The Lightning Network: fast Bitcoin payments explained

A normal Bitcoin transaction is secure, but often impractical for a coffee: new blocks are created only every ten minutes on average, and when the network is busy, fees rise (more on this in Transactions & fees). The Lightning NetworkGlossaryLightning NetworkA second layer on top of Bitcoin for fast, low-cost payments. Amounts move off the blockchain via payment channels; only opening and closing a channel ends up in a block as a normal transaction.On the learning path: Stage 1 · Step 3 – How does Bitcoin work? →In the glossary →× is a second layer on top of Bitcoin for payments that arrive in seconds and usually cost only small fees.

Payment channels: the principle

The idea comes from Joseph Poon and Thaddeus Dryja (draft paper, version of January 2016): many payments between two parties take place outside the blockchain, and only the result is recorded there.^[1] A payment channelGlossaryPayment channelA shared bitcoin pot between two parties, secured by a 2-of-2 multisig address. Within the channel, both shift balances by signing a new channel state, without writing every payment to the blockchain.In the glossary →× works like a shared till:

1. Opening

   Anna pays bitcoin into an address she shares with Ben, which can only be spent with both signatures (2-of-2 multisigGlossaryMultisig (multi-signature)A wallet in which several keys jointly control the bitcoin – for example 2 of 3. If one key is lost or stolen, the bitcoin stays safe. In return, setting it up and backing it up is considerably more demanding.On the learning path: Stage 6 · Step 4 – Inheritance & emergency plan →In the glossary →×). This transaction is recorded in the blockchain.^[1]

2. Paying

   For each payment, both simply sign a new channel state, for example ‘Anna 480,000 sats, Ben 20,000 sats’. This takes seconds and can be done as often as they like.

3. Closing

   At the end, the latest channel state goes into the blockchain. Hundreds of payments become a single transaction.

The channels are not a separate network of trust but real Bitcoin transactions that can be enforced on the blockchain at any time.^[1] Today, Lightning is laid down in open specifications, the BOLTs, so that wallets from different developers work together.^[2]

Dive deeperAnd what if someone publishes an old channel state?

Anyone who sends an outdated state that is more favourable to them to the blockchain risks losing the entire balance in the channel to the other side – provided the other side notices in time.^[1] TimelocksGlossaryTimelockA condition under which bitcoin may only be spent from a certain block height or point in time, or after a waiting period. Timelocks are a building block for Lightning and for inheritance and emergency setups.On the learning path: Stage 6 · Step 4 – Inheritance & emergency plan →In the glossary →× give the cheated party a window of time to do so.

Worked example: Anna opens a channel with 500,000 sats – around $400 at an example price of $80,000 per BTC. She pays for a coffee 20 times at 5,000 sats each (around $4). Afterwards, the channel stands at 400,000 sats for Anna and 100,000 sats for Ben. Only two transactions appear in the blockchain: opening and closing. At the current price, $1 gets you around 1,169 sats.

Routing: paying without a direct channel

You don’t have to open a separate channel with every merchant. A payment can be passed along across several channels. In the paper’s example, Alice pays Dave via Bob and Carol:^[1]

• Dave creates a secret and gives Alice only its hash value.
• Alice offers Bob a payment that he can only redeem with the secret. Bob makes Carol the same offer, and Carol then makes it to Dave. The deadlines get shorter from step to step.
• Dave redeems his payment with the secret. This now allows Carol and Bob to redeem theirs as well.

Either the payment arrives in full, or it fails without anyone losing anything. The intermediate stations cannot divert the money. For forwarding it, they receive a small routing fee, which according to the authors should be well below on-chain fees.^[1]

Dive deeperThe technical term HTLC: the contract behind every hop

Each station on a route concludes a conditional contract with the next one: the ‘Hashed Timelock Contract’ (HTLC).^[1] In essence: If you show me the secret for this hash value within the deadline, you get the amount. Otherwise the offer lapses.

The deadlines get shorter towards the recipient because each station, once it learns the secret, still needs time to claim its money from the previous station. Carol only learns the secret from Dave, so her deadline with Bob must run longer than Dave’s deadline with her.^[1]

As soon as Alice knows the secret, she can prove that Dave has been paid. That is the proof of payment your wallet shows after a Lightning payment.^[3]

The Lightning invoice

Payment is usually made via an invoice, which the recipient creates as text or a QR code. Invoices on the Bitcoin main network start with lnbc. They contain a description, the hash value of the secret and usually the amount. If no validity period is specified, an invoice expires after one hour.^[3]

Paying with Lightning in an example wallet

9:41Example wallet

Receive

LightningOn-chain

5,000sats≈ $4 (example price $80,000)

Lightning invoicelnbc50u1pexampleinvoicenotrealdemoonly7xk

1 Fixed amount · 2 valid 60 min

9:41Example wallet

Pay invoice

Amount5,000 sats

DescriptionCoffee, Example Café

Routing fee (max.)10 sats

Expires in57 min

1 Amount & purpose · 2 Fee

Pay

9:41Example wallet

Payment

Paid

after 2 seconds

Amount5,000 sats

Fee paid2 sats

Proof of payment9c1e…b07a

1 Proof

Illustrative example – real apps look different in detail.

