What is lightning network and how it works.

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Aprile 8th 2019 – Blockchain Devs, Milan
A l e s s a n d r o C o n f e t t i

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Image from Julia Donaldson's books – in pictures
Alessandro Confetti - Aprile 8th 2019 – Blockchain Devs, Milan
IS THERE
SUCH A THING AS
A FAST BITCOIN
CHAIN?

QUESTIONS TO ASK YOURSELF…
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Alessandro Confetti - April 26th 2018 – Politecnico, Milan
1.Who can set or change  
the rules of the protocol?
2.Who runs the nodes  
and pay for them?
3.Who can read  
and/or write  
the blocks?
4.Who validates the block  
and at which cost?
Source howmuch.net

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Ok, I need a blockchain, but which one?
By Pavel Kravchenko Sep 26, 2016
SLOW
FAST

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Source blockchainhub.net

STATE CHANNELS
Parties agree upon:
1.How to set initial state
2.How to handle state
changes
3.When and how to set
final state
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Source The Basics of State Channels

PAYMENT CHANNELS
1. Alice & Bob: agree upon the amount of money they
want to exchange, and how and/or up to when to
move the entire amount or fractions of it  
(aka smart-contract)
2. Alice & Bob: prove to own the amount of money in
their wallets and set it aside for each other on the
blockchain (aka funding transaction)
3. Alice or Bob: sends money to the each other on a
side-chain (aka commitment transactions)
4. Alice & Bob: close the transactions flow based on
the contract rules, and save the new balance
between Bob and Alice to their respective wallets or
refund them back if something goes wrong (aka
settlement transaction)
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Alice Bob
bitcoin blockchain
side-chain transactions
mono-directional
Alice Bob
bitcoin blockchain
side-chain transactions
bi-directional

PAYMENT CHANNELS
1. smart-contract:
• transaction-level timelocks (nLocktime)
• ARC (asymmetric revocable commitments) using script-
level timelocks (CHECKLOCKTIMEVERIFY)
• HTLC (Hash Time Lock Contracts) with script-level
timelocks (CHECKSEQUENCEVERIFY)
2. funding transaction:
• multisignature 2-of-2 address founded by both parties
and stored on the bitcoin blockchain
3. commitment transactions:
• bitcoin-like transactions starting from the founding
transaction using the same multisignature 2-of-2 as
input and parties’ wallets as output
4. settlement transaction:
• last bitcoin-like transaction saved back to the bitcoin
blockchain
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• Problems:
• transaction-level timelocks: limited
channel life-time, transaction
number limited by blocks ahead
• Requires a channel for each
recipient
• Costs:
• transaction fees for initial and final
state persistence
• money is frozen until settlement
transaction
• Risks: contract safeguards levels

Routed Payment Channels 
(aka Lightning Network)
..allow any participant to route a payment  
from channel to channel without trusting  
any of the intermediaries.
Andreas M. Antonopoulos - Mastering Bitcoin, 2nd Edition [O’Reilly Media 2017]
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The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments (white paper)

LIGHTNING NETWORK
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Source TheBlockPro.com

LIGHTNING NETWORK
1. Alice: search for Eric’s LN node and ask for an hash of a secret
2. Alice: find out a route to Eric’s LN node
3. Alice: creates a HTLC with Eric’s hash with a +10 blocks refund,
payable to Bob if he knows the Eric’s secret
4. Bob: creates a HTLC with a +9 blocks refund payable to Carol
if she knows the Eric’s secret
5. Carol: creates a HTLC with a +8 blocks refund payable to
Diana if she knows the Eric’s secret
6. Diana: creates a HTLC with a +7 blocks refund payable to Eric
(that obviously he knows his own secret…)
7. Eric: claims the HTLC from Diana and gives her the secret
8. Diana: claims the HTLC from Carol and gives her the secret
9. Carol: claims the HTLC from Bob and gives him the secret
10. Bob: claims the HTLC from Alice
11. Diana: claims the or Bob: sends money to the each other
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Andreas M. Antonopoulos - Mastering Bitcoin, 2nd Edition [O’Reilly Media 2017]

LIGHTNING NETWORK
1. smart-contract:
• HTLC (Hash Time Lock Contracts) with script-level
timelocks (CHECKSEQUENCEVERIFY)
2. funding transaction:
• multisignature 2-of-2 address founded by both parties
and stored on the bitcoin blockchain
3. commitment transactions:
• bitcoin-like transactions starting from the founding
transaction using the same multisignature 2-of-2 as
input and parties’ wallets as output
4. settlement transaction:
• last bitcoin-like transaction saved back to the bitcoin
blockchain
5. Routing protocol:
• onion-routed protocol based on a scheme called Sphinx
• path is fixed at 20 hops padded with random data
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• Benefits:
• privacy of transactions
• fungibility of the currency (limits
censorship and surveillance on
transactions)
• speed of transactions in millisecond
• micropayments
• increment of capacity of standard
bitcoin blockchain
• Costs:
• transaction fees for initial and final
state persistence
• transaction fees for each hop
• money is frozen until settlement
transaction for each channel

LIGHTNING NETWORK
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Source eclair

LIGHTNING NETWORK
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Source bitcoinvisuals.com

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$ tail -f questions
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Alessandro Confetti
aconfet@thoughtworks.com
twitter @zigolab  
blog http://blog.zigolab.it

What is lightning network and how it works.

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