allowing users to customize their settings, LNURL meets the unique demands of an advanced user community, offering greater control over the architecture of their payment channels on the Lightning Network.

How does LNURL improve authentication processes?

Lightning Network URL provides an additional layer of security by allowing users to authenticate on websites without directly sharing sensitive information.

By using their wallets to generate specific passwords for each website, users can enjoy a more secure and streamlined authentication experience while maintaining the privacy of their information.

Although this subprotocol doesn’t involve Bitcoin balances or use the Lightning Network for direct payments, it offers a valuable option for two-factor authentication (2FA).

With this feature, users can use their wallet keys to generate unique passwords for each site they want to access.

This approach allows wallets integrated with the Lightning Network to perform a role similar to “Login with your Google or Facebook account,” making the authentication process more secure and convenient.

Which wallets support LNURL?

Some Lightning wallets where you can use Lightning Network URL are:

Wallet Of Satoshi

Renowned for its user-friendly interface, Wallet of Satoshi enables fast and efficient transactions on the Lightning Network while supporting LNURL.

Users can customize channel configurations and explore other advanced features directly from the wallet.

Breez

Breez offers a complete experience by integrating support for LNURL.

Known for its ease of use, this wallet provides an intuitive way to interact with LNURL’s advanced features, such as channel customization.

Zeus

Zeus is known for its robustness and extensive features. It supports LNURL, allowing users to fully utilize advanced functionalities on the Lightning Network.

Blixt

Blixt stands out as a Lightning wallet that goes beyond the conventional by integrating Lightning Network URL support. Its advanced features harmoniously combine with the ability to effectively interact with the protocol, providing users with a complete and personalized experience.

Phoenix

Phoenix is praised for its innovative approach and intuitive design. With LNURL support, this wallet enables users to explore and utilize the specific features of this protocol.

By choosing one of these wallets, users can enjoy fast, efficient transactions on the Lightning Network while exploring the advanced functionalities of LNURL, such as channel customization and enhanced authentication processes.

Conclusion

The LNURL protocol is a significant innovation for Bitcoin and the Lightning Network. It not only simplifies transactions but also promotes greater Bitcoin adoption for daily payments, thanks to its simplicity and efficiency.

With this protocol, the experience of using Bitcoin has become even more accessible and practical.

One of the major challenges in using Bitcoin is making tools more user-friendly so that anyone can participate and be part of this new digital economy.

I hope you enjoyed this article. Until next time, and opt out!

The post What is LNURL and how does it work? appeared first on Area Bitcoin.

Despite being a relatively new technology—it was created in 2017—the Lightning Network has been developing year after year and has proven to be an effective solution for scaling Bitcoin.

Today, various Lightning wallets and exchanges support this network, facilitating cheap and fast payments without relying on intermediaries.

Additionally, the Lightning Network is decentralized and open-source. This allows anyone to access the code, propose improvements, and contribute to the network’s development.

Just as in the first layer of Bitcoin, where developers can propose improvements through BIPs, in the Lightning Network, improvements are proposed through BOLTs.

In this article, you’ll understand what BOLTs are and the main ones in operation.

Let’s dive in!

How does the Lightning Network work?

Before understanding what BOLTs are, it’s worth noting that the Lightning Network is not a blockchain but a network of payment channels between Lightning nodes that establish peer-to-peer connections by locking funds within the network.

So, since it doesn’t have a blockchain to perform operations, transactions are made “off-chain” by the users. In other words, funds never leave the Lightning Network; they keep moving from one channel to another.

What are Lightning channels?

Lightning channels allow users of the Lightning Network to send and receive money among themselves. They function like interconnected money tubes, facilitating the transfer of payments between users. Thus, each Lightning channel is established between two nodes on the Lightning Network.

To transfer funds to the Lightning Network, a channel must be opened. Then, once opened, the user can transact payments within the channel limits and exit the network at any time by closing the channel and transferring the funds back to the Bitcoin blockchain, the first layer.

Why was the Lightning Network created?

The Lightning Network was created to enable the use of Bitcoin for small value payments, such as a cup of coffee, with cheap fees, instant transactions, and global reach.

To give an idea, while the Lightning Network can process up to one million transactions per second (TPS) and settle all of them immediately, Bitcoin can process only about 7 transactions per second.

In September 2023, River released a report estimating that between 279,000 and 1 million wallets were actively using the Lightning Network, performing approximately 6.6 million transactions. This represents a growth of 1,212% in two years, compared to the 501,000 transactions recorded in August 2021.

As more people start using the Lightning Network, developers receive feedback, analyze critical points, identify potential security flaws, improve privacy, and discover new use cases.

From this, protocol improvements are discussed, and this is where BOLTs (Basis of Lightning Technology) come into play. These are specifications guiding these updates.

What is BOLT in the Lightning Network?

BOLT stands for Basis of Lightning Technology and is a set of technical specifications or protocols that define the rules and procedures for the functioning of the Lightning Network.

BOLT was launched in 2017 by a group of Lightning Network developers and has undergone several updates and revisions since then.

Additionally, these protocols are open-source and available to anyone who wants to use or develop applications and services related to the Lightning Network.

BOLT covers various topics, including payments, channel opening and closing, routing and forwarding, peer-to-peer interactions, invoices, error handling, dispute resolution, messaging, and networks.

Therefore, any Lightning Network implementation, like LND, eClair, and c-lightning, must follow the BOLT standards.

Let’s briefly look at each of these implementations:

LND (Lightning Network Daemon)

LND, or Lightning Network Daemon, is a Lightning Network implementation developed by Lightning Labs.

Basically, it is software that allows users to create nodes on the Lightning Network, manage payment channels, send and receive transactions, and perform other necessary operations to participate in the Lightning Network.

LND is one of the most popular Lightning Network implementations, known for being robust and flexible, offering a variety of tools and APIs for developers to integrate the Lightning Network into their applications.

eClair

eClair is a Lightning Network implementation developed by ACINQ, a French technology company focused on Bitcoin network solutions.

That being said, eClair is designed to be an efficient and scalable solution for the Lightning Network, allowing users to create and manage nodes, establish payment channels, and send and receive fast and cheap off-chain transactions.

