The Lightning Network is a decentralized system designed for instant and high-volume micropayments. Unlike traditional payment systems, the Lightning Network does not require users to delegate custody of their funds to trusted third parties. Instead, it operates as a layer-2 protocol built on top of the Bitcoin base layer (layer 1) blockchain, leveraging the high protection standards of the Bitcoin network to ensure security.
Bitcoin, the world’s first cryptocurrency, was originally designed as a slow payment system. Transactions on the Bitcoin blockchain typically take around one hour to be finalized. This delay is due to the process of assembling transactions into blocks spaced approximately 10 minutes apart, with payments considered secure after confirmation of six blocks, equivalent to about one hour.
Realizing the inefficiency of Bitcoin for micropayments and smaller transfers, the Lightning Network was conceived as a solution. It serves as one of the first implementations of a multi-party smart contract using Bitcoin’s built-in scripting capabilities. By operating on the Lightning Network, users can benefit from instant, atomic transactions that do not need to be recorded on the blockchain.
The Lightning Network can be utilized by retailers for point-of-sale terminals, individuals for device-to-device transactions like remittance payments, or for any scenario where instant payments are required without the need for third-party validation.
The Lightning Network is hailed as the fastest payment method available, with a potential throughput rate of approximately 1 million transactions per second (TPS). In comparison, Solana, another blockchain platform, has a TPS rate of 65,000, and Visa can process around 24,000 TPS. The Lightning Network’s scalability allows it to meet the increasing demand for Bitcoin payments and micropayments.
How to Use the Lightning Network
Setting up a Lightning Wallet
In order to send and receive payments on the Lightning Network, users must first set up a Lightning wallet and fund it with Bitcoin. Numerous Lightning Network-enabled wallets are available, with popular options including Muun, Wallet of Satoshi, Phoenix, and Cash App. These wallet apps can be downloaded on iOS and Android devices.
Most Lightning wallets are designed for mobile use, as they offer convenience and frequent instant payment capabilities. However, it is crucial to choose a non-custodial wallet that gives users control over their Bitcoin funds. Non-custodial wallets ensure that the owners have sole custody of their Bitcoin and often provide additional security measures such as multi-signature functionality.
By depositing Bitcoin into a Lightning wallet, users can open a payment channel, which serves as their entry point into the Lightning Network. Each time a user makes a payment to a new person or business, a new channel is opened between the user and the counterparty. These channels can be direct, established between two parties to enable seamless transactions, or they can be routing payments that utilize pre-existing channels between unconnected parties.
Once a channel is established, users gain access to the entire network’s public channels, which are interconnected and ready to route payments. Lightning nodes within the network will search for the most efficient route to facilitate the transaction. As a result, users can pay retailers instantly by simply scanning a QR code, without the need to open a direct channel for every payment.
How to Make Lightning Network Payments
Making a payment on the Lightning Network is as straightforward as any other digital payment method. To initiate a payment, follow these steps:
- Open the payer’s Lightning wallet on the respective app or platform.
- Click on the “Send” option to begin the payment process.
- Scan the QR code provided by the merchant or manually enter the recipient’s Lightning address.
- Verify that the payment details are correct and proceed with the checkout.
Similarly, to receive Bitcoin through the Lightning Network, follow these steps:
- Open your Lightning wallet on the respective app or platform.
- Click on “Receive” to generate a payment request.
- Share the generated QR code or payment link with the sender. Alternatively, the sender can manually enter the Lightning address.
- Ensure that all the transaction details are accurate and await the completion of the transaction.
It is worth noting that manually entering a payment address on the Lightning Network can be error-prone and time-consuming. Using a QR code scanner provides a more accurate and efficient method of entering the payment address, ensuring a seamless transaction process.
Funding Your Lightning Network Wallet
In order to utilize the Lightning Network, users need to have Bitcoin funds in their Lightning wallet. Funding a Lightning wallet involves the following steps:
- Select the appropriate wallet network, either the Bitcoin base chain (Bitcoin wallet) or the Lightning Network (Lightning wallet).
