Lightning Network

Each Lightning payment channel begins as a two-party Bitcoin transaction that locks funds into a shared, multi-signature address. From that point, the two users can exchange an unlimited number of signed balance updates privately, without broadcasting anything to the Bitcoin network, and either side can close the channel at any time to settle the final balance on-chain.

What makes Lightning more than a simple payment channel is its ability to route value across a mesh of channels that were never opened directly between the sender and recipient. Payments hop through intermediary nodes using Hashed Timelock Contracts, a cryptographic construction that locks funds to a hash and a timeout so each hop is either paid in full or automatically refunded, meaning no single node in the path needs to be trusted with the money. Nodes that forward payments earn a small routing fee for supplying liquidity along the way.

The design suits frequent, low-value transfers such as tipping, streaming "sats" payments, point-of-sale purchases, and cross-border remittances, since fees stay a fraction of a cent and settlement is nearly instant. Major exchanges and wallets, including Coinbase, Cash App, and Strike, have added Lightning withdrawals and deposits, and El Salvador's government wallet relies on it for everyday Bitcoin spending.

Running Lightning well has trade-offs: a node needs enough inbound liquidity to receive payments, must stay online (or use a watchtower service) to prevent a channel partner from broadcasting an outdated balance, and channel closures still compete for Bitcoin block space and fees. Recent upgrades such as splicing let users resize channels without closing them, easing some of that liquidity management burden.