This implementation is also known for its robustness and developer-friendly approach, offering an API that makes it easy to integrate the Lightning Network into various services and applications.

Additionally, ACINQ also develops a mobile wallet called Eclair Mobile, enabling users to interact with the Lightning Network in a simple and intuitive way.

c-lightning

c-lightning is a Lightning Network implementation developed by Blockstream and is written in C, making it efficient and fast.

c-lightning allows users to set up nodes on the Lightning Network, manage payment channels, and perform off-chain transactions quickly and at a low cost.

Due to its flexibility and efficiency, c-lightning is a popular choice among developers and companies looking to implement the Lightning Network on their platforms.

Thus, standardizing the rules and procedures for the protocol ensures that different Lightning Network implementations can communicate and work together in consensus.

As the Lightning Network grows, BOLTs are updated and improved, and new Basis of Lightning Technology can be created if major changes in the protocol affect how all Lightning Network implementations work together.

Another interesting point is that BOLTs are designed to be compatible with improvements in the Bitcoin protocol (BIPs). This is important because it allows interoperability between different Bitcoin layers.

Layers of BOLT

There are several layers in BOLT, each defining a specific set of rules and protocols, as shown in the image below:

Let’s understand each of them better, from top to bottom:

1. Payment Layer: The highest layer of the network, which provides a reliable payment interface for applications. It defines the rules for using Hash Time Locked Contracts (HTLCs) to route payments between nodes, specifies the format of HTLC messages, and outlines the process for exchanging pre-images to release payments.
2. Routing Layer: It defines the rules for creating payment channels between nodes, specifies the messages used for opening and closing channels, and defines the format of channel updates used to adjust the channel balance.
3. Peer-to-Peer Layer: It includes protocols that nodes use to negotiate features, format messages, and encode message fields.
4. Message Layer: It covers cryptographic transport protocols that secure messages on the Lightning Network.
5. Network Connection Layer: It contains protocols that directly interact with the main Internet protocols (TCP/IP), overlay protocols (Tor v2/v3), and Internet services (DNS).

Now, let’s understand the BOLTs that have already been created.

Knowing and understanding all the BOLTs

Below is a list of all existing BOLTs, with links for you to view them directly on GitHub:

1. BOLT #1: Base Protocol
2. BOLT #2: Peer Channel Management Protocol
3. BOLT #3: Bitcoin Transaction and Script Formats
4. BOLT #4: Onion Routing Protocol
5. BOLT #5: Recommendations for On-Chain Transaction Handling
6. BOLT #7: P2P Node and Channel Discovery
7. BOLT #8: Encrypted and Authenticated Transport
8. BOLT #9: Assigned Feature Flags
9. BOLT #10: DNS Bootstrap and Node Assisted Location
10. BOLT #11: Invoice Protocol for Lightning Payments
11. BOLT #12: Offers and Static Invoices

Wait, isn’t BOLT 6 (IRC Announcements) missing? I see you’re paying attention! BOLT 6 is not on the list because it was replaced by BOLT 7.

BOLT 1: Base Protocol

This BOLT defines message formats, data types, and peer connection management.

Below are the topics this standard covers:

• Connection handling and multiplexing
• Lightning message format
• Type-Length-Value format
• Fundamental types
• Setup messages
• Control messages

BOLT 2: Peer Channel Management Protocol

Discusses channel operations such as opening, closing, and management.

Below are the topics this standard covers:

• Channel ID definition
• Channel establishment (opening, accepting, funding, etc.)
• Channel closure
• Channel operations (HTLCs, fee updates, revocation and acknowledgment, CTLV expirations, etc.)
• Message retransmission

BOLT 3: Bitcoin Transaction and Script Formats

This one informs us how the necessary formats for on-chain Bitcoin transactions should be. It includes funding, commitment, HTLC transactions (Hash Time-Locked Contract), and key derivation.

Below are the topics this standard covers:

• Transaction output ordering
• Use of Segwit
• Funding transaction output
• Commitment transaction
• HTLC-timeout and HTLC-success transactions
• Closing transaction
• Fees
• Dust limits
• Commitment transaction construction
• Keys

BOLT 4: Onion Routing Protocol

This standard describes the Onion Routing mechanism used for secure and private payment routing within the Lightning Network.

Below you can see the topics this rule covers:

• Conventions
• Key generation
• Pseudo-random byte stream
• Packet structure (payload formatting, multi-part payments, and route blinding)
• Accepting and forwarding a payment
• Shared secret
• Blinding ephemeral keys
• Packet construction
• Packet forwarding
• Filler generation
• Returning errors
• Test vector

BOLT 5: Recommendations for On-Chain Transaction Handling

It addresses channel closures in the good (mutual close), the bad (unilateral close), and the ugly (revoked transaction) ways.

Below you can check the topics this rule covers:

• Commitment transaction
• Failing a Channel 
• Mutual close handling
• Unilateral close handling: Local Commitment Transaction
• Unilateral close handling: Remote Commitment Transaction
• Revoked transaction close handling
• HTLC transaction generation

BOLT 7: P2P Node and Channel Discovery

This standard defines mechanisms for discovering nodes and Lightning channels on the network, including node announcements and channel updates.

Below are all the topics this rule covers:

• short_channel_id definition
• announcement_signatures message
• channel_announcement message
• node_announcement message
• channel_update message
• Query messages
• Initial synchronization
• Rebroadcasting
• HTLC fees
• Pruning the network view
• Routing recommendations

BOLT 8: Encrypted and Authenticated Transport

It specifies the requirements for secure transport and message encryption between Lightning nodes.

Below are the topics BOLT 8 covers:

• Cryptographic messaging overview
• Authenticated Key Exchange Handshake specification
• Lightning message specification
• Lightning message key rotation
• Security considerations

BOLT 9: Assigned Feature Flags

This standard establishes a framework for assigning feature flags to enable optional protocol extensions within the Lightning Network.

Feature flags allow network participants to indicate their support for new or experimental features and help coordinate the activation of these features across the network. These flags are represented by bits, where odd bits indicate optional features and even bits indicate mandatory features.

