What is the Lightning Network of Bitcoin?
This article is a translation of an article from Cryptoast.fr, which you can find here.
What is the Lightning Network?
To understand the Lightning Network, you need to set aside everything you know about Ethereum’s layer 2 solutions: there are no rollups here, nor any zero-knowledge proofs (zk-proofs). The Lightning Network is a separate system, unique in its kind.
Its primary goal is to tackle a fundamental challenge that hinders Bitcoin’s adoption: making payments faster and more accessible to everyone.
This problem stems from a simple observation: a blockchain struggles to relay and secure transactions quickly without compromising, in the process, some of its decentralization.
If the Bitcoin network processes only 6 to 7 transactions per second, it’s no coincidence: this relatively slow pace allows nodes to verify and propagate blocks without requiring excessive computing power.
This ensures that anyone, even with modest resources, can participate in validating the network, thereby preserving its openness and resilience.
By contrast, other blockchains like Solana or even Ethereum have chosen to sacrifice some of the accessibility of validation, thus, some decentralization, by making it more resource-intensive, in order to gain scalability. The result: more transactions per second and the ability to execute complex operations, such as smart contracts.
To be clear: the Lightning Network does not add any programmability layer to Bitcoin. However, it enables nearly instant, very low-cost transactions between peers through a network of payment channels that operate outside the main blockchain.
What is the difference between the Bitcoin blockchain and the Lightning Network?
Envisioned in 2015 by Joseph Poon and Thaddeus Dryja in a pioneering whitepaper, the Lightning Network was born out of the desire to overcome Bitcoin’s scalability limits.
Its principle? Moving small transactions off the main blockchain through a system of bidirectional payment channels.
However, it was only in 2017, after the activation of the SegWit upgrade, that its development could truly begin. Since then, several implementations have emerged, including LND, c-lightning, and Éclair. Eight years later, the network continues to evolve, its adoption is accelerating, and it is gradually establishing itself as an essential component of the Bitcoin ecosystem.
Still, its status remains contested, both by actors from other crypto ecosystems and even by some Bitcoin developers themselves.
The main criticism of the Lightning Network concerns its reliance on the scalability of the Bitcoin blockchain. Indeed, while once a Lightning channel is opened, it is theoretically possible to carry out an infinite number of transactions, this remains constrained by the available liquidity on the right side of the channel, in other words, the actual capacity to receive funds, a point we will detail later in the article.
This limitation forces users to occasionally perform on-chain transactions, whether to rebalance their channel, close it, or open a new one.
But this dependency poses a problem: in the event of a forced channel closure (due to the peer’s decision or prolonged disconnection) at a time when Bitcoin blockchain fees are exceptionally high, a user with limited means could find themselves unable to recover their funds without paying more in fees to open a new channel than the amount they actually hold.
Faced with this reality, the Bitcoin ecosystem has come to a sober conclusion: the Lightning Network is a powerful tool, but it does not solve all the challenges of Bitcoin’s daily use, particularly for beginners who wish to use it without relying on a trusted third party.
How does the Lightning Network work?
The Lightning Network is based on a system of bidirectional payment channels, in other words, a channel established between two users. These channels work with smart contracts programmed in Bitcoin’s scripting language, allowing an unlimited number of payments between two parties without recording each transaction on the blockchain, which avoids transaction fees for every transfer.
Payment channels instead of blocks
To open a channel, one or both users lock BTC funds in a 2-of-2 multisignature contract, included in an on-chain transaction. This contract acts like a shared vault: the funds it contains can only be unlocked with the signatures of both parties.
When a Lightning transaction is made, the two users sign an update to the channel’s state, essentially a new transaction redistributing the deposited funds.
The complexity of the Lightning Network lies in preventing one of the parties from publishing an old commitment transaction that would give them an unfair advantage.
To counter this, the network uses a sophisticated mechanism combining commitment transactions and a penalty system. With each channel balance update (after a Lightning payment), both participants sign a new commitment transaction reflecting the current state of the channel.
