This is a second layer protocol built for Bitcoin. It is designed to increase the scalability and allow people to send BTC with minimal fees. Through this technology, micropayments are possible through the peer-to-peer operations. There is no need for a custodian of funds.
Since it is a Layer 2 solution, the actual transactions occur on the Lightning Network as opposed to Bitcoin itself.
How To Use Lightning Network
Normal use of the Lightning Network consists of opening a payment channel by committing a funding transaction to Bitcoin's base layer, followed by making any number of Lightning Network transactions that update the tentative distribution of the channel's funds without broadcasting those to the blockchain. This is followed by closing the payment channel by broadcasting the final version of the settlement transaction to distribute the channel's funds.
For settlement to take place, the channel much be closed. This can happen in a cooperative or uncooperative manner. Either way, no settlement is possible without closure.
The process starts with one node broadcasting the most recent settlement information. In a cooperative situation, both parties confirm the distribution and funds are immediately settled.
When things are uncooperative, the funds do not settle immediately. Instead, there is a period where a node can dispute the transaction. This is to prevent nodes from defrauding the network by using out of date transactions.
Joseph Poon and Thaddeus Dryja published a draft of the Lightning Network white paper in February 2015.
On May 10, 2017, the first non-test Lightning payment was made using Litecoin. It was made by Christian Decker of Blockstream. A micropayment was made and settled within a fraction of a second. This is not possible, not economically viable on blockchain.
The Lightning Network got a big test in 2019 when an anonymous Twitter user named hodlonaut started the Bitcoin Lightning Torch. Starting with 100,000 satoshi that were sent to a trusted node, a chain of transactions formed where each recipient added 10,000 sats. The torch was passed 292 times until it reached the maximum limit of 4.3 million sats. This was them passed onto Bitcoin Venezuela which promotes Bitcoin in that country.
There are number benefits as compared to on-chain transactions:
- Atomic Swaps: cross-chain integration is possible. Charlie Lee, the founder of Litecoin, was the first to accomplish this using Lightning. He was able to swap LTC for BTC.
- Granularity: the ability potential exists to transfer less than a sat.
- Privacy: details of each transaction are not posted to the Bitcoin blockchain. Lightning transactions travel across many sequential channels. Individual operators are able to see what takes place on their node but have no idea where the transactions came from nor where the destination is.
- Speed" Lightning can settle in a minute and often does it in under a second. This is in contract to the Bitcoin network which can take 10 minutes or longer.
- Throughput: There is no limit to how many transactions can be processed. The only limit is based upon the individual nodes themselves.
Like the original chain, this is also open source as well as permissionless. Anyone is free to run a Lightning node. The only requirement is having the technical expertise while also having some Bitcoin to fund it.