Therefore, feature flags are generally implemented through a consensus process in which network participants signal their support for a specific feature by adjusting a flag in the protocol messages they exchange. When a sufficient majority of participants signal their support, the feature can be activated on the network.

This feature flag system allows for a more gradual and coordinated implementation of new features, ensuring compatibility and minimizing network disruptions.

Additionally, it also allows for backward compatibility, as older implementations can still function without supporting the new features.

BOLT 10: DNS Bootstrap and Node Assisted Location

This one defines a method for Lightning Network nodes to find initial connections using DNS records and assisted node location services.

We use DNS for:

• Bootstrap: Helping new nodes find other nodes on the network when they have no known contacts.
• Assisted node location: Helping nodes discover the current network address of peers they already know.

Below are the topics this rule addresses:

• DNS Seed queries
• Reply construction
• Policies

BOLT 11: Invoice Protocol for Lightning Payments

This standard specifies the format and semantics of Lightning Network invoices, which are used to request and receive payments.

Below are the topics BOLT 11 covers:

• Encoding overview
• Human-readable part
• Data part
• Payer / Payee interactions

BOLT 12: Flexible Protocol for Lightning Payments (Offers)

It addresses a limitation of BOLT 11.

For security reasons, BOLT 11 invoices can only be used once. BOLT 12 solves this by allowing the creation of new invoices in real-time without needing web servers (unlike LnURLs).

Besides generating invoices, offers in BOLT 12 are different because:

• They are reusable, allowing for receiving payments from multiple people.
• They can be used both to receive and request payments.

For users, this means being able to make reusable payment requests, having more privacy, and greater censorship resistance.

You can learn more about BOLT 12 on its official website.

Conclusion

Although the Lightning Network has grown significantly since 2018 and thousands of transactions are made monthly, many still consider it to be in an experimental phase and not ready to serve billions of people.

Indeed, there are some challenges for the mass adoption of Lightning.

First, the Lightning Network is more complex to use when users self-custody their balances compared to the first layer of Bitcoin.

Second, understanding channel opening and closing, as well as knowing how to run a Lightning node, requires some technical knowledge and involves risks. This is a big barrier for novices and makes them opt for custodial wallets, for example, where they do not need to deal with the technical issues happening on the protocol’s backstage.

However, developers are working tirelessly to reduce these friction points.

Remember, perfection takes time. As new tools are created, new Basis of Lightning Technology will emerge to improve all aspects of Lightning Network usability, from user experience to performance.

I hope this article has helped you better understand what BOLTs are in the Lightning Network.

Don’t forget to share it with friends and opt out!

The post What is BOLT in the Lightning Network? appeared first on Area Bitcoin.

In this article, we’ll help you understand the differences between on-chain Bitcoin transactions and transactions on the Lightning Network, which is the fastest and cheapest way to send Bitcoin.

Let’s get started!

Understanding Bitcoin On-Chain

Bitcoin works in layers, and to make it easier, you can think of Bitcoin as a building. Layer one is the blockchain layer, the foundation of the building. It is the network that supports all the security and decentralization of the protocol.

Bitcoin is revolutionary because, for the first time, a computer network is able to create digital money independent of banks and governments. To achieve this, the Bitcoin protocol uses several mechanisms such as proof of work (mining), difficulty adjustment, cryptography, digital signatures, and nodes that connect the network, verify records, and store copies of the blockchain across the world.

This layer is completely dedicated to preserving the fundamentals of Bitcoin as a network that cannot be hacked, invaded, or modified by anyone, as it has more computing power than the 500 most powerful computers in the world combined!

Furthermore, this layer maintains the principles of Bitcoin as a solid currency, with a limit of 21 million units that can be created. That’s why Bitcoin is a predictable currency that does not suffer from infinite inflation like fiat money.

However, such a secure and decentralized blockchain cannot be fast and cheap all the time. Each block that processes transactions sent by users can take 5, 10 minutes, or even hours to mine. This variation in time depends on the number of transactions waiting to be included in the block by a miner and the difficulty of mining each block at that time.

Difficulty adjustment is a mechanism in the Bitcoin network that maintains predictability in the issuance of new bitcoins, ensuring that even if many miners connect to the network or if a miner with a very powerful machine participates, they will not be able to mine all the bitcoins at once.

The Bitcoin network has reached records in computational power, which increases the difficulty of mining each block to keep Bitcoin’s properties immutable.

One way the network selects which transactions will have priority when demand is very high is by charging a higher processing fee for those with more urgency. As the network does not intend to change its fundamentals and, over time, the demand for transactions tends to increase, Bitcoin network fees at the on-chain layer are expected to become more expensive in the future. This will help maintain miners’ revenue as halvings reduce the block reward.

In this sense, layer one will become a final settlement layer, where the highest volume transactions occur, while smaller payments will be made in adjacent layers focused on scalability, such as the Lightning Network.

Now that we’ve talked about layer one, the Bitcoin blockchain, which is the foundation of the building, let’s understand the Lightning Network.

What is Bitcoin’s Lightning Network

The lightning network is a layer two of Bitcoin. This network is based on layer one and allows you to make instant payments almost for free. It’s like the first and second floors of the Bitcoin building.

At this point, most users will access the “building” and head to their desired floor.

You can go to the third floor, where more complex contracts take place, or to the fifth floor, where in the future, it will be possible to carry out Bitcoin collateralization contracts on the Lightning Network without intermediaries.

The Lightning Network aims to enhance the characteristics of Bitcoin through a network of P2P payment channels, without requiring all payments to be recorded on the blockchain.

These channels make Lightning payments as fast as lightning and interconnect, making Bitcoin the most efficient global financial network in existence. It gives power back to the people, allowing them to use their money however they want, without depending on banks or governments.

That’s the theory, but how does it work in practice? The time has come to show you!

We will demonstrate two types of Bitcoin transactions: one on-chain and one on the Lightning Network, so you can understand the differences. To do this, we will use vouchers from Azteco, purchased on the azte.co website, and I will redeem them in my own Bitcoin on-chain and Lightning wallets.

Don’t know Azteco? Then, check out our article: Is it worth buying Bitcoin through Azteco?

This way, you will be able to understand the processing times and different methods when purchasing Bitcoin on-chain or on the Lightning Network and sending it to your wallet using different types of networks.