This new transaction replaces the previous one, but none are published on the blockchain immediately. This introduces a risk: a dishonest participant could try to cheat by broadcasting an older transaction that credits them with more funds.
To prevent this fraud, each channel update is accompanied by an exchange of cryptographic secrets via a revocation mechanism. These secrets allow the other party, in the event of cheating, to revoke the outdated transaction and punish the attacker. Concretely, if a user broadcasts an old commitment transaction, the other can create a punitive transaction, called a penalty transaction, that lets them seize all of the cheater’s funds.
This penalty system makes any attempt at fraud irrational, since cheating would result in the total loss of funds for the attacker.
The Lightning Network as a payment network
On the Lightning Network, each transaction corresponds to a transfer of funds between two nodes through payment channels. A channel enables nearly instant, fee-free off-chain exchanges as long as it remains open.
However, opening a channel with every counterpart requires two on-chain transactions (opening and closing), which is only cost-effective for frequent exchanges. To avoid this constraint, the Lightning Network allows payments to be routed through multiple intermediary nodes.
For example, if Alice does not have a direct channel with Bob but is connected to Claire, who does have a channel with Bob, the payment can pass through Claire. This mechanism relies on adjusting the liquidity within each channel, without satoshis (the smallest unit of BTC) literally “moving” across the network.
Routing automatically selects the optimal path depending on the liquidity available in each channel. Intermediary nodes, like Claire in this example, act as neutral relays and earn routing fees, which consist of a fixed amount (base fee) and a variable percentage (fee rate, expressed in ppm).
The Lightning Network also uses onion routing, a transmission method that ensures user privacy: each node only knows its immediate neighbor, and only the sender knows the complete route to the recipient.
In this way, the Lightning Network forms a decentralized and efficient infrastructure capable of carrying payments between peers without requiring a direct connection, while preserving speed, security, and a relative level of privacy in exchanges.
How to use the Lightning Network?
Using the Lightning Network is more accessible than ever today, thanks in particular to a new generation of mobile wallets suited to all types of users.
Custodial wallets: fast but not sovereign
For an ultra-simple and immediate experience, custodial wallets like Wallet of Satoshi or Blink are very effective. These wallets manage the node and channels for you, making payments easier but sacrificing sovereignty over your funds.
Blink is also the most widely used wallet in El Salvador, where Bitcoin has been legal tender since 2021.
Self-custodial wallets: more control
For those who want to keep full control of their BTC, self-custodial wallets like Phoenix (developed by the French company ACINQ) or Breez are among the most popular.
Another excellent choice is Bitkit, which stands out by providing incoming liquidity automatically when a channel is created, allowing you to receive funds immediately.
Hybrid wallets: Liquid + Lightning
Solutions like Aqua or the Bull Bitcoin wallet allow you to hold L-BTC on the Liquid sidechain and make Lightning payments via atomic swaps through services like Boltz or Sideswap.
Running your own Lightning node
It has also become relatively simple to run your own Bitcoin/Lightning node at home thanks to solutions like Umbrel or Start9, providing complete sovereignty over your transactions.
Where to spend your satoshis?
Once your wallet is ready, you can:
- Pay at more than 200 to 300 merchants in France listed on BTC Map, a number that doubles or triples when including Belgium and Switzerland;
- Buy gift cards or digital services on Bitrefill;
- Pay for VPN subscriptions at Mullvad, IPVPN, etc.;
- Use Lightning for ultra-fast payments on compatible merchant sites.
Native Lightning applications on the rise
The Lightning Network is not limited to merchant payments. It powers a new generation of Bitcoin-native applications designed to take advantage of instant transactions, ultra-low fees, and peer-to-peer functionality.
Among them, LN Markets, a BTC/USD derivatives trading platform, allows instant deposits and withdrawals via Lightning, making trading far smoother than with traditional banking rails.
