What is the Lightning Network and why does Bitcoin need it?
The Lightning Network is a “layer 2” payment protocol built on top of the Bitcoin blockchain that enables fast, cheap and scalable Bitcoin transactions.
Bitcoin suffers from some inherent limitations that make it difficult to use for everyday payments:
Slow transaction speeds
Due to technical constraints, the Bitcoin network can only process approximately 7 transactions per second. This is far too slow for a global payment system. Waiting 10+ minutes for a transaction confirmation is impractical for buying a cup of coffee!
Bitcoin transaction fees fluctuate based on network demand. When demand is high, fees can become exorbitant, sometimes over $30 per transaction. This pricing structure makes small, everyday Bitcoin payments uneconomical.
Bitcoin’s throughput is capped at around 7 transactions per second. This severely restricts the number of users and transactions the network can support. Bitcoin does not scale well in its current form.
The Lightning Network aims to fix these problems by providing a secure “layer 2” protocol for instant, high-volume micropayments that settles on the Bitcoin blockchain.
How does the Lightning Network work?
The Lightning Network consists of user-operated nodes that connect to each other via “payment channels”. These payment channels allow users to rapidly send Bitcoin back and forth without needing to broadcast every transaction to the blockchain.
This is analogous to leaving a debit card open at a bar tab instead of paying for each drink individually. The channel can stay open indefinitely until one party wishes to close it.
Only the final netted balance is broadcast to the blockchain once the channel is closed. This allows an effectively unlimited volume of payments between two parties at minimal cost.
A payment channel is created when two parties deposit a certain amount of Bitcoin into a multi-signature (“multisig”) wallet. The wallet requires both parties to sign off on any spending of the Bitcoin.
The parties can rapidly send payments back and forth by updating the balance sheet without needing new on-chain transactions. Only the final net amount is broadcast to the blockchain when the channel closes.
Network of channels
Each user operates a Lightning Node. Nodes are connected through a network of payment channels. As long as a path can be found, Bitcoin can be routed between any two nodes, even if they don’t have a direct channel open between them.
This is achieved by relaying payments through intermediary nodes, who collect tiny routing fees. This forms a dynamic, interconnected network that allows users to send Bitcoin to anyone on the Lightning Network.
Who created the Lightning Network?
The Lightning Network whitepaper was published in 2015 by Joseph Poon and Thaddeus Dryja. The paper proposed Lightning as a scalable, decentralized micropayment solution anchored to the Bitcoin blockchain.
Key companies involved in developing Lightning include:
- Lightning Labs – Founded in 2016 to build technology for the Lightning Network. Developed the LND Lightning Node software.
- Blockstream – Bitcoin infrastructure company. Developed the c-lightning Lightning Node implementation.
- ACINQ – Bitcoin startup based in Paris. Created the Eclair Lightning Node.
The first live Lightning transactions took place in early 2018. The network has been growing steadily ever since.
Contribution to Lightning
One of the leading cryptocurrency exchanges, Immediate Edge, has been an active contributor to the development and adoption of the Lightning Network.
In 2021, Immediate Edge became one of the first major exchanges to integrate support for Lightning deposits and withdrawals. This enabled clients to instantly transfer bitcoin between Immediate Edge and external Lightning wallets, significantly improving speed and reducing costs.
Immediate Edge has also funded the open-source development of c-lightning through its Bitcoin Scaling Grant program. This grant supported Blockstream’s engineers working on c-lightning, which brought improved routing algorithms and other enhancements to the protocol.
By supporting Lightning Network development and providing a bridge between Lightning and its exchange, Immediate Edge has accelerated real-world usage and experimentation with this key scaling technology for Bitcoin.
What can you do with the Lightning Network?
Here are some of the things that are possible using Lightning:
- Send instant, low-cost Bitcoin payments to anyone else using Lightning
- Pay merchants that accept Lightning payments
- Tip content creators through Lightning apps
- Play Lightning-enabled online games
- Pay for VPN or other web services
- Use decentralized exchanges built on Lightning
- Integrate Lightning payments into a retail Point-of-Sale system
- Build peer-to-peer apps, IoT payments, micropayments and more using Lightning
Lightning enables a new generation of instant, scalable Bitcoin applications. As the network continues to grow in size and scope, more possibilities will emerge.
