The Lightning Network is a payment network that runs on top of Bitcoin (BTC). It lets people send bitcoin almost instantly and for very small fees by moving payments through a web of payment channels. Those payments are recorded off the main chain. Only the transactions that open and close channels are written to the Bitcoin blockchain, which keeps final settlement anchored to Bitcoin's security.
Lightning is the best-known example of a second layer on Bitcoin. It sits above the base protocol described in Layer 1 in Bitcoin Blockchain and is a specific case of a state channel. This entry gives the overview. Money Wiki has separate guides to running a Lightning node, opening a channel, routing a payment and managing channel liquidity.
The Lightning Network in plain terms
Think of a bar tab. Instead of paying by card for every drink, you open a tab, order through the evening, and settle once at the end. The bar and you both keep track of the running total, and only one card payment goes through. A Lightning channel is a tab between two parties, with bitcoin locked up front so that neither side has to trust the other.
Now imagine you could pay a stranger through a chain of people who each have tabs with each other, with a rule that makes the whole chain either complete or cancel together. That is what lets Lightning work as a network rather than a set of separate tabs.
History
Joseph Poon and Thaddeus Dryja described the design in "The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments". An early draft circulated in 2015, and the widely cited version is dated 14 January 2016. Their goal was to let Bitcoin handle far more payments than its block size allows, without trusting a custodian.
Secure channels needed a fix for transaction malleability, which Segregated Witness (SegWit) provided when it activated in August 2017. Developers agreed shared specifications, the BOLTs ("Basis of Lightning Technology"), so that separate implementations could work together. On 15 March 2018 Lightning Labs released lnd 0.4-beta, the first implementation it described as ready for mainnet, while warning users not to risk more money than they could afford to lose. Other implementations include Core Lightning (Blockstream), Eclair (ACINQ) and the Lightning Development Kit.
How channels and HTLCs work
- Funding transaction. Two parties lock bitcoin in a 2-of-2 multi-signature output on-chain. That opens the channel.
- Commitment transactions. Each payment is a new pair of signed, unpublished transactions that split the channel balance differently. Either party could broadcast the latest one at any time to close the channel.
- Penalties. If someone broadcasts an outdated state to claim more than they are owed, the other party can use a revocation secret to take the whole channel balance. Watching for this can be outsourced to a "watchtower" service.
- Hashed timelock contracts (HTLCs). To pay through intermediaries, the recipient creates a secret and shares only its hash. Every hop locks funds that can be claimed only by revealing the secret before a deadline. When the recipient reveals it to collect, each hop in turn can claim its funds, so the payment either completes end to end or expires everywhere. The same lock pattern underlies atomic swaps.
- Closing. A cooperative close publishes the final balance in one on-chain transaction. A one-sided close imposes a waiting period so the counterparty can contest it.
Amounts in channels are tracked in satoshis and even in thousandths of a satoshi, though anything below one satoshi is rounded when settled on-chain.
Uses
- Small payments. Tipping, paying for content and pay-per-use services, covered in Microtransactions on the Lightning Network.
- Retail and peer-to-peer payments. Wallets let users pay invoices by scanning a QR code, with settlement in seconds and fees usually far below an on-chain transaction fee.
- Exchange deposits and withdrawals. Several exchanges let customers move bitcoin over Lightning to avoid on-chain fees and confirmation delays.
- Cross-border transfers. Some remittance and payout services use Lightning as a fast way to move value between bitcoin wallets.
Limitations and criticism
- Liquidity. A channel can only send what is on your side and receive what is on the other side, so large payments may fail to find a route.
- Being online. A self-run non-custodial wallet must be online to receive payments and to guard against cheating, which pushes many users toward custodial wallets that hold funds for them.
- On-chain dependence. Opening and closing channels still costs Bitcoin fees, and a fee spike can make closing small channels uneconomic.
- Centralisation of routing. Large, well-funded nodes handle much of the routing, which critics say concentrates the network.
- Throughput claims. Lightning has no single network-wide transactions-per-second figure, because payments are processed by independent channels. Claims of "millions per second" are theoretical.
Proposals to improve the system are discussed through the Bitcoin Improvement Proposal (BIP) process when they need base-layer changes, and through the BOLT specifications when they do not.