This will also help you understand how it works when receiving a payment from someone, giving you a sense of how long the network takes to process and how to verify transactions.

Using Bitcoin On-Chain in practice

First, let’s send Bitcoin on-chain, which is layer one of Bitcoin, and understand the times and fees associated with this network. To carry out the process, just follow the steps below:

1. Go to azteco.co and click on ‘redeem’. 

2. Then, enter the on-chain voucher code that you have already purchased from Azteco. 

3. Now enter the on-chain address where Azteco should send the satoshis.

4. After pasting the bitcoin on-chain address, the satoshis will automatically be sent to the specified wallet.

At the end, a screen will appear with a summary of the entire purchase, including the redeemed bitcoin balance, the Azteco commission, and the on-chain network fees, which was 97 euro cents.

The last step is to paste the address where you want to receive the satoshis, wait for the transaction to be processed by the Bitcoin blockchain, and the balance to be confirmed at the specified wallet address.

And the transaction was received! This Bitcoin on-chain transaction arrived very quickly, taking about 5 minutes. However, often, when there is a lot of demand for transactions on the network, it can take more than an hour for a transaction to be processed.

For example, on April 20th, when the fourth Bitcoin halving took place, transactions took hours and the fees were very expensive, more than $20 per transaction.

Note that in the Bitcoin on-chain network, the transaction is not immediate and may take a few minutes to complete.

Also, depending on the amount you want to send, the fee is often not worth it for smaller payments, such as a cup of coffee. A fee of $3 could be the price of the coffee itself! Therefore, the Lightning Network was created, allowing smaller payments, such as a coffee, without fees making the transaction unfeasible.

So now let’s see how sending via the Lightning Network works so you can see the difference in rates and speeds of each of these Bitcoin networks.

Using the Lightning Network in practice

Let’s go through the same process using Azteco.

1. Go to azteco.co and click on “redeem“. 

2. Then, enter the Lighting voucher code that you have already purchased from Azteco. 

The voucher is confirmed and the amount of 25 euros to be sent to my wallet is now available. 

Notice how the “network fee” line is zero. This is because the Lightning network has virtually no fees, with only a few satoshis being worth less than a penny. Azteco does not even consider this value as relevant.

3. Now let’s scan this QR Code with a lightning wallet. We’ll use the Blink wallet, which supports the Lightning network. Open the wallet and click “scan”. The camera will open, and you can scan the Lightning QR Code that appears on the computer screen.

4. A message appears in the Blink wallet confirming whether the balance is to be redeemed, showing that is an Azteco voucher worth 35,588 satoshis, exactly the balance of the lightning voucher purchased at Azteco. Now just click on “Redeem Bitcoin” for the amount to be received via Lightning in this wallet. 

Once this is done, the transaction immediately appears in the wallet. In addition to being fast, it had a lower fee than the transaction made on-chain. 

In the Blink wallet, you can see the details of this transaction, such as the time it took place (just 18 seconds ago), the fact that it was via Lightning, and other data such as pre-image, invoice, hash, and wallet identifier.

Notice how the transaction took just a few seconds, much faster than the bitcoin on-chain transaction, which took 5 minutes.

*There is a small variation in the amount of Bitcoin shown because my wallet is pricing Bitcoin in dollars instead of euros, showing $24.41.

Now that the balance has arrived, you can use your sats to make payments!

Conclusion

Do you notice the huge difference in processing time and fees between the layers of the Bitcoin network?

It’s important to highlight that each layer has a specific use. Layer one, the blockchain, is best suited for storing Bitcoin in the long term without relying on intermediaries. Layer two, the Lightning Network, is ideal for everyday payments and smaller amounts.

The Lightning Network is like the money you set aside for your daily or weekly needs, while the bitcoin on-chain layer is used to protect and store your Bitcoin, functioning as a digital vault.

When we think of gold, we imagine gold bars in a vault; at the bitcoin on-chain layer, this “gold” is digital, represented by Bitcoin. If you take good care of your keys, no one can steal it from you.

Each network has its own benefits and drawbacks, and choosing which one to use depends on your specific needs, such as security, convenience, cost, and transaction speed.

In summary: 

• On-chain transactions take longer and have higher fees, but the network is safer for storing Bitcoin in the long term. 
• Lightning transactions are instantaneous, with low, almost insignificant fees, making it ideal for everyday payments.

We hope this article has helped you understand the differences between bitcoin on-chain and Lightning. We suggest you try the same practice using Azteco vouchers to get the full experience of how Bitcoin networks work.

Until next time and opt out!

The post Bitcoin on-chain and Lightning: what’s the difference? appeared first on Area Bitcoin.

With this in mind, companies and developers are constantly looking for solutions to improve the user experience, a concept known as UX (User Experience).

Over the years, we have seen a continuous effort by companies involved in the Bitcoin ecosystem to improve this aspect of UX. Therefore, the goal is to make Bitcoin intuitive and easy to use for both beginners and advanced users.

An example of this was the creation of the Lightning Network (and the Lightning Address protocol), designed to facilitate everyday payments, improve speed, and reduce the cost of transaction fees.

Do you want to understand more about the Lightning Address protocol?!

A Lightning Network 

Before understanding what the Lightning Address is, it is important to understand what the Lightning Network is, as it was with the aim of improving Lightning payments that the Lightning Address protocol was created.

What is the Lighting Network?

The Lightning Network, or Lightning network, is a second-layer Bitcoin network, created to meet users’ needs for making micropayments.

Therefore, since Bitcoin was created, it has been gaining adoption, resulting in the need to be able to transfer small amounts at a lower rate than in layer 1 of Bitcoin, the main layer. Therefore, the Lightning Network emerged to solve this.

LN sending and receiving addresses are different from Bitcoin addresses. While a Bitcoin address usually starts with “bc1…”, in Lightning, transfers are made via invoices and are significantly larger than a Bitcoin address.

