Lightning Network — Deep Dive

Why Lightning Exists

Bitcoin's base layer processes ~7 transactions per second — too few for high-frequency use like coffee purchases or small remittances. Lightning Network (LN) enables off-chain payments via bilateral payment channels. Two parties open a channel by locking BTC on-chain; they then exchange payments off-chain by updating channel balances; when they're done, they close the channel on-chain. Payments through connected channels can traverse multiple hops. This enables essentially unlimited transaction throughput with instant settlement.

How Payment Channels Work

Alice and Bob open a channel by depositing BTC into a 2-of-2 multisig. They both sign successive versions of the channel state (how much each owns). To pay Bob, Alice signs a new state giving Bob more, Alice less. Bob signs. Neither posts on-chain; the signatures are just held. Either can post the latest state on-chain to close the channel; the network enforces the latest signed state. If someone tries to post an old state, the counterparty can prove it and take all the channel's funds. This design provides economic security without on-chain settlement of every payment.

Multi-Hop Routing

You don't need direct channels with everyone you want to pay. If Alice has a channel with Bob and Bob has a channel with Charlie, Alice can pay Charlie by routing through Bob. Cryptographic techniques (HTLCs — Hash Time-Locked Contracts) ensure the payment atomically completes across all hops or fails atomically. This lets a relatively sparse network handle payments between anyone connected to the graph. Routing efficiency depends on network topology and channel capacities.

• Payment channels: two parties lock BTC, exchange off-chain payments
• Multi-hop routing enables payments through connected channels
• HTLCs ensure atomic payment across hops
• Enables essentially unlimited throughput with instant settlement