If Lightning Network takes transactions off Blockchain, would that defeat the whole purpose of having a Blockchain ledger?

Question

Currently Bitcoin transactions can take around 45 minutes. If everyone in the world uses Bitcoin, computers would have to consume 1000 of terabytes per Hour.

The solution is the Lightning network, which takes transactions Off the Blockchain and groups many transactions into one.

a) However would taking transactions off the blockchain temporarily, defeat the whole purpose of having ledger transaction?

b) Additionally, can Lightning Network know who owns how many bitcoins with multi transactions off the ledger?

Answer 1

Think of the blockchain as a court of law. A perfectly fair and incorruptible court which - if presented with a dispute - always rules justly.

However, like real-world courts, it has high operational costs. Those do not have enough judges and juries to adjudicate every dispute anyone could ever encounter. Thankfully, it doesn't need to. The fact that anyone who has been harmed has the ability to go to court on itself is a deterrent against crime. The primary benefit of the court is incentivizing people to behave honestly.

Lightning, in a way, is applying this principle to Bitcoin. The blockchain (court) has limited capacity, but there is really no need for it to adjudicate every transaction. Here is how it works at a very high level:

• Two participants, Alice and Bob, create a "channel": it involves one or both of them putting up some money (on chain!) in a joint address that can only be spent from when they both agree, but with some extra tricks attached (see below).
• Once that transaction is confirmed on chain, they can transact with each other by simply updating their idea of how much both of them own. Every time they do this, they hand the receiving party a proof, which will become useful later. This is instant, and very efficient, because it doesn't require telling the whole world.
• Multiple such channels can be linked: Bob can connect to Carol as well, and now Alice can instantly pay Carol - by going through Bob as long as that side of the channels has sufficient funds. This is why Lightning is called a network. It is a network of channels.
• If one party tries to renege on an update, the harmed party can take the proof they received earlier, and take it to chain. This proof allows them to receive the entire bond put up by the infringing party as reward, and punish the infringing party.
• At some point, one or both users want to use the funds locked up in the channel for non-Lightning payments. To do so, they propose closing the channel, and most likely both just sign off and go their merry way. If one party refuses, the other can still take their money again by providing proof on-chain, though with a delay.

So yes, Lightning does indeed result in transactions "not happening on chain". But it's not like they're moved elsewhere - they're just replaced with privately settling between the participants, but still using the chain to go back to whenever a party cheats.

Answer 2

Currently Bitcoin transactions can take around 45 minutes.

This is not true. Bitcoin transaction is broadcasted instantly. Confirmation time depends on fee rate used, demand for block space, mining pools and few other things. It can take few seconds to few days for a bitcoin transaction to be included in a block. For example: Right now if you use fee rate 1 sat/Byte it will not be correct to expect transaction to be confirmed in few minutes based on https://mempool.space

If everyone in the world uses Bitcoin, computers would have to consume 1000 of terabytes per Hour.

I am not sure what is this calculation based on.

The solution is the Lightning network, which takes transactions Off the Blockchain and groups many transactions into one.

Yes, lightning transactions are off-chain except opening and closing channels require on-chain transactions.

However would taking transactions off the blockchain temporarily, defeat the whole purpose of having ledger transaction?

No. Lightning Network depends on Bitcoin protocol and blockchain. It leverages the security of the underlying blockchain as an arbitration layer.

Consider Orange sphere is Bitcoin and Outer hemisphere is Lightning Network. Layers exist in other things too. Examples: Network Layers, Onion Routing, etc.

Additionally, can Lightning Network know who owns how many bitcoins with multi transactions off the ledger?

The contents of a channel are only known by the two involved nodes. There are two types of channels: Public and Private. Private channels are never advertised. Users can open private channels to a few big liquidity providers, and never advertise a single channel to the rest of the network. The node itself might not even be known to the network. There are few privacy issues with Lightning Network but I am not the best person to comment on it.

Related Q&A: How much privacy does Lightning actually have?

Few links to learn and discuss more about Lightning:

https://docs.lightning.engineering/ https://www.reddit.com/r/lightningnetwork/