For example, a Bitcoin address looks like this:

bc1qeu0srtr7zfqoi7l879lydnw8re47gtzzwe5pot

And an invoice on the Lightning Network looks like this:

lnbc10u1p39w7q4pp5t6z24zk232x40g5wsndlq0qnc56f9t6zusyf7nkn358mhvc43c0sdq5fe85zjpqf9h8vmmfvdjscqzpgxqzjcsp564eu3afmm05clfxeu4zklkj0amn4vvwlwzq lecasmkn6kcn65m4q9qyyssq2xw4fet6um6ynm5t2f2gmy934av7z9x89e9j7vyyd2umpmjslaazs3dpszstdhqpdw7vsmud9zd7vyjernp0wranzn20js233t279ccpxw9et0

What is an invoice on the Lightning Network?

An invoice on the Lightning Network is a digital document that contains all the essential information for making a payment. This includes the amount to be paid, the recipient’s address, and other relevant information.

This document is generated by the party wishing to receive payment, providing a structured and secure way to facilitate transactions on the Lightning Network.

Furthermore, this process simplifies communication between payer and recipient, contributing to the efficiency and transparency of operations.

QR Codes on Lightning

To avoid the need to copy and paste the lengthy alphanumeric phrase (similar to the one seen above), QR codes began to be used to facilitate and simplify payments, directly reflecting invoices.

However, QR codes in Lightning do not yet represent the most viable solution, as they are not static; that is, they have an expiration time and generally can only be used once, precisely because they reflect a temporary invoice.

LNURL

However, a promising alternative to this issue seems to be LNURL, which essentially consists of a Lightning invoice in the format of a website URL.

The proposal with LNURL is to provide the ease of a QR Code but without an expiration date.

Using a Lightning URL, it becomes possible to send and receive Bitcoin through a static QR Code, eliminating the need to change it with each transaction.

However, this solution still requires the presence of a QR Code and requires a website, and a camera to scan the invoice, which, in turn, creates friction in communication with users, making the experience difficult.

With the aim of further improving usability and simplifying transactions, Lightning Address was created.

Lightning Address depends on the LNURL protocol but incorporates more user-friendly usability, providing a more efficient and user-friendly alternative for operations on the Lightning Network.

What is the Lightning Address?

Lightning Address offers an instant method for sending bitcoins over the Lightning Network, utilizing an email-like address to streamline the bitcoin-sending process.

Consequently, Lightning Address is a protocol that simplifies utilizing Bitcoin’s Lightning Network, making transactions more accessible and easier to comprehend.

The proposal suggests that the Lightning Address acts as your identifier on the Internet—an email address that enables you to send and receive Bitcoin on the Lightning Network in a straightforward and direct manner.

For example, instead of using invoices in QR Code format or letters and numbers, as shown in the image below:

You can have a Lightning Address, such as fernando@getalby.com.

In simpler terms, instead of utilizing traditional and complex character strings, the Lightning Address enables individuals to send and receive Bitcoin on the Lightning Network by merely entering their Bitcoin “email” address into compatible wallets.

This approach significantly simplifies daily transactions, serving as a universal identifier on the Internet.

Memorizing and sharing your Lightning Address is as straightforward as with a regular email. Moreover, certain platforms allow the use of your own web domain to create your Lightning Address.

It’s also important to note that the Lightning Address protocol was developed by two Brazilians:

• André Neves;
• and Fiatjaf (a pseudonym), the latter of whom also played a role in developing the Nostr protocol.

Both are recognized for their substantial contributions to the Bitcoin ecosystem, particularly in the development of solutions for the Lightning Network.

Which wallets support the Lighting Address?

Numerous wallets and applications now support the Lightning Address.

Here is a list of some of the main ones:

• Zebedee
• Alby
• Wallet of Satoshi
• Zap
• Phoenix
• Flash
• Blink
• Beep
• Breez Wallet 
• Mash

Advantages of Lightning Address

A key advantage of the Lightning Address is its resemblance to an email, a universal identifier on the Internet. This similarity significantly eases the transaction process and encourages wider adoption among new users.

In contrast to traditional Bitcoin addresses, Lightning invoices are more extensive, have a time limit, and can only be utilized once.

Moreover, the process of scanning a Lightning QR Code, though seemingly straightforward, involves several steps for the user, such as opening a camera, scanning the code, and, occasionally, inputting the number of satoshis, among other details.

This process can introduce various difficulties, such as non-functional QR Codes or issues with camera activation. In some instances, a user may not have access to a camera to scan the code or may want to conduct a transaction on their behalf, necessitating another device to read the QR Code.

Consequently, the Lightning Address provides users with a universal identifier that applies to any wallet supporting this feature. Futhermore, the address is static, does not expire, and eliminates the need for a QR Code, unlike LNURL.

The Lightning Address significantly improves the overall user experience, facilitating the adoption of Bitcoin in daily life.

Related posts:

• Lies about the Lightning Network
• Bitcoin Lightning Wallets

Step-by-step guide on how to create and use a Lightning Address

Creating and using a Lightning Address is straightforward, particularly with wallets like Zebedee that support this feature. Zebedee is notable for its integration with various services, especially within the gaming sector.

When you register with Zebedee, you’ll be prompted to choose a username. This username will serve as your “gamertag,” essentially your identifier within the platform.

Your chosen username will act as your Lightning Address, formatted as “yourname@zbd.gg.”

Here are the step-by-step instructions to create your Lightning Address with Zebedee:

• Download the Zebedee (ZBD) app for Android or iOS on your mobile device;
• Create an account using your email or social media profile;

• Select your username;

Your username will serve as your Lightning Address in the format “yourname@zbd.gg.”

To make your first transfer using the Lightning Address to the ZBD wallet, simply click on the top right corner, where your satoshi balance is displayed.

After clicking this green button, you will choose the “Pay/Request” option in your wallet.

Upon selecting this option, you’ll need to specify the amount of satoshis you wish to send and then input the Lightning Address of the recipient.

Once you’ve completed these steps, you’ve not only set up your Lightning Address but also completed your first transaction with it.

Simple, right?

One of the standout features of the Lightning Address is its interoperability. This means that, regardless of the domain used after the “@”, the address will function. This removes the need to worry about the specific provider, as they are all compatible.

Thus, whether the address ends with .com, .net, or .io, they all operate the same way. Just as emails can be sent from Gmail to Hotmail, with Lightning Addresses, you can transfer funds between platforms like ZBD and Alby, for instance.

