Lightning Network

How Payment Channels Function

Instead of broadcasting every single coffee purchase or micro payment to the global base blockchain:

1. Channel Opening: Two parties open a private channel by depositing funds into a 2 of 2 multi signature address on the main Bitcoin blockchain.
2. Unlimited Offchain Swaps: The parties can transact back and forth thousands of times offchain by continuously updating their internal balance sheet with cryptographic signatures.
3. Channel Closing: When finished, the final net balance is broadcast to the base blockchain in a single settlement transaction, consuming minimal block space.

Multi Hop Routing Across the Global Network

You do not need to open a direct channel with every person you pay.

Transactions route automatically across interconnected nodes across the globe using Hashed TimeLock Contracts (HTLCs), ensuring the transfer settles safely across intermediate hops without any middleman having the ability to steal funds.

Key Advantages and Trade Offs

1. Instant Finality: Payments settle in milliseconds rather than waiting 10 to 60 minutes for block confirmations.
2. Sub Cent Fees: Transaction costs are a tiny fraction of a single penny, enabling global streaming payments and micropayments.
3. Channel Liquidity Management: Routing nodes must maintain balanced inbound and outbound liquidity to ensure payments route smoothly.

Learn how Layer 2 scaling technologies function in our Layer 1 and Layer 2 Blockchain Architecture Guide.