Lightning Network

What Is Lightning Network and How does It Work – A Simple Guide

Satoshi might have never thought of Lightning network but what exactly is Lightning network? Bitcoin first appeared in 2008, courtesy of Satoshi Nakamoto. There have been comments questioning its scalability from its inception and that still has persisted as a problem for bitcoin and other cryptocurrencies. So, what does scalability refer to? Bitcoins, for starters it can accommodate only seven transactions per second but the initial lack of congestion made this ideal.

Later down the years, these transactions take more time to process and the transaction fees are more on the higher side. If bitcoin were to be a fully operational alternative for the conventional payment system, it still wouldn’t be able to compete. To put things in perspective we can compare their seven transactions per second (TPS) to that of Visa’s 24,000 TPAs.

This is where the Lightning network comes in, which supposedly would be solving the scalability issue as it is being tested.

What is the Lightning Network?

History vouches for our evolving technology and its advancement. Bitcoin somehow resembles an archaic system which if put through an analogy can easily resemble the telegram. But Lightning Network, on the other hand, is like talking to someone on speed-dial. To put in simpler words, the Lightning Network for Bitcoin blockchain will not be keeping a record of a single transaction happening on the blockchain.

Essentially, they will be adding another layer to the BTC blockchain where the users can create respective payment channels between any two parties. These channels may exist till they are required and since they are set between two people, the transaction will be faster and instantaneous without incurring a heavy transaction fee.

How does the Lightning Network work?

The buzz is one and everyone is intrigued about the Lightning Network. As seen in the previous paragraph, the Lightning Network essentially adds another payment layer which operates ideally on top of that blockchain. They are notably compatible with Bitcoin and Litecoin as of yet.

The current scenario is unfortunately not equipped to provide the required number of cryptocurrency transactions, not enough to be even considered as a hypothetical alternative payment method for mass adoption in the future. This can very well compromise decentralization which is a primary feature of blockchain technology. However, there have been improvements which were made to compress and reduce the size of transactions individual or otherwise.

More improvements are still under works or in their testing phase. There are other adoptions employed by few cryptocurrency networks where they have taken a short-handed decision of increasing their respective block size. This was done since the blocks would need to be of thousand megabytes in size or more to be able to provide the scalability of any conventional credit card processor.

Lightning Network will be providing improvements for micropayment functionalities which will allow cryptocurrencies to scale without compromising on the decentralization of their base blockchain.

Lightning Network Payment Channel

Lightning Network employs a wide network of payment channels which is powered by smart contracts.

Two parties concerned can start a payment channel by just creating a multi-signature transaction on their respective blockchain network. At least one of the parties must be committing funds to their transaction. The participants can start their transactions once their payment channel is established on the Lightning Network layer. It promises instantaneous transaction with a lower transaction fee.

Each of the transaction updates will create a temporary balance sheet, signed with private keys of both the parties. The balance sheet produced can then be broadcasted as a BTC transaction at any given time if either of them feels like closing their channel. There is no intermediary since Lightning Network payments are done through the peer-to-peer transaction.

Let’s take an example to understand how this works. A set up their payment channel with B. The capacity of this particular channel is one BTC, where A and B both are committing to each half of that capacity. Now, they can transact as many times they please over the Lightning Network. If A decides to send 0.05 BTC to B, their temporary balance sheet will be signed by each A and B further stating that 0.45 BTC belongs to A and 0.55 BTC belongs to B (minus the transaction fee incurred). Now, if B sends 0.03 BTC to A, then the sheet will show that A has 0.48 BTC while B has 0.52 BTC. They can do it for an unlimited number of times theoretically. Lightning Network payments are instants unless the internet speed decided to go slow but with sub-satoshi fees.

If either or both the concerned parties decide to close the channel, their recently updated activity in the balance sheet will be published on the public BTC blockchain. The updated values will then be going to the respective owners. Security breaches can be fended off with cryptography coming in play which will make sure that there is no theft involved during transactions.

Payment Routing in Lightning Network

Lightning Network is opening up a number of possibilities where one can expect to open respective channel with the parties they want to connect to. Each user here is called node which is quite similar to blockchain transaction structure. Here every node is connected to one another and the payments can thus be forwarded to another node present, till the payment reaches their intended recipient. This way can ensure that anyone can send funds to another user without involving a direct payment channel.

The payments that happen through the Lightning Network either completes or fails which means that the payment will either reach to its recipient or it simply won’t. Even if there is an intermediary channel involved, the users can still find reassurance on the fact that the fund sent will return in case the recipient fails to receive it.


In spite of having the promising potential offered by the Lightning Network, it is still in its early days of development and faces difficulties. The routing performance is being improved continually for better user experience. Some speculate that a secondary added network layer will be crucial in compensating the scalability that Bitcoin formerly lacked without compromising on its base protocols i.e. decentralization and security.

The solution, in reality, will likely pertain to a combination of respective protocol improvements like Segwit, increasing block size or additional layer like that of Lightning Network. Lightning Network is to stay and will fundamentally change the current cryptocurrency scenario if they are being able to deliver their promise.

Caleb Lombardo
Caleb Lombardo
Caleb is an experienced cryptocurrency analyst, day-trader, and enthusiast. Since 2015, Caleb has been involved in various cryptocurrency projects as an advisor and executive. His passion for cryptocurrency and blockchain technology led him to the acquisition of Stackzea.