But its use goes far beyond finance. The Lightning Network also paves the way for a new content economy, from social networks to podcasts.
A new content economy
With Lightning, pay-per-use finally becomes possible. Articles, music, videos, podcasts: everything can be monetized per second, per read, per listen.
Social networks based on Nostr, like Primal or Damus, embody a new digital era: censorship-resistant, decentralized, and natively integrating the Lightning Network. "Super likes" sent in satoshis become a real signal of support.
Platforms like Stacker News offer a simple model: directly rewarding authors with satoshis. In music, Wavlake allows artists to be supported without going through centralized platforms.
Finally, the Podcasting 2.0 movement, driven by apps like Rumble, Fountain, Breez, or Podverse, lets listeners stream sats as they listen, a "value for value" model that reinvents the relationship between creators and audiences.
Earning satoshis by playing
Gaming is also part of this revolution. Platforms like Zebedee or THNDR Games allow players to earn satoshis in real time, simply by playing.
This Play-to-Earn model, made possible by Lightning, transforms playtime into tangible value, without waiting for on-chain confirmations.
The limits and drawbacks of the Lightning Network
As promising as it is, the Lightning Network is not without constraints. Its use, though constantly improving, still presents technical and structural challenges.
Liquidity management: a delicate balance
One of the major obstacles remains liquidity management in the channels. For a payment to go through, there must be enough funds available on the correct side of the channel. This sometimes requires manual adjustments or complex strategies for opening and closing channels.
Fortunately, innovations such as splice-in / splice-out (which allows channels to be adjusted without closing them) drastically simplify this experience.
The need to return on-chain
Lightning does not operate in a vacuum. Opening or closing a channel, or adjusting liquidity, requires going back through the Bitcoin blockchain, which exposes users to on-chain fees and network congestion. This is a structural trade-off: Lightning remains an extension of Bitcoin, and therefore dependent on its infrastructure.
Risk of centralization… nuanced
A common criticism is the risk of liquidity centralization in a few large nodes (notably those operated by exchanges or popular services).
But in practice, we are seeing rather a growth in the number of nodes and connections as the Lightning ecosystem develops. And above all, even if you route through a third-party node, you remain sovereign over your funds, since you own a UTXO in a multisignature channel. In case of problems (censorship or otherwise), you can always unilaterally close your channel and open another one elsewhere, without ever losing funds.
Small payments, but effective
The Lightning Network excels in small transactions, generally under $300. In this range, the success rate is very high, especially with the most widely used wallets like Phoenix, Breez, or Wallet of Satoshi.
For larger amounts, liquidity limits become more apparent, and the probability of failure increases with the size of the payment.
Lightning is not the final interface, but the language of Bitcoin’s infrastructure of tomorrow
The Lightning Network draws its security and resilience directly from Bitcoin. This is both its greatest strength, no need to trust a third party, and its main limitation when it comes to scalability. Unlike second-layer (layer 2) solutions developed on other blockchains, often based on more aggressive trade-offs, Lightning preserves Bitcoin’s UTXO model and original decentralization.
However, this choice imposes structural constraints. From a technical standpoint, the Lightning Network is already showing its limits today. Even though many wallets and applications simplify its use, the challenges related to liquidity management, on-chain dependency, and routing capacity will not disappear.
This is why the future of the Lightning Network likely does not lie in massive direct adoption by all users, but rather in its role as an intermediate communication layer, used in the background by protocols better suited for the general public.
Solutions like the Liquid sidechain, already mentioned, but especially more innovative and decentralized protocols such as Ark, Spark, or the RGB protocol, could rely on the Lightning Network to streamline liquidity transfers, perform fast swaps, and optimize payments, all while offering a user experience that completely abstracts away channel management or the need to use the same protocol as one’s counterparty.
Deepening the topic of the Lightning Network and BTC payments
To explore the workings of the Lightning Network further, the lessons by Fanis Michalikis offered by Plan B Network is probably the most complete and accessible in many languages.
