Cryptoasset Anti-Financial Crime Specialist (CCAS) Certification Practice Test

How does the Lightning Network operate?

1. It uses privacy features for larger transactions

2. It establishes off-blockchain payment channels

3. It enhances security for Bitcoin transactions

4. It facilitates transactions across multiple blockchains

The correct answer is: It establishes off-blockchain payment channels

The Lightning Network primarily operates by establishing off-blockchain payment channels, which allows for faster and more scalable transactions without burdening the main blockchain. This is achieved by creating a series of peer-to-peer channels that enable participants to conduct numerous transactions instantly and without the need for every transaction to be recorded on the blockchain. By settling these transactions off-chain, the Lightning Network can significantly reduce congestion and lower transaction fees, making it more efficient for users. This model is particularly useful for microtransactions and frequent trading, as it allows for the creation of a network of payment channels that can collectively process a large volume of transactions. When the payment channels are closed, only the final balances are recorded on the blockchain, minimizing the amount of data written to the blockchain and ensuring privacy for users engaged in multiple transactions. The other options, while related to various aspects of cryptocurrency and blockchain technology, do not accurately capture the core function of the Lightning Network. It does not specifically focus on enhancing security for Bitcoin transactions or facilitating transactions across multiple blockchains, nor does it primarily operate based on privacy features for larger transactions.