What is the Lightning Network Basics for beginners

Float like a cadillac and sting like a beemer. Sounds like Lightning right? Lightning Mcqueen.

So I assume that made nobody laugh but nevermind. Let us begin this post on Lightning Network.

What is Lightning Network

The Lightning Network is a “second layer” payment protocol which functions on top of a blockchain platform mostly Bitcoin, i.e., #king of the world ( however, only in the crypto world ). It facilitates instant transactions amongst participating nodes and has been acknowledged as a remedy for bitcoin scalability problemo. Comprendo? It consists of a peer-to-peer mechanism for making micropayments of cryptocurrencies by employing a system of bidirectional payment networks, channels, etc. without having to the need to license possession of funds or trust to any external parties.

Routine usage of this network includes commencing a payment channel by allocating a funding transaction to the respective blockchain. This is followed by making n number of lightning transactions which update the conditional distribution of the channel’s funds without broadcasting to the blockchain.
After this, you need to close the payment channel by transmitting the final version of the transaction to circulate the channel’s funds.

The specification for using the Lightning Network relies on Segregated Witness(SegWit).

How does it work

The Lightning Network relies upon the utilization of blockchain technology. By using blockchain based transactions and employing its native smart-contract scripting language, it is feasible to build a safe network of members that can trade at high speed and volume.

That is okay. But how does it work?

1). A multi-signature wallet that contains some amount of any crypto coin (provided by at least one of both parties) is deployed. Although bitcoin is the most predominant user of this service known as the lightning network, platforms such as litecoin have also employed it for providing better service to their end users.

2). The wallet address is then stored within the respective blockchain along with a balance sheet (smart contract) that acts as evidence as in this much of whatever cryptocurrency mostly bitcoin, litecoin belongs to you and this much to me. Simple? Let us move forward.

3). Then once this payment mechanism is in place, two or more parties can pretty efficiently perform any amount of transactions between them. They can do all of this without needing to access this information regarding transactions that get stored on the respective blockchain.

4). After every transaction, all the parties involved are required to sign an updated balance sheet so that everyone concerned stays informed as in how much of any cryptocurrency has been traded and hoarded till date in the multi-sig wallet of XYZ i.e. this much bitcoin or litecoin belongs to XYZ, etc.

5). But the catch-22 or the specialty of this service is that this balance sheet that gets updated after every individual transaction does not get uploaded to the independent blockchain ( bitcoin, litecoin, etc.); instead, all parties involved keep a personal copy of it for their records.

6). Then in case of a dispute or the closure of the respective payment channel being utilized, anyone and everyone concerned can use the latest mutually signed balance sheet for settling the differences of the multi-signature wallet.

Even though all of this may sound a pretty complicated and laborious process, making payments using this service requires hardly any extra effort on the part of the end user because all of the stuff mentioned above happens in the background almost immediately.

By employing lightning network’s payment channels, people can transact amongst themselves pretty efficiently without having to broadcast whatever they are up to on the blockchain. Also by keeping an account of the transaction history between themselves, all the concerned parties can avoid the costly and prolonged interactions with the blockchain. Then after this is if there is a dispute concerning the balances on the Lightning Network, then the latest updated balance sheet rendered by either of the two parties shall decide the way in which the funds in the multi-sig wallet are going to be split, i.e. “I” owe you xyz and “You” owe me xyz.

This video should help you understand more

What problems does it solve:

Before the lightning network was invented transactions on Bitcoins blockchain ( because it was the first blockchain that implemented this mechanism ) had to be broadcasted to the entire blockchain, and thus it was pretty expensive and time consuming for people to send and receive bitcoin on its network. However, with the lightning network, only two transactions need to broadcast to the blockchain, i.e., an opening and closing transaction for using its payment channels. After that, all interested parties can make unlimited transactions between themselves at a faster pace and cheaper rate as compared to making these transactions on the main blockchain be it bitcoin or any other platform.

Pros & Cons of the lightning network:


  • It is pretty easy to make small payments using the lightning network because the amount of fees you need to pay is proportional to the transaction amount i.e you don’t have to spend 15$ for sending 25$ worth of bitcoin. You can send your 25 at a cheaper rate or preferably a fraction of a cent. The records are also maintained in thousandths of a Satoshi.
  • Transactions are made in a jiffy, i.e., pretty quickly. Money changes hands as soon the transaction information travels from one person to another and back, i.e., in a fraction of a second.
  • Enhanced privacy: Unlike bitcoin, it isn’t necessary to store the transaction on the lightning network. Transactions are only broadcasted to the parent blockchain when the payment channel is opened and ultimately closed, and the remaining balance is settled.


  • Peer failures: If anyone of the peers delays the process of channel closure all members involved might have to wait for a pretty long time for the completion of the channel closure and settle the differences through a different route.
  • Offline payments not possible: If the person whom you want to send money to isn’t online on the lightning network, then you won’t be able to send him any money. Pretty Simple. Eh?
  • Not viable for big transactions: Although a way of sending and receiving money through several payment channels may be present, sometimes the amount of funds present in your peer’s multi-sig wallets may not suffice for undergoing transactions involving a more copious amounts of funds.
  • Centralization: The Lightning Network could advocate consolidation in payment hubs as is the case concerning miner centralization.

Which platforms have implemented/planning to apply it

For now, Bitcoin and Litecoin seem to be the ones taking advantage of the features this service has to offer. Other cryptocurrencies that are intending to leverage this service are Zcash, Ethereum, Ripple. However, it is uncertain as to whether or not will they follow through with this intention that they possess.

So that is it for this post. Now if you want to throw fireballs at me then you can do that in the comments section below. Also remember to follow us on Facebook, Twitter, , Instagram.

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About Author

I am a tech enthusiast & Digital nomad from Dhenkanal, India I've been dealing with Bitcoin since 2014.I started CoinGyan to help users around the globe to learn about popular Cryptocurrencies. Here at CoinGyan, I write about Bitcoin Wallet, Cryptocurrency wallets, & making money from Crypto.

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