What is the Bitcoin Lightning Network?

The Bitcoin Lightning Network (LN) is a second layer that is built on top of the Bitcoin network to facilitate faster and cheaper bitcoin transactions. Transactions are done between parties off of the blockchain (off-chain). Therefore, using the Lightning Network allows you to cut costs by saving on transfer fees. LN is useful for instant micropayments.

While the core Bitcoin blockchain (layer 1) can handle fewer than 10 transactions per second, the Bitcoin Lightning Network (layer 2) can handle millions of transactions per second (TPS).

History of Bitcoin Lightning Network and the Problems it is Meant to Solve

Bitcoin’s popularity has undermined many aspects and processes associated with the blockchain. This includes the costs, speed, and the volume of transactions the system can accommodate at a given time. To fix these problems and enhance its capability, researchers and developers came up with the Bitcoin Lightning Network. Lightning was designed to solve bitcoin network limited capacity to handle large amounts of transactions in a short period of time (bitcoin scalability problem).

Bitcoin Network’s Problems

The main blockchain has been facing these problems:

Speed

When the bitcoin network tries to process many transactions simultaneously, there occurs a congestion in the main blockchain which slows down processing speeds.

Cost

Bitcoin’s congestion on the core blockchain is one of the factors that influence its transaction costs. Miners prefer to validate transactions with higher fees. This is usually expressed in a satoshi/vbytes. The minimum fee is 1 satoshi per vbyte, which comes down to a couple of dollar cents per transaction. With this minimum fee your transaction might be validated in less than 10 minutes, but it could also take much longer. At mempool.space you can try to see what this looks like.

When using a non-custodial wallet like Sparrow it is relatively easy to opt for the lowest fee, which is okay for many cases most of the time. But if you hold your Bitcoin on exchanges or with other custodial wallet providers you often don’t have the possibility to change the fee and in many cases the fees are much higher than a couple of cents. This is another reason to strive for keeping your bitcoin in your own custody.

History of Bitcoin Lightning Network

The Lightning Network idea has its origins in reflections by Satoshi Nakamoto, but it was specifically formalized by Thaddeus Dryja and Joseph Poon in 2015. In January 14, 2016, the two researchers published a white paper about the Lightning Network. In the paper, they argued that a network of micropayment channels could fix the capability issues of the Bitcoin network rather than changing the Bitcoin network itself to accommodate more transactions. The first version of the Bitcoin Lightning Network was launched in March 2018.

Bitcoin Nature Fund supports conservation projects via the Bitcoin Lightning Network. For instance, the Fund intends to hire illegal gold miners in Peru to reforest the land and pay them in bitcoin via the Lightning Network.

How the Bitcoin Lighting Network Works

The Bitcoin Lightning Network enables the creation of peer-to-peer off-blockchain payment channels between a pair of users. The channel enables two parties to send or receive bitcoin outside the regular blockchain network. The transactions between them happen almost instantly and at low cost.

The reason the transactions can be instant is that transactions do not need to be approved by all nodes within the blockchain network. Instead, lightning nodes can verify each other’s channel balances and in case of a node cheating the node being cheated can initiate a penalty payment.

When two nodes decide to finish transacting, they can close their channel. All of the channel’s information will then be consolidated into a single transaction and be sent to the core Bitcoin’s blockchain for recording.

How Do You Access the Bitcoin’s Lightning Network?

You can access the Lightning Network by using a crypto wallet that supports Lightning such as Muun or setting up your own Lightning node. A node is software that verifies transactions, keep a record of transactions, and communicate with other users. Lightning nodes will only verify transactions they are involved in and only communicate through established channels.

Kiveclair is a project that uses Bitcoin and the Lightning Network to promote financial inclusion in Goma, the Democratic Republic of Congo.

Best Bitcoin Lightning Wallet

What is Lightning wallet? A Bitcoin wallet is an app or program that enables you to send and receive Bitcoin. A Lightning-compatible or Lightning-enabled wallet allows you to interact with the Lightning Network. They establish channels and facilitate Lightning network transactions. There are several types of Bitcoin Lightning wallets including desktop wallets, mobile wallets, hardware wallets, and web-based wallets. These wallets can either be custodial or non-custodial. Examples include the following:

Custodial Bitcoin Lightning Wallets

Custodial Bitcoin Lightning Wallets (wallets whose private keys are held by a third party) include the following:

  • BlueWallet. The Blue Wallet is non-custodial for on-chain transactions but its Lightning wallet is custodial by default. It is available for both Apple and Android devices. Bluewallet has a feature that connects users to Lightning Marketplace, a place where users can access a Lightning Network-related services and features.
  • Wallet of Satoshi. It is a mobile wallet available for Android and iOS. The wallet holds the private keys to your Bitcoin and also opens payment channels for you. It can be used both on-chain and off-chain. The wallet has a merchant finding feature. You can search for Lightning Nework-enabled merchants in your area.

Non-custodial Bitcoin Lightning Wallets

Non-custodial Bitcoin Lightning wallets are Lightning wallets that give you complete control of private keys to your bitcoin. They include the following:

  • Breez. Breez is available for Android and iOS. It takes care of opening up a Lightning Network for you. It charges a 0.4% fee for automatic channel creations.
  • Phoenix. The Phoenix wallet is available for both Android and iOS. The wallet does not require set up making it a good option for beginners.
  • Muun. Muun is a Lightning wallet is available for both Android and Apple devices. It can integrate a Lightning and on-chain wallet in the same user interface with just a single BTC balance.
  • Zap. Zap is a non-custodial Lightning Network wallet available for desktop (Mac, Windows, Linux) and Mobile (Android and iOS).

We strongly advise you to only use crypto wallets that you give you complete control of your private keys (non-custodial). “Not your keys, not your coins.” Entrusting your private keys to a third party such as a crypto exchange means you may lose all your funds if the exchange goes bankrupt.