Conclusion

As explored in this article, Bitcoin continues to evolve, enhancing the user experience with regular updates and the introduction of various applications designed to improve usability.

The Lightning Address is a prime example of such innovations, offering a significant simplification for both newcomers to Bitcoin and seasoned users of the Lightning Network.

Previously, with QR Codes, it was necessary to repeatedly create new addresses for payments, creating friction and difficulties in transactions. LN Address, in turn, reduces this hurdle by providing a more efficient and hassle-free way to engage financially with Bitcoin.

Now, traders, beginners, and advanced users have a new way of interacting financially with Bitcoin, easily and quickly. This is fully aligned with the Lightning Network proposal, which aims to offer a simple and agile network for micropayments.

These advancements underscore the ongoing efforts to make Bitcoin more accessible and user-friendly for a broader audience.

I hope you enjoyed this article, be sure to share it with friends and family and see you next time!

The post What is Lightning Address? appeared first on Area Bitcoin.

However, amidst its immense potential, there are individuals who engage in nitpicking and spreading baseless criticisms.

At Area Bitcoin, our mission is to dispel fear, uncertainty, and doubt (FUD) while providing clarity. Therefore, we have undertaken the task of addressing the five most prevalent falsehoods surrounding the Lightning Network, debunking each one of them in this article.

1. Is the Lightning Network centralized?

What is the Lightning Network? The Lightning Network is more than just a second layer of programming codes that connects to the blockchain; it brings speed and lower costs to operations on the Bitcoin network.

In fact, the Lightning Network relies precisely on the rules, security, and decentralization of the main layer. Each of the 45,000 nodes on the Bitcoin network, distributed around the world, can also run a Lightning node. Therefore, if the Bitcoin network is decentralized, relying on it with a peer-to-peer (P2P) structure is the most obvious way to maintain decentralization. This is precisely what the Lightning Network accomplishes through its network of over 76,000 active channels and over 5,000 Bitcoins providing liquidity for these channels.

Currently, there are over 14,000 Lightning nodes in operation. However, it is important to note that this number is an estimate as it only considers public channels. Numerous nodes utilize anonymous networks, making them undetectable and thus not accounted for in this estimation.

Hence, it is highly likely that the actual number of Lightning nodes surpasses the reported count of 14,000, similar to how the number of Bitcoin nodes exceeds the 16,000 nodes listed on search platforms such as Bitnodes.

It is estimated that there are now over 45,000 Bitcoin nodes actively decentralizing the network, encompassing both detectable and undetectable nodes.

P2P Networks

P2P networks like Bitcoin and Lightning rely on the fact that anyone can have a node, verify the blockchain themselves, and check if the network consensus is being followed. The Bitcoin blockchain is lightweight; any simple computer can run it. This is significantly different from other protocols where downloading the entire blockchain is extremely resource-intensive, resulting in a reliance on centralized servers and data centers, such as Amazon, Microsoft, or Google.

Then, someone might argue that the majority of Lightning nodes and channels are located in data centers, suggesting that the Lightning Network is centralized. They may also claim that Lightning hubs, which possess more capital, are centralizing the system.

That’s also not true!

If a significant portion of nodes utilize Tor, it raises the question of how we can accurately determine the prevalence of Lightning nodes in data centers.

The statistics we commonly refer to only account for detectable nodes, excluding those operating through TOR. Given that it is likely that a majority of personal nodes employ Tor for enhanced privacy and security, these statistics do not provide a comprehensive representation of the network.

Those who claim that the more liquid channel hubs centralize the network usually draw this mistaken conclusion from images like this:

The image illustrates that 33% of nodes, represented by the gray portion, are not located in data centers. These nodes belong to ordinary individuals.

However, it is important to note that when considering the entire proportion of nodes in data centers (the colored portion), it surpasses the number of personal nodes. These data center nodes tend to possess a larger volume of liquidity, making them the wealthier nodes with more Bitcoin allocated in their channels.

This observation highlights that certain channel hubs with substantial liquidity heavily rely on data centers.

It supports a common criticism directed towards the Lightning Network, suggesting that it may become centralized around a few prominent nodes, ultimately leading to the formation of monopolistic payment hubs.

This concern becomes particularly relevant when considering the integration of exchanges and payment companies into the Lightning Network, as they could accumulate significant liquidity and consolidate payment routes around their services.

Delving Deeper: Reflecting on the Implications

Yes, this possibility exists, but it would not lead to the centralization of the network.

The Lightning Network is intrinsically tied to Bitcoin, and no matter how much capital-rich entities participate, they cannot centralize the decision-making power. The entrance of exchanges and centralizing forces has always been expected. What truly matters is the network’s ability to resist total centralization.

To comprehend this, it is crucial to recall the concept of decentralization and the risks associated with centralization. The primary concern with centralization is the monopolization of decision-making power. When this occurs, changes in rules disproportionately favor those who control the infrastructure, potentially leading to censorship, the creation of barriers to entry, and restrictions on protocol usage. Fortunately, neither Bitcoin nor the Lightning Network allow for such outcomes.

Even if entities start censoring transactions, smaller nodes will still continue routing transactions normally. They won’t be affected because they are independent because the fundamental rules of Bitcoin don’t change.

If centralized entities start infiltrating the network and censoring transactions, there will always be ordinary people running nodes with VPN and TOR who won’t censor. This is a result of the ease of running a full node.

So there is no single point of failure. It’s pure game theory.

Independent nodes will receive satoshis for routing these operations, and financial incentives will keep the network running normally. This means that even if participants try to monopolize the network, they can’t prevent people from choosing to follow other payment routes.

It is difficult for me to ascertain the motivations behind those who claim that the Lightning Network is centralized.

It seems likely that either they have not thoroughly studied the dynamic incentives of Bitcoin and Lightning, or they are attempting to promote an alternative protocol as superior to Bitcoin for payment purposes.

It is worth noting that those who propagate these assertions often tend to be proponents of fiat currency and centralization or enthusiastic supporters of “shitcoins.”

2. Are non-custodial Lightning Network wallets not good?

Bitcoin and Lightning still have plenty of room for improvement in terms of user experience and interface, but this is entirely normal.

