The rise of cryptocurrencies has driven fundamental changes in how we think about networking. Traditional currencies are based upon a centralized system in which a “bank” controls the integrity of the money and the legitimacy of Transactions. Cryptocurrency turns that model on its head, decentralizing the monetary system and putting it under the control of individuals.

For cryptocurrency to work, you have to have a means of verifying and recording transactions in a way that cannot be changed. Blockchain was developed in 2008 as a tamper-proof system for digitally storing records, or blocks, on a distributed ledger in chronological order. A block of data cannot be changed once it’s added to the blockchain. It can only be complemented by new blocks, which are added sequentially and time-stamped. 

But another aspect involves connecting individuals who know nothing about one another so that they can engage in these transactions. In the cryptocurrency realm, peer-to-peer (P2P) networking is the solution. Blockchains have no centralized management — they run on P2P networks comprising millions of nodes. The ledger is copied in real-time across this global network, allowing a transparent view of the entire ledger history and dramatically reducing the risk of data loss or corruption.

A New Approach to P2P Networks

However, the P2P networking model lacks the scale to support skyrocketing numbers of crypto transactions across an ever-increasing number of nodes. Each block is limited to 1MB, or about 4,000 transactions. On average, a block is added to the ledger every 10 minutes, which equates to about seven transactions per second. That’s part of what makes crypto mining so expensive in terms of time and energy.

The answer was to build an overlay on top of the original P2P network, known as a Lightning Network, to handle “off-chain” transaction. The lightning network still depends upon the underlying blockchain technology, but works on the principle that transactions don’t have to be recorded individually in the master ledger. A “payment channel” based upon an enforceable blockchain “smart contract” is set up between parties, who may deposit as much as they want in the pool but only extract funds if all parties agree. 

Any party can close out the payment channel at any time and broadcast the final balance to the blockchain network. “Watchtowers” (third-party monitors) help reduce the risk of fraudulent closing of a channel.

Speed, Throughput and Privacy

The primary benefits of the lightning network are speed and throughput. Transactions can be settled in less than a minute and often in milliseconds. The transactions aren’t data-intensive — only headers are sent across the network in most cases and a few Kbps of bandwidth are sufficient. It is estimated that the lightning network could ultimately support millions of transactions per second, making microtransactions feasible.

The lightning network also affords greater privacy to users. It uses the “onion routing” techniques of the Tor network, which encapsulates messages in layers of encryption. Additionally, the details of individual payments are not recorded in the blockchain, and individual nodes cannot trace the source or destination of funds unless they are directly involved in the transaction.

Purpose-built P2P crypto networks have useful applications in mobile computing, decentralized payment systems, crowdsensing, distributed storage and more. The need to solve the scalability problem with cryptocurrency is redefining networking to enable highly efficient transactions across millions of distributed nodes.

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