Bitcoin Lightning Network Apps

With the conception of the Bitcoin Lightning Network to address Bitcoin’s scalability issue, many projects have launched applications to leverage the benefits of the network. Some of the Lightning apps include:

  • Strike. Strike non-custodial platform that uses Bitcoin Lightning Network and USD instant payments to enable users in the US and El Salvador to send and receive funds, pay for goods and services online, tip content creators, etc. You can also use the platform convert your paycheck into bitcoin.
  • Bitrefill. The Bitrefill app allows users to buy almost anything with cryptocurrencies through the use of gift cards, mobile phone top ups, and a lightning network node.
  • Cash App. Cash App comes with a bitcoin wallet address that allows its users to send and receive bitcoin. Recently, Cash App integrated the Bitcoin Lightning Network on its platform allowing users to send bitcoin payments worldwide for free.
  • BitPay. BitPay is a crypto payment gateway. It offers Lightning Network tools for spending and accepting crypto payments.
  • Sphinx. Sphinx is an encrypted instant messaging app that requires a small fee to eliminate spam each time a message is sent. Its users can also send and receive BTC from others and also tip content creators via the LN.
  • Tippin.me. Tippin.me is a browser extension available for Firefox and Google Chrome web browsers. After downloading and installing the extension, top up your account with BTC and use the Lightning Network to send crypto tips to other users on Twitter.

Which Crypto Exchanges Use Lightning?

The following cryptocurrency exchange support Lightning Network transactions for instant and expensive deposits and withdrawals:

Is Coinbase a Lightning wallet? No, Coinbase does not support Lightning Network at the moment.

Bitcoin Lightning Network Fees

Fee structure for Lightning wallets can be complex and confusing to new users. For example, some wallets may charge you upfront for opening a Lightning network channel on your behalf while others may spread out the fees into future transactions. Although you may be charged a fee to send payments, these fees are very low per transaction because transactions are settled off-chain (outside the regular blockchain). Some of the fees to expect include the following:

  • Routing Fees. These are fees that go towards nodes when they validate transactions and transfer payments between channels.
  • Opening and Closing Channel Fees. Users will need to make an initial deposit via on-chain to open a channel. When they finish transacting, the transactions are added to the main Blockchain in a single transaction at a low cost.

How Do You Pay for the Lightning Network? How Do You Receive BTC on Lightning Network?

Paying or receiving bitcoin on the Lightning Network is simple and straightforward. You will need to follow the following steps:

Get a Bitcoin Lightning-enabled Wallet

Not all bitcoin wallets are Lightning compatible. Therefore, you will need to get a wallet that allows you to receive, hold, and spend bitcoin via the Lightning Network such as the ones listed above. Most popular wallets can be downloaded to your mobile device.

To pay a merchant or send bitcoin to another person, the receiver must also have a wallet that supports Lightning Network. The person you need to send money to needs to send you their Lightning Network address or you can scan their QR code. To receive bitcoin, you need to generate a Lightning invoice by tapping on “Receive” in your wallet, tap on the Lightning Network address, copy the address and send to the person you are receiving bitcoin from.

Lightning Network Privacy

Is the Lightning Network private? Is the Lightning Network anonymous? There are a number of privacy issues related to the Lightning Network. At the Bitcoin 2022 Conference, it was noted that Lightning Network is not completely private yet. However, sender privacy is greater on the Lightning Network than receiver privacy. Receivers need to give certain revealing information to the sender so that they can send the payment. Here’s an in-depth discussion of Lightning Network privacy issues.

We believe when dealing with privacy it is crucial to focus on what you know works right now today for the people who really need it. Lightning in our estimation is not ready to be a privacy solution for real world users, and until such time that it has shown its ability to survive and thrive in an adversarial environment such as a darknet market, we will continue to put out tools for on-chain use. – Email from Samourai wallet staff to FiFi Finance on why the wallet doesn’t support the Lightning Network.

Overall Lightning is a lot more private than using on-chain Bitcoin transactions, but if you worry about privacy it is good to do your research.

Comparison

Payment MethodPrivacyTransfer SpeedTransfer CostSettlement
Cashgoodsecondsfreeclear
Card paymentnot privatefast1-3%unclear
National bank transfernot privateseconds to daysusually 0unclear
International transfernot privateseconds to days0 – 30 USDunclear
Bitcoin on-chaindependsminutes to hourscents/dollarsclear
Bitcoin off-chain (Lightning Network)okaysecondscentsclear

Final Thoughts on What is Bitcoin Lightning Network?

The Bitcoin Lightning Network allows users to transact with each other quickly and cheaply by moving the transactions off of the core blockchain. The Lightning Network can be used for any type of transaction but most users find it useful for instant micropayments. With crypto wallets such as Muun, Breez and Phoenix, you are able to make faster and cheaper bitcoin transactions over the Lightning Network.

Bitcoin Lightning is used extensively in the Bitcoin Beach community in El Zonte, El Salvador. And Bitcoin Beach was a big reason for El Salvador to adopt the Bitcoin standard. In 2022, a lot of people active in “crypto” are still not aware of how much Lightning has progressed over the past years. Bitcoin Ekasi in Mossel Bay, South Africa is another great example of the use of Lightning Network at grassroots level. Bitcoin Ekasi is a project that teaches residents and merchants in the townships how to use Bitcoin as money.

Combined with instant fiat-bitcoin conversion solutions like Strike and Bitnob it has become possible to instantly transfer funds between countries like the US, Ghana and Nigeria, without exposure to the Bitcoin price.

Daisy Neema is a graduate of Chuka University. She is a prolific writer and researcher and has an interest in finance. She also loves writing about businesses and startups.