what is it and how does it work


What is it?

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Lightning Network for Bitcoin: what it is and how it works


Lightning Network for Bitcoin: what it is and how it works



  • Lightning Network (LN) is a second layer solution for the Bitcoin blockchain. It is a network of payment channels between users. It is open source software.
  • The project is designed to scale bitcoin and can offer faster and cheaper transactions of the first cryptocurrency than the mainnet. The LN transfer fee is 1 Satoshi (0.00000001 BTC).
  • The project is criticized for lack of economic incentives to keep the network running and lower user anonymity compared to the bitcoin blockchain.

What is the Lightning Network for?

The throughput of bitcoin is about 7 transactions per second (TPS), and the time between new blocks is about 10 minutes. This relatively low scalability is the result of Bitcoin’s way of addressing the blockchain trilemma, which involves finding a balance between the three characteristics of the network: decentralization, security, and performance.

The current performance does not allow Bitcoin to compete with centralized payment solutions like Visa, whose system is capable of processing 65,000 TPS, as well as with modern blockchain platforms, such as Solana, which can process up to 400,000 TPS.

Therefore, a layer 2 solution like the Lightning Network is a necessary compromise to keep the core network layer decentralized and secure by adding a faster and cheaper layer 2.

According to data As of September 30, 2022, the average daily fee on the Bitcoin network has not risen above $5 per transaction since the summer of 2021. In the Lightning Network, the transfer fee is 1 satoshi (0.00000001 BTC) – $0.0001 at the price of bitcoin at $20,000.

LN scaling is theoretically unlimited. According to message According to Lightning Network developer Joe Kenjiki, the limit of LN is in the millions of operations per second.

How the Lightning Network Works

The key principle of the Lightning Network is the use of payment channels. This is a special wallet with a multi-signature function (multisig), which stores a certain amount of bitcoins. Coins can be provided by both parties, or only one of them.

The channel is opened through a regular bitcoin transaction. Its data is written to the blockchain, and the bitcoins are “blocked” for LN. In the future, all transactions carried out within the channel occur directly between participants outside the blockchain. The maximum transfer amount within the channel cannot be higher than the blocked one.

The Lightning Network channel is essentially an analogue of a safe, in which money is placed, which is available in the future to a certain circle of people. But if you need to know a combination of numbers to open the safe, then in the case of LN, private keys are used.

How the Lightning Network Works
Dynamics of the number of Lightning Network channels. Data: bitcoin visuals

Lightning Network Example

Let us present the situation of using LN in practice. Anatoly’s favorite coffee shop has announced that it has started accepting bitcoins as payment. But paying every time for a cup of coffee in BTC is too expensive due to high commissions. In addition, it takes a certain amount of time to confirm a transaction.

LN comes to the rescue. Anatoly opens a payment channel between himself and the coffee shop and puts 0.001 BTC into it, which he is going to spend later on ordering coffee. When creating a channel, Anatoly’s balance shows 0.001 BTC, and 0 BTC on the coffee shop’s balance.

Let’s say a cup of coffee costs 0.0003 BTC. After the first order, 0.0007 BTC will remain on Anatoly’s address in LN, and 0.0003 BTC will remain on the balance of the coffee shop. Thus, Anatoly can order coffee until his balance is reset to zero or he decides to close the channel. With each transaction, Anatoly and the coffee shop sign an updated contract that reflects how many coins in the channel belong to each party. Data is not written to the Bitcoin blockchain – instead, each party keeps its own copy of the contract.

Lightning Network is based on the network principle. This means that Anatoly may not have an open payment channel with the coffee shop, but may be connected to him through other channels. That is, users can exchange transactions in LN with any other users who are connected to their network of payment channels through nodes.

The financial incentive to open such bridge nodes is to receive small commissions received each time a transaction occurs through one of the channels connected to it.

Thanks to the use of smart contracts, the architecture of the Lightning Network does not require the trust of the parties. Funds always reach their recipients through intermediaries or are returned to the sender if an indirect path to the recipient is impossible for some reason.

Which bitcoin wallets support Lightning Network

By the fall of 2022, there are already a number of bitcoin wallets on the crypto market that allow you to open channels and make transactions of the first cryptocurrency through LN.