Even the Internet was challenging to navigate in its early days.

Can you recall those dial-up connections and the exorbitant costs incurred on your landline phone bill for browsing? It was an expensive affair.

New technologies typically entail a learning curve that cannot be overcome overnight. However, they gradually evolve and improve over time.

Check out the Best Bitcoin Hot Wallets

That being said, if you are seeking a non-custodial Lightning wallet, you can already utilize options like Blixt or Bitkit or connect Blue Wallet to your own node and channels.

Numerous other emerging choices are available. Hence, stating that “there are no good non-custodial wallets” goes beyond spreading fear, uncertainty, and doubt (FUD). It reflects a lack of willingness to conduct research and test the existing solutions that are already in place.

Learn more about Bitcoin Wallets!

3. Do I need to open a channel with everyone I’m going to trade with?

Channels are an essential component of the Lightning network’s operation, but it would be entirely impractical if we had to open a channel with every individual we wished to send Bitcoin to.

Fortunately, that is not how the system functions.

Let’s consider a scenario where I need to pay Pedro 100 satoshis, but I do not have a direct channel with him. However, I do have an open channel with Carol, and Carol, in turn, has an open channel with Pedro.

In this case, I can request Carol to act as a bridge and facilitate the payment to Pedro on my behalf. As compensation for providing this service, I offer Carol a few satoshis.

This is how transaction routing functions in Lightning. It is not imperative for me to have a direct channel open with the ultimate recipient; rather, I need to establish connections with other channels that possess those connections.

Now, if we substitute Carol, Kaká, and Pedro with all the individuals and businesses interested in utilizing Lightning, we can envision a network map resembling the one depicted here.

Numerous channels become accessible, enabling us to send Bitcoin to anyone globally without the necessity of opening a dedicated channel with each individual recipient.

4. Does Lightning Undermine Bitcoin’s Security with Fee Reduction?

This myth is rooted in a factual observation: as the number of Lightning transactions increases, on-chain transactions are likely to become cheaper due to reduced network congestion.

However, it is important to note that lower fees could potentially diminish incentives for miners, resulting in reduced Bitcoin rewards.

Nevertheless, the situation is not as straightforward as it may seem.

If the usage of the Lightning network expands, it implies that more Lightning channels will be opened, which in turn necessitates processing on the blockchain layer to establish these channels.

The growth of Lightning does not diminish the demand for Bitcoin; rather, it intelligently accommodates and utilizes the existing computational power of the network to facilitate transactions more efficiently.

Learn here: What is Taproot?

Blockchain Trilemma

Lightning resolves the blockchain trilemma, a situation where achieving security, scalability, and decentralization simultaneously was not feasible within a single protocol. It accomplishes this by shifting scalability to layer 2 and reducing the number of less significant transactions at layer one.

Consequently, the blockchain layer becomes dedicated to the ultimate settlement of operations, enabling it to encompass an entire economic system.

In layer 2, a channel can facilitate millions of transactions, while in layer 1, only the opening and closing of the channel are recorded. As a result, despite exerting the same computational effort to include transactions in a block, the network can achieve significantly more throughput and efficiency.

With the creation of additional applications in Lightning and other layers, the demand for these lightweight solutions grows.

These solutions offer the advantage of bypassing the blockchain layer while retaining its underlying guarantees of security and decentralization. As a result, miners can operate more efficiently and earn higher fees, all while expending the same amount of energy to mine a block.

This dispels the myth that miners will abandon the network once the last Satoshi is mined.

The reduction of Bitcoin network fees does not present a problem nor pose any security risks. As the network expands and more channels are opened, miners will continue to receive increased fees.

Therefore, the growth of the network ensures a sustainable incentive structure for miners, debunking concerns regarding their long-term participation.

5. Do you need to be always online to use the Lightning network?

This is no longer true, thanks to the introduction of a new implementation of Lightning called LNURL, which is already in operation.

Prior to this protocol, having a static QR Code for Lightning payments was not feasible. Each time a QR Code or address was used, it became unusable, necessitating the recipient to be consistently online to generate new QR Codes.

This practice is impractical for merchants since having to generate a new QR Code for each payment received can be detrimental to their business.

However, LNURL has revolutionized the usability of the Lightning network by enabling the use of a single QR Code that remains valid indefinitely, even when offline.

The architecture of the Bitcoin network is inherently decentralized, and the Lightning network serves as an additional layer within this global, digital, and distributed web that encompasses Bitcoin. While there is ample room for improvement and further development, this presents an exciting opportunity for early adopters—the ones who seize the advantage of being at the forefront of this technology.

That’s why it’s important to start today!

The post 5 biggest lies about the Lightning Network appeared first on Area Bitcoin.

The question was how people could transact quickly and cheaply in the future, given that block mining occurs every 10 minutes and supports a maximum byte size.

Thus, the solution was to create a second-layer network, preserving the Bitcoin blockchain’s fundamental security and decentralization features while addressing the issues of agility and transaction fee value.

Here’s what Lightning Network is all about!

Understanding the Scalability Problem

Bitcoin has grown in popularity in recent years but still faces some challenges concerning its wide-scale adoption.

One of these challenges is Bitcoin’s scalability problem, which refers to its ability to process a large number of transactions quickly and efficiently.

As more people start using Bitcoin, the network can become congested, and transactions may take longer to confirm.

Blockchain Trilemma

The triangle below represents the famous blockchain trilemma (scalability, decentralization, and security), where you can only choose two features, that is, two sides of this triangle.

This happens because the computer codes of blockchains cannot have these three characteristics simultaneously.

So, if the blockchain is secure and decentralized, it ends up being slow and has difficulty scaling as adoption increases.

If it is decentralized and scalable, it will compromise data security properties. And if it is scalable and secure, it ceases to be decentralized, that is, you are back to depending on an intermediary, no different from a Visa or PayPal.

Bitcoin Network

Bitcoin is the most secure and decentralized cryptocurrency, and these characteristics eliminate the need for the centralization of private banks and central banks.

However, as more people started adopting Bitcoin, the network’s processing became slower.