What Lightning is used for today

• Small everyday payments: coffee, donations, tips.
• Withdrawals from exchangesTermExchange (crypto exchange)A trading platform where buyers and sellers trade bitcoin with each other via an order book.On the learning path: Stage 4 · Step 2 – Choosing a provider →In the glossary →AdLicensed providers with a paid linkProviders from our comparisonKrakenExchange · MiCA (Central Bank of Ireland)Visit Kraken* (paid link, opens in a new window)BitvavoExchange · MiCA (AFM, Netherlands)Visit Bitvavo* (paid link, opens in a new window)CoinbaseExchange · MiCA (CSSF, Luxembourg)Visit Coinbase* (paid link, opens in a new window)All 7 compared – including non-partners →*Paid link: if you sign up or buy through it, we earn a commission. Your price stays the same. How we make money →18+ · Crypto assets are highly volatile; you could lose all your money. No deposit protection.×: large trading platforms such as CoinbaseProvider · ExchangeCoinbaseListed US crypto platform with an EU licence from Luxembourg – simple buying, an Advanced order book and Lightning transfers.Licence: MiCA (CSSF, Luxembourg) · reviewed Sept 2026Costs: variable: spread plus Coinbase fee, shown before you buy (as of Sept 2026)On the learning path: Stage 4 · Step 2 – Choosing a provider →Our profile →AdVisit Coinbase* (paid link, opens in a new window)on coinbase.com*Paid link: if you sign up or buy through it, we earn a commission. Your price stays the same. How we make money →18+ · Crypto assets are highly volatile; you could lose all your money. No deposit protection.× and KrakenProvider · ExchangeKrakenLarge crypto exchange with an EU licence from Ireland: simple in-app buying or an order book, withdrawals via Lightning too.Licence: MiCA (Central Bank of Ireland) · reviewed Sept 2026Costs: App 1% plus spread; Kraken Pro 0.40% maker / 0.80% taker (as of Sept 2026)On the learning path: Stage 4 · Step 2 – Choosing a provider →Our profile →AdVisit Kraken* (paid link, opens in a new window)on kraken.com*Paid link: if you sign up or buy through it, we earn a commission. Your price stays the same. How we make money →18+ · Crypto assets are highly volatile; you could lose all your money. No deposit protection.× also pay out to your wallet via Lightning.^[4]
• Earning bitcoin in small steps: for example tips for content, see Earning Bitcoin instead of buying it.

Measured against Bitcoin as a whole, Lightning is small: depending on the statistics site, only a few thousand BTC are publicly visible in channels (as of September 2026).^[5],[6] Private channels, as used by many mobile wallets, are not included; Spark Research estimates they hold at least twice the visible capacity (an estimate, not a measurement).^[4] Current figures are available from 1ML, for example.

Limits and risks

• Hot wallet: Lightning payments are signed with keys on an online device. If the device is hacked, the bitcoin can be stolen. The paper therefore advises routing nodes not to hold large amounts in such a hot walletGlossaryHot walletA wallet whose private keys are stored on a device connected to the internet – such as a smartphone app. Handy for payments and small amounts, but more exposed to online attacks than cold storage.On the learning path: Stage 5 · Step 1 – Understanding custody →In the glossary →×.^[1] The same applies to your wallet.
• Monitoring: You can only use the penalty mechanism against old channel states if someone watches the blockchain in time – you or a service you appoint (often called a ‘watchtower’).^[1]
• Data loss: If the current channel state is lost, the other side can exploit this. The paper already suggests encrypted backups with a service.^[1] Check how your wallet handles channel backups.
• Liquidity: You can only receive as much as sits on the other side of your channels, and only send as much as sits on your side. Every station on a route needs enough balance, which is why large payments are more likely to fail.
• On-chain costs: Opening and closing a channel are normal Bitcoin transactions and cost network fees.^[1]
• Chain split: If a split of the blockchain is looming, close open channels beforehand. The reason is explained in Forks & controversies.

Lightning wallets: what to look out for

Broadly, there are two kinds:

	Self-custodial	Custodial
Who holds the keys?	you – backed up via a recovery phrase	the provider
Channels	managed by the wallet for you, partly with the help of a service provider	invisible; the provider books internally
Advantage	no dependence on a provider	very simple, ready to go immediately
Disadvantage	a little more responsibility, fees for channels	trust, risk of outage or freezing

A well-known example of a self-custodial Lightning wallet is Phoenix from ACINQ: open source, with a 12-word recovery phrase that you back up yourself.^[7] BlueWalletProvider · Software walletBlueWalletOpen-source wallet with no purchase price for iPhone, Android and Mac – Bitcoin only, with multisig, watch-only and hardware wallet support.Non-custodial software – no financial licence required · reviewed Sept 2026Price: no purchase price; network fee when sending (as of Sept 2026)On the learning path: Stage 5 · Step 2 – Setting up your first wallet →Our profile →Official website ↗× shows how dependent you are on a custodial wallet: the team shut down its custodial Lightning service on 31 May 2023, and users had to move their balances beforehand.^[8] Other wallet types are covered in Types of wallet.

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