Bitcoin Lightning Network: Everything you need to know to operate payment channels

The scalability problem that Lightning Network solves

Blockchains face a fundamental limitation: processing capacity. Bitcoin generates blocks every ten minutes, and each block can only contain a limited number of transactions. This creates a bottleneck.

When many users try to send funds simultaneously, they compete for the available space in the blocks. Miners prioritize according to the fees, so costs can skyrocket. In 2017, they reached 50 USD per transaction, and in 2021 they exceeded 60 USD. For a 3-dollar cup of coffee, a fee of 10 USD is unsustainable.

Lightning Network is a Layer 2 solution or “off-chain” that enables thousands of transactions without recording each one on the blockchain. Only two transactions are published on the network: the opening and closing of the channel.

How does Lightning Network work in practice?

Instead of waiting for block confirmations, the Lightning Network uses direct payment channels between users. Imagine that Alice and Bob need to make multiple transfers. They create a joint smart contract by depositing funds (, for example, 5 BTC each ).

Within this channel, they can make transactions instantly without recording them on the blockchain. Alice sends 1 BTC to Bob: in the private ledger of the channel, Bob now has 6 BTC and Alice has 4. They can continue like this indefinitely. When they decide to close the channel, they publish the final state on the blockchain, and each receives their updated balance.

Transactions are as fast as lightning: they do not depend on block confirmations, only on your internet speed.

The security behind Lightning Network: multisignatures and smart contracts

What prevents Bob from simply refusing to cooperate and claiming all the funds? Lightning Network uses two technical mechanisms:

Multisignature Addresses (multisig)

To open a channel, both parties lock funds in an address that requires the signature of both to spend. Alice cannot withdraw without Bob, and vice versa. In a 2 of 2 scheme, both signatures are mandatory.

Hash Timelock Contracts (HTLC)

This mechanism automatically enforces agreements. It combines two elements:

• Hashlock: The receiver can only spend funds if they provide a secret that matches a specific hash. The sender provides it, linking both transactions.
• Timelock: A time limit. If the recipient does not claim the funds within the timeframe, the sender can recover them.

Together, they create conditional payments that ensure no one can cheat without losing money. If someone tries to broadcast an old transaction ( when they had more funds ), the other party can immediately access their entire share thanks to the secret revealed in later rounds. The incentive disincentivizes fraud.

Payment Routing: Extending the Reach

Channels do not work in isolation. If Alice has a channel with Bob, and Bob has one with Carol, Alice can send money to Carol through Bob. Routing can be extended through multiple “hops” creating an interconnected network of channels.

By facilitating these routes, intermediaries may charge commissions ( although it is not mandatory ). Unlike the base blockchain, where 1 USD and 1,000,000 USD cost the same, the Lightning Network allows for fees based on liquidity: the more local balance you sacrifice to route payments, the more profit you earn.

Example: If Alice has 0.7 BTC in her channel with Carol, and needs to send 0.3 BTC to Frank through Carol, Carol “loses” flexibility. Her spending capacity is reduced until someone returns funds to her.

Key Advantages of Lightning Network

Radical scalability

With Lightning Network, block space is used efficiently: only opening and closing channels take up space. High-volume, low-value transactions occur within the channels for free (you only pay for opening and closing).

viable micropayments

Bitcoin allows you to send a minimum of 0.00000546 BTC (~38 cents). The Lightning Network removes that limit: you can transfer one satoshi (0.00000001 BTC) at no cost. This opens up new business models, such as subscription services based on micropayments where you pay fractions of a cent every time you use a service.

Enhanced Privacy

Transactions within the channel are not published on the blockchain. You only see that a channel has been opened, not what happens inside. If you want your channel to be private, only you and your counterparty will know the transactions that occurred.

Current Limitations of Lightning Network

Usability complexity

Open channels, manage liquidity, understand fund inflows/outflows: Lightning Network still requires technical expertise. For the average user, the initial steps can be overwhelming.

Liquidity problem

You cannot spend more than what you have locked in a channel. If you run out of balance, new money must come in or the channel must be closed. This can limit your payment routes. If Alice-Carol has 5 BTC but Carol-Frank has only 1 BTC, Alice can never send more than 1 BTC to Frank.

Risk of centralization in hubs

Due to liquidity constraints, there is fear that massive “hubs” will form: highly connected entities with a lot of capital. Any significant payment would go through a few nodes, weakening decentralization and increasing censorship risks.

The state of Lightning Network today (2024)

The Lightning Network is experiencing continuous growth. It has more than 13,000 operational nodes, over 52,000 active channels, and a total capacity exceeding 4,570 BTC.

There are several implementations of nodes: c-lightning from Blockstream, Lightning Network Daemon from Lightning Labs, and Eclair from ACINQ. For less technical users, there are plug-and-play solutions that only require powering on the device.

Why Lightning Network Matters for the Future of Bitcoin

Since its launch in 2018, Lightning Network has grown significantly without compromising Bitcoin's security. It enables a Layer 2 to experiment and scale without risk to the base network.

On-chain transactions continue to operate normally. Users now simply have options: pay on the blockchain for maximum security, or use channels for speed and low cost. It's a pragmatic approach that expands the use cases of Bitcoin without replacing its essence.

With more companies optimizing wallets and tools for the Lightning Network, the barriers to entry will continue to decrease. The end result could be a Bitcoin network that scales to millions of transactions per second while maintaining its fundamental security.