What is the Lightning Network?

Written by Lightning Pay Limited

Updated Feb 21, 2024

Bitcoin

Bitcoin is an amazing creation. It offers the world an opportunity to create a new foundation on a financial system that is not controlled by any single institution or government, a neutral global reserve asset. In order to serve this function  bitcoin optimises for security, decentralisation, censorship resistance, and immutability. 

The Bitcoin network and its blockchain is somewhat limited in the number of transactions it can perform over time, only finalising 7 transactions per second on its base layer. In addition, the finalisation of Bitcoin transactions are done by miners, and are only settled once every 10 minutes. In the future, the Bitcoin base layer will operate at the level of final settlement, similar to how we imagine the function of central banking ledgers today.

Just as with our current system of finance, day to day commerce and payments between individuals and businesses will occur on a new layer, optimised for every day payments, but solidly connected to the base layer. This means that each of those 7 transactions per second that Bitcoin finalises on the base layer will be very dense in terms of the true economic activity it represents, with many payments occurring at other layers, and batched for final settlement on the Bitcoin Blockchain.

Lightning Network

The Lightning Network has emerged over the past few years as the leading candidate for the payments layer of Bitcoin. It is a second layer protocol built on top of the Bitcoin blockchain.

Simply put, it works by turning a single bitcoin transaction into many. Transactions on the Lightning Network function by its participants agreeing on a potential future transaction on the Bitcoin base layer, but these do not require final settlement on that base layer. Because of this, payments on the Lightning Network are extremely fast and cheap.

The amazing thing about the Lightning Network is that it manages to stay connected to the Bitcoin base layer, meaning each transaction, while fast and very inexpensive, can be settled finally on the Bitcoin blockchain whenever a participant requires.

We believe this technology is the future of payments, offering instant and near-free transactions. Every transaction is as final as handing cash to your merchant, with a good level of privacy for payers.

Lightning Wallets

Lightning wallets are simply bitcoin wallets that specifically support the Lightning Network for payments. You can see a list of supported lightning wallets you can use to interact with our services at Lightning Pay in our article “Supported Wallets.”