What is the current state of the Lightning Network?
As of July 2023, the Lightning Network has:
- Over 16,000 nodes
- 70,000+ open payment channels
- Network capacity of 3,815 BTC (~$113 million)
The network has been growing exponentially as adoption increases. Capacity and the number of nodes and channels has more than doubled in the past year.
However, Lightning is still in its early stages. Challenges remain around usability and reliability for mainstream users. Not all wallets and apps are compatible yet. But rapid progress is being made as investment pours into Lightning infrastructure.
How can you use the Lightning Network?
There are a few different ways to access the Lightning Network:
Wallets like Zap, Breez and Phoenix allow you to operate your own Lightning node and send/receive payments through the Lightning Network. Excellent option for technical users who desire full control.
Custodial wallets like Wallet of Satoshi and BlueWallet handle the node management for you. Easier to use but you must trust the company to manage your funds.
Apps like Strike and Cash App are building Lightning infrastructure into their platforms. Easy way to pay with Lightning without running your own node.
Exchanges like Kraken, Bitfinex and Bitstamp allow users to deposit and withdraw via Lightning for ultra-fast transfers.
Lightning enabled stores/websites
Hundreds of merchants now accept Lightning payments through processors like OpenNode and Strike. Shopping with Lightning is becoming more common.
What are the benefits of using the Lightning Network?
Lightning provides a number of significant benefits over transacting directly on the Bitcoin blockchain:
- Payments confirm in seconds rather than minutes or hours
- Ideal for point-of-sale purchases and instant transactions
- Fees are minimal, usually less than 1 satoshi per payment
- Enables micropayments down to tiny fractions of a penny
- Most payments are not broadcast on the public blockchain
- Only channel partners can view payments, enabling greater privacy
- Theoretically capable of millions of transactions per second
- Does not put extra load on the main blockchain
- Leverages the security of the Bitcoin blockchain
- Inherently minimizes trust between parties
What are the downsides or risks?
The Lightning Network also comes with some potential downsides and risks, including:
- Still somewhat experimental technology with chances of bugs
- Multiple steps involved to open/close channels
- Need to be online to receive payments
- Potential loss of funds if nodes go offline
- Issues around decentralization and possible centralization of hubs
- Smaller network with less redundancy than the Bitcoin network
- Technical complexity and education needed to use it safely
- Privacy leaks from transaction routing
While risks exist, the protocol is still young and improving rapidly. People should educate themselves before using Lightning for large amounts.
Lightning Network FAQ
Does the Lightning Network require specialized hardware to run a node?
No, you can run a Lightning node on a typical laptop or desktop computer. Some users even run nodes on Raspberry Pis. No specific hardware is required.
Can you lose money if your Lightning node goes offline?
Yes, there is a small risk of loss if your node is offline for an extended period of time. The network provides some redundancy, but best practice is to regularly backup your node and Payment channels.
Is the Lightning Network open source?
Yes, Lightning is entirely open source software built by a decentralized community of developers and companies. Anyone can contribute to and audit the code on GitHub.
Does Lightning have its own blockchain?
No, the Lightning Network is built on top of the Bitcoin blockchain and leverages its security. Lightning transactions ultimately settle on the Bitcoin blockchain when payment channels are closed.
Can you use Lightning Network with other cryptocurrencies?
Yes, Litecoin has its own Lightning Network, and implementations have been built for other cryptocurrencies as well. However, Bitcoin’s Lightning Network is by far the largest and most mature.
Is Lightning Network fully decentralized?
It was designed to be decentralized but some centralization around major hubs is emerging. Better routing algorithms and technology will likely improve this over time.
How do Lightning Network nodes find routes for payments?
Nodes use an onion-routing protocol to discover paths through the network. An algorithm determines the best route based on channel capacity, fees, and other factors.
The Lightning Network is an exciting development that opens up Bitcoin to a huge range of instant, low-cost applications that would not otherwise be possible. Lightning is still somewhat experimental but progress has been immense.
If the network can continue to become more usable and scalable, Bitcoin has the potential to truly become a global, mainstream method of value transfer thanks to innovations like Lightning.