What Is the Lightning Network? Bitcoin Payments Explained

What the Lightning Network is

The Bitcoin blockchain processes a block of limited size roughly every ten minutes. That is deliberate, so anyone can verify the network themselves, but it caps how many transactions fit into a given time. For a coffee every day that is impractical.

Lightning adds a layer above it. According to the Lightning Network project site, it uses real Bitcoin transactions and Bitcoin’s own scripting language to form a network of two-party links over which a great many payments can be settled without each one appearing on the blockchain. Only the opening and the closing of such a link are ordinary Bitcoin transactions.

How a payment channel works

The building block is a payment channel between two participants. According to the Lightning Network project site, both jointly create an entry on the blockchain that can only be spent with both of their signatures. That entry records how much bitcoin sits in the channel.

• Inside the channel the two shift their balance by creating new transactions, signed by both, that split the channel total differently.
• These transactions are not broadcast, only kept. Only the most recently signed version counts. Older versions could technically still be published, but doing so is penalised.
• Either side can close the channel at any time by publishing the current version to the blockchain. No custodian and no trust in the other side is required.

The protection against an outdated channel state sits in Bitcoin’s script rules. Anyone who tries to publish an older version that favours themselves risks letting the other side claim the entire channel balance. That is why a Lightning wallet should be online regularly or delegate that job.

How a payment finds its way through the network

A single channel connects only two parties. It gets interesting when many channels are linked. According to the technical specification (BOLT 0), a path can then be found through the network, similar to forwarding data packets on the internet. Your wallet sends the payment along a chain of nodes to the recipient.

The nodes along the way do not have to be trusted. The payment is tied to a condition only the recipient can meet and is secured through staggered time locks so that it either succeeds along the whole route or is rolled back everywhere. An intermediate node can neither skim the payment nor execute it partially.

Forwarding nodes take a small fee for the service. Because the hops are short and no blockchain transaction is involved, these fees are usually well below those of an ordinary Bitcoin transaction. There is no fixed promise on the amount; it depends on the path chosen.

Amounts, fees and invoices

Lightning counts more finely than the blockchain. According to BOLT 2, amounts are held internally in millisatoshis, thousandths of a satoshi. Only whole satoshis can be represented on the blockchain in the end, and smaller amounts are rounded at settlement. In practice that means payments of a few cents are possible and useful on Lightning.

Payment usually happens against an invoice. The recipient creates a Lightning invoice, a string that BOLT 11 designs to be QR-code ready. It carries the destination, a payment reference, a description and usually the amount. You scan it and confirm. Directories such as Pay in Bitcoin list places where bitcoin and Lightning are accepted.

Where Lightning runs into limits

Lightning works well day to day, but it has four recurring points of friction. They are not a reason to avoid it, just worth knowing before you are caught off guard.

Some wallets take these points off your hands. If they do it by holding custody, that is convenient but means someone else holds your keys. Self-custody gives you full control and full responsibility. What that means in detail is in the overview of wallet types.