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What is the Lightning Network?
The Lightning Network is a payment network built on top of Bitcoin. Two people lock bitcoin into a shared channel on the main chain, then swap balance updates privately and instantly; payments can hop across several channels to reach someone you have no channel with.
What it means for you
Lightning bitcoin sits in channels, not in an ordinary on-chain address, so moving it back to the main chain means closing a channel, which costs an on-chain fee and takes longer if the other side does not cooperate. If a counterparty broadcasts an outdated channel state, you or a monitoring service need to respond within a set number of blocks, or funds can be lost.
A common mistake: “Lightning payments are recorded on the Bitcoin blockchain.”
In fact: Only the transactions that open and close a channel are recorded on-chain. Payments in between are signed balance updates held by the channel's two parties, which is why they can be fast and cheap.
How it works
Two parties fund a 2-of-2 multisig output with an on-chain funding transaction. Each holds a signed commitment transaction paying out the current balance; every payment replaces it with a new one and revokes the old. Broadcasting a revoked state lets the other side take the whole channel with a penalty transaction, if it acts within a set number of blocks. Payments cross several channels using hashed timelock contracts (HTLCs): each hop is paid only by revealing a secret, or the payment refunds after a deadline. Unlike a sidechain, there is no second blockchain: channel states are real Bitcoin transactions held back from broadcast.
An example
Say you open a channel with 100,000 sats. You pay a cafe 5,000 sats and later a friend 10,000 sats; neither payment appears on the blockchain, only new signed balances. When the channel closes, one on-chain transaction pays out your remaining 85,000 sats, less the closing fee.
Sources: Lightning Network paper (Poon and Dryja), BOLT #0: Introduction and Index (Lightning specification) · checked 4 October 2026
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Educational content, not financial advice. Written by hand and checked against the source named above. Something wrong? Tell us and we reply within two business days.