The Lightning Network is a “layer 2” protocol built on Bitcoin to enable nearly instant, low-cost transactions. While it involves trade-offs in security and complexity compared to the main chain, it is ideal for small, everyday payments. This guide covers why it’s necessary, how it functions, and how to get started in under five minutes.
Why We Need the Lightning Network?
While Bitcoin’s greatest strength is its decentralization, this often creates scalability issues. To maintain security, every node must validate every transaction, capping the network at roughly 5 transactions per second. In contrast, Visa processes over 10,000 transactions per second.
The Lightning Network serves as the bridge between the two worlds. It allows Bitcoin to scale to global demand without compromising its core decentralization. By moving frequent, high-speed activity to this secondary layer, the Lightning Network enables Bitcoin to match and eventually exceed the volume of traditional payment giants like Visa.
Bigger Blocks vs. Off-Chain Scaling
There are two scaling solutions that are often mentioned with regards to bitcoin—bigger blocks and off-chain solutions.
The “big block” argument states that to increase transaction limits, we should allow blocks in the blockchain to contain more data, thus allowing more transactions to be stored in each block. The problem with big blocks is that we would need 32 GB blocks to reach Visa’s scale of transactions. This would mean that every 10 minutes, 32 GB of data would be broadcast to every bitcoin node, who would each have to validate all 32 GB worth of transactions.
For anyone wanting to store the blockchain, it would require 400 TB of storage per year. Instead of running their own “full nodes,” Bitcoin users would be forced to trust others to validate their transactions. This defeats the whole purpose of bitcoin, which is to send and receive payments without needing to trust anyone else.
Off-chain solutions, on the other hand, get around bitcoin’s transaction limit by conducting payments without recording each individual payment on the blockchain. Individual payments are kept track of separately (off-chain), and at a later time only the final balance is recorded on the blockchain. For example, you could make five payments of $10 to a store each month by only recording a single $50 bitcoin transaction at the start of the month.
Payment channels
A popular type of off-chain scaling solution is called a payment channel. In a payment channel, two nodes exchange payments back and forth within the “channel” between them. These nodes only record their balance in an on-chain bitcoin transaction once they decide to stop using the channel.
You can think of payment channels like credit card tabs at a bar: you “open the channel” by giving the bartender your credit card, you “update the channel balance” when you buy another drink, and you “close the channel” once you settle the tab.
A Complete Guide to The Lightning Network
The Lightning Network is a large network of payment channels. These payment channels do not rely on trust to work, as each user always has access to their funds.
Lightning Network payments can be “routed” through the network. Imagine Alice has two channels open, one with Bob and one with Carol. Even though there isn’t a channel between Bob and Carol, Bob can still pay Carol by routing the payment through Alice’s node. This works because Alice has channels with both Bob and Carol.
Payment routing also provides a layer of privacy for users of the Lightning Network. A payment might be routed through many nodes, but each node along the way does not know where the payment originated or where its final destination is.
Lightning network channel balances
Typically, payment channels are initiated by only one of the people involved, such as Alice opening a channel with Bob. In this case, only Alice controls funds in the channel’s initial state. Alice can choose to send some of her channel balance to Bob as a payment. Once Bob has received this payment, he controls some funds in the channel and can now send payments back to Alice.
The funds within the channel that you control are referred to as your “outbound” or “local” capacity, since they are on “your side” of the channel. Funds on the other side of the channel are called the “inbound” or “remote” capacity, since this is the amount that you can receive as incoming payments. The highest payment you can send is controlled by your outbound capacity, and the highest payment you can receive is controlled by your inbound capacity.
How Do Lightning Network Payments Work?
The Lightning Network uses an invoice-based payment system. If you want to send a Lightning Network payment, you first must receive an invoice from whoever you are paying. Payment invoices will sometimes have an amount defined, so you’ll have to pay the exact amount.
Other times, invoices will be left blank, and you can choose the amount to send. If you want to receive a Lightning Network payment, you will need to create an invoice to request the payment and provide the invoice to whoever is paying you.
Payment invoices are a long string of characters that contain all the information needed to complete the payment. Sometimes payment invoices are displayed as QR codes, and other times they are displayed as a long string of characters such as:
lnbc50u1pwsyhx9pp57ppqvzwex3qapu0wn63v06jzxqdtt46qypks4pnexwrr2ansz9msdqcgejhxctzd
9kxjare23jhxap3cqzysxqy2ljqd47a9cdlnj84cy0a0zg7frd8jnera8fen2du6d2g500wzs7mpsmpqe0c
3ddhrrxpehyhj4c9fwj3cfr5mvyxcyaaq98fw39jketl89cq0j9hy2
Wallet Recommendation for the Lightning Network
Before choosing a wallet, it is important to note that the Lightning Network is a developing product. Be sure to use it only for small amounts that you are comfortable potentially losing. This is especially true while you are first learning to use the Lightning Network.
Our recommendation for beginners is the Phoenix wallet by ACINQ. ACINQ has played a critical role in developing the Lightning wallet, and is now in its 3rd generation and handles almost all technical complexities automatically. It is available on Android, iOS, and desktop.
The ease of use of Phoenix does come with a couple of trade-offs.
Phoenix uses “splicing” technology to manage your funds in a single dynamic channel. While this makes the experience seamless, it comes with a small on-chain mining fee when you first deposit funds or exceed your current spending capacity.
The service primarily connects to ACINQ’s lightning nodes. While this connection ensures high reliability for your payments, you rely on their infrastructure to stay online. Crucially, you always maintain control of your funds; you hold your keys and can recover your money even if the company disappears.
ACINQ also maintains a high-level view of your payment activity because they route your transactions through their nodes. Most daily users accept this minor trade-off in exchange for the app’s convenience.
Using Phoenix is a great way to get started on the Lightning Network since it removes the need to manage channels or worry about connecting to your remote Lightning Network node. You simply install the app on your mobile device, record a backup of your 24-word seed phrase, and you can start using the Lightning Network right away!
Latest News