For beginners, options such as blue wallet, Wallet of Satoshi or Nicehash. The latter is available for devices on Android or iOS. For more advanced users, we recommend using Muun, Breez, Phoenix or Zap.

History of the Lightning Network

The concept of payment channels was proposed by Satoshi Nakamoto in 2009, providing the community with code sketch, which involved the creation of special channels between users. In 2013, Bitcoin developer Mike Hearn published Satoshi’s letter, which describes these mechanisms in detail.

In February 2015, bitcoin developers Joseph Poon and Thaddeus Draya published the first unfinished white paper of the LN paper”The Bitcoin Lightning Network“. Released in early 2016 main version white paper LN.

Due to the decentralized nature of LN development and the many independent development teams, the community has had to create common implementation standards. The basis of “standardization” was laid on summit in Milan in October 2016.

In August 2017, the Segregated Witness soft fork was activated on the bitcoin network, a necessary update for the further implementation of the Lightning Network.

Test version of the LN client released in March 2018, the Lightning Labs team. At that time, more than 1000 nodes were already working in the network and 1863 channels were open.

As of September 29, 2022, according to service 1mlLN has 17,829 nodes and 86,282 payment channels with a total network capacity of over 4,900 BTC (about $94.6 million).

How the Lightning Network Works
Total Lightning Network capacity in Bitcoin (in red) and USD (in blue). Data: bitcoin visuals

Lightning Network Ecosystem

In 2021, analysts at the research company Arcane Research noted the exponential growth of the LN ecosystem due to the legalization of bitcoin in El Salvador, where the Chivo crypto wallet compatible with this proctol is used at the state level. In February 2022, the country’s authorities relaunched Chivo, improving the app’s user interface, fixing bugs, and adding improved LN support.

Transfers in the Lightning Network support many centralized cryptocurrency exchanges, including Kraken, Bitfinex, OKX and OKCoin.

The development of the sector of payment solutions based on LN is accompanied by interest from venture capital companies. Strike, an operator of a payment application based on the Lightning Network, successfully raised an investment of $80 million in September 2022. The startup is developing an application with the ability to buy bitcoin through LN, as well as transfers within this network.

How the Lightning Network Works
Projects and companies that are part of the Lightning Network ecosystem. Data: Coinbase

There was also interest from analytical companies. In February 2022, Chainalysis added Lightning Network support to its transaction tracking solution.

Gradually LN is being integrated into their services by leading financial companies. In the spring of 2022, online broker Robinhood announced plans to integrate LN, and MicroStrategy included the development of a wallet, server, and authentication options using the Lightning Network in the plans.

There are projects that allow you to tokenize assets and even issue stablecoins with their subsequent use in LN-based applications. The corresponding initiative, in September 2022, was announced by the Lightning Labs team, presenting the alpha version of the Taro protocol.

What is the Lightning Network being criticized for?

Experts point to a number of problems and possible vulnerabilities in the LN protocol. One of them was discovered in 2020 by bitcoin developer Joost Jaeger: some payment channels were unable to process more than 483 micropayments and subsequently blocked BTC for up to two weeks. In addition, in the Lightning Network described opportunities for fraud with payment channels.

By opinion technical expert Shinobi, there are serious flaws in the architecture of the Lightning Network: the network is not able to develop due to the lack of significant economic incentives. According to him, the routing fees that LN nodes collect are too small.

An important note about LN did an analyst under the pseudonym “Zem”, citing anonymity as one of the key challenges for technology adoption. The researcher also believes that the technology does not comply with financial laws, so solutions based on it will be difficult to get the approval of organizations such as the US Financial Crimes Enforcement Agency (FinCEN).

LN also found criticism in the community of developers of the Ethereum platform. Anthony Sassano, founder of the ETHhub blockchain project compared LN with fax machines of the last century, calling Rollups technology used as a solution for scaling the Ethereum network, the best option.

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In conclusion, understanding what something is and how it works is an important part of problem solving and decision making. Having knowledge about a particular topic or technology can help to make informed decisions and improve efficiency. Knowing what something is and how it works is a key factor in being successful in any endeavor.


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