The Lightning Network is a second layer payment protocol that operates on top of the Bitcoin blockchain.
It is meant to improve Bitcoin’s scalability and to allow for fast transactions, even as the network’s block size limit constraints the amount of data that can be verified quickly and affordably.
While the Lightning Network is a vastly complicated solution to a complex problem, it can be understood on a very basic level without high-level technical knowledge. A sophisticated understanding of how it works requires a deep dive into its history and the Bitcoin network at large.
But, in essence, the Lightning Network is a peer-to-peer system that allows for micropayments using bitcoin through direct payment channels (though nondirect channels can also be set up through mutual connections). A user would open such a payment channel by setting up a multisig wallet with another party and saving that wallet’s address to the Bitcoin blockchain.
Bitcoin can then be sent back and forth within that payment channel while recording the balance of which party owns what amount of bitcoin in that wallet. Therefore, each one of those individual transactions won’t have to be validated by the Bitcoin network, saving time and energy. Only when the two parties are done transacting and the channel is closed does the blockchain need to validate the final balance.
The Lightning Network was first proposed in 2015 in a white paper by Joseph Poon and Thaddeus (Tadge) Dryja called “The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments.”
Following that introduction, several companies in the space began working on how to implement the technology. As they did so, some individuals began testing lightning transactions on the Bitcoin network.
While payment channels have been opened, the Lightning Network is still not widely used. Some altcoin networks, including Litecoin, have also opened Lightning Network payment channels.