For instance, the Bitcoin network processes an average of 7 transactions per second, which is meager compared to Visa, which processes an average of 4,000 transactions per second.

The Bitcoin network constantly verifies information blocks on its blockchain to ensure data security. This obsession with security and constant verification, however, makes the Bitcoin blockchain’s layer 1 slower compared to centralized solutions and other cryptos.

Alright, but isn’t this a bad thing?

No! This is not bad, in fact, it’s quite good!

If Bitcoin wants to be a new global financial network and a store of value, it first needs to be extremely secure and independent of any government, and Bitcoin already is.

Each transaction in layer 1, on the Bitcoin blockchain, needs to be recorded in a block, which takes about 10 minutes to happen. Besides, the blocks have a limited amount of information to 1 MB, which means not all transactions in the queue make it into the next block.

Transactions that pay more to the miners have priority in the processing queue and are recorded first in the blocks. This creates a bottleneck, which can get quite congested at times when many people decide to transact Bitcoin.

Thus, once a transaction is recorded in the blockchain, it is transmitted to all computers processing the network, which is why the network is slow. Each transaction takes an average of 10 minutes to be inserted into a block and then propagated.

Now you understand why the Bitcoin blockchain is not the most agile for processing layer 1 payments and, thinking about a world where everyone uses Bitcoin, this layer 1 would not be able to handle the growing transaction demand.

From there, bitcoin’s layer 2 emerges.

So what is the Lightning Network?

The Lightning Network is a payment layer built on top of the Bitcoin network, which allows for instant and low-cost transactions between two parties without those transactions being recorded on the Bitcoin blockchain.

Instead, transactions are conducted off the blockchain, in payment channels opened between users, which are then recorded on the blockchain only when the channel is closed.

The Lightning Network has the potential to make Bitcoin transactions faster, cheaper, and more scalable, as well as enabling micropayments and instant payments anywhere in the world.

Why was the Lightning Network created?

This is why there are various layer 2 protocols trying to solve Bitcoin’s network scalability while maintaining its security and decentralization characteristics.

It’s kind of like a second floor to the protocol:

Layer one is the foundation, the structure, and everything that keeps the network up, and layer two and beyond are all the other functionalities that are wanted to be implemented on the network.

Therefore, it’s important to have a solid foundation and Bitcoin already has that.

So, it was with this goal in mind that they created the Lightning Network. The aim is to perform thousands of transactions instantaneously, for less than 1 cent, in a decentralized and global manner.

How does the lightning network work?

The Lightning Network is an off-chain payment protocol, meaning it operates in parallel to the Bitcoin blockchain and works through nodes and payment channels that connect around the world.

This means that it is a network that connects to the blockchain, but not all transactions are recorded on the blockchain.

Think of it like a building where all floors necessarily connect to the 1st floor and the base structure, everyone who enters or leaves the building must go through the lobby, take an elevator and go to the desired floor, Bitcoin is the same.

The layers above necessarily have to go through the base layer to enter or exit the protocol.

Also read: what is Taproot

How does opening a channel on the lightning network work?

To open a lightning channel, two people need to lock funds, bitcoin, in a multisig address, which is a type of address where two or more people can sign the transactions on the blockchain.

It’s like a joint Bitcoin account that avoids a single point of failure. This transaction is done on layer 1 and is like entering the building’s lobby.

These bitcoins locked in the blockchain represent the maximum capacity of the channel. For example, if you and I want to open a payment channel on the lightning network, we will need to deposit funds into a multisig address and we will be able to exchange values within that channel, as long as we don’t exceed the total value we locked.

Therefore, it’s as if the floors above the building were a bar and you have a prepaid tab. You can order what you want, as long as it’s within the maximum amount you paid.

So, when you want to settle the bill and close the tab, you just need to go to the cashier, close the tab and go home. In other words, close the lightning channel and close the transaction on the blockchain, so that this transaction can be mined and the final balance settled.

In summary, the two only transactions that are recorded on the blockchain are:

• the opening transaction;
• and the closing transaction of the channel.

So, I could open a lightning channel with you where I would put 2 bitcoins and you would also put 2 bitcoins. This way, we could send satoshis instantaneously, almost cost-free and at any time, as long as we don’t exceed the total value of 4 bitcoin.

Who can open a channel on the Bitcoin lightning network?

Anyone can open a lightning channel, as long as they have enough technical knowledge to set up and run a Lightning node on their machine and allocate their bitcoin in this channel.

This solution enables the execution of thousands of instantaneous transactions, without needing to wait the 10 minutes of block processing, making the Bitcoin network more scalable.

And what about the privacy of the Lightning Network (LN)?

You may be wondering about privacy in transactions on the Lightning Network. In short, the network uses cryptography and a protocol similar to TOR, called onion routing, to ensure transaction privacy. This protocol allows intermediary nodes to verify and decrypt only their part of the route, without having access to other payment information.

Lightning Network wallets

There are several wallets that support the Lightning Network, like Blue Wallet and Wallet of Satoshi. Even so, to maintain your long-term hodl, it’s ideal to keep your bitcoins in your wallet via layer 1, via blockchain, as it is the most secure layer.

Network growth

Despite not seeing many people using lightning here in Brazil, the network is growing fast. Today there are about 19,700 nodes, 42,000 channels and more than a million bitcoins locked in lightning channels.

Furthermore, as Bitcoin grows in adoption, the Lightning Network also follows this global growth.

More and more countries are using this payment network.

The growth of the Lightning Network can be observed by the increase in bitcoins locked in the network since 2017. The more bitcoins are allocated in the network, the greater its capacity and financial volume.

Network usability

In terms of this network’s usability, a brilliant function that can be adopted is that the Lightning Network allows for the evolution of on-demand consumption.

Have you ever paid a subscription fee even without using the service?

Well, with the Lightning Network, on-demand business models can be created, where you only pay for the minutes or seconds you consume.

Amazing, right?! This could be used in music apps, movie apps, or any online content.

And I’ll go further, can you imagine receiving your salary for every hour or minute worked? This is where time and money come together allowing for micropayments and new formats to receive your pay for work.

We hope that in the future people can transact more and more quickly, globally, at a low cost, but most importantly, using Bitcoin, the most solid money that exists.

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