What Is Lightning Network?

Two users open a payment channel by locking funds in a multisig transaction on the Bitcoin main chain. As long as the channel stays open, the parties can change the balance as often as they like through updates they sign with each other; only the opening and closing of the channel are written to the main chain. Payments between users who do not have a direct channel are routed securely through intermediary nodes thanks to conditional contracts called HTLCs (hash time-locked contracts).

The network is based on a design proposed by Joseph Poon and Thaddeus Dryja and became practically feasible after SegWit fixed the transaction malleability problem. It is used in areas such as small payments, tipping applications and everyday payments; payments can be completed within seconds.

The system also has limits: the recipient must have enough inbound liquidity in their channel to receive a payment, nodes must stay online, and finding a suitable route can become harder for large payments. Channels need to be monitored against the possibility of the counterparty cheating by broadcasting an old channel state; watchtowers can be used for this task.