- Access the “Receive” option within the wallet.
- Verify the transaction details presented to ensure accuracy.
- Scan the QR code or copy and paste the receiving address provided by the wallet onto the platform or wallet from where you will transfer the Bitcoin funds.
- Optionally, you can include an invoice for the payment by clicking on the “Invoice” button and following the necessary steps.
After receiving Bitcoin and successfully opening a channel, users can send and receive Bitcoin without any time or amount limitations. However, it is essential to note that the Lightning Network is still considered experimental and requires further refinement. Consequently, it is advisable not to store significant amounts of Bitcoin in a Lightning wallet and exercise caution while transacting.
The Lightning Network and Its Developers
The Lightning Network is an open-source project that was conceptualized by research scientists Joseph Poon and Tadge Dryja in 2015. They introduced the Lightning Network as a potential solution to address the increasing transaction fees associated with Bitcoin. In January 2016, Poon and Dryja published a white paper outlining the concept and gained significant attention from developers and investors.
Following the publication of the white paper, Lightning Labs, a company dedicated to developing and maintaining the Lightning Network, was founded by Elizabeth Stark. Lightning Labs released a beta version of the ecosystem to allow developers to test its capabilities and demonstrate the value of layer-2 solutions to the broader blockchain ecosystem.
With growing funding and interest surrounding the Lightning Network, it has gained considerable traction among Bitcoin enthusiasts. In addition to its potential for scaling Bitcoin’s transaction volume, the Lightning Network’s smart contract functionality opens up opportunities in decentralized finance and various other applications.
Using the Cash App with the Lightning Network
One of the popular platforms that have integrated the Lightning Network is the Cash App. By adding Lightning Network support, the Cash App enables faster Bitcoin transactions with minimal fees. Here’s how to send and receive BTC using the Cash App Lightning Network:
Sending Bitcoin with the Cash App Lightning Network
- Open the Cash App and navigate to the “Payments” tab to access the home screen.
- Click on the QR scanner located at the top left corner of the screen.
- With your phone’s camera, scan the Lightning invoice QR code provided by the recipient.
- Follow the on-screen instructions to confirm and complete the payment request.
Receiving Bitcoin with the Cash App Lightning Network
- Open the Cash App and go to the “Money” tab.
- Select “Bitcoin” to access the Bitcoin wallet features.
- Click on the “Receive” option to generate a QR code or payment link.
- Share the generated QR code or payment link with the sender to enable them to initiate the Lightning Network transaction.
It is worth noting that senders do not require a Cash App account to fulfill Lightning Network payment requests. Instead, they need a Lightning-enabled Bitcoin wallet of their own.
Moving Funds with Lightning Addresses (LNURLs)
The Lightning Network is gradually being adopted by various crypto community members and service providers, including cryptocurrency exchanges. Some notable implementations include Kraken, which integrated Lightning Network functionality in March 2022, and Coinbase, whose CEO announced a partnership with the Lightning Network in April 2023.
A significant development in the Lightning Network’s evolution was the introduction of Lightning addresses in December 2022. Lightning addresses function similarly to email addresses but for Bitcoin transactions, providing a convenient method for instant transfers on the Lightning Network. This addition has the potential to establish a new standard for how value moves across the global financial landscape.
LNURLs have gained recent popularity due to an incident involving Brian Armstrong, the CEO of Coinbase, who apparently failed to recognize the Lightning address of a Cointelegraph journalist, resulting in a missed payment. Lightning addresses are a crucial addition to Lightning payment services, although wider adoption may take time.
To sum up, the Lightning Network offers a transformative solution for micropayments and smaller transfers on Bitcoin. Its ability to facilitate instant, low-cost transactions while leveraging the security of the Bitcoin network makes it a promising advancement in the world of digital payments.