A Lightning Network Deep Dive: Here’s What You Need to Know About the Layer-2 Protocol

You might have seen the occasional Lightning post if you’ve been following me on X. I’ve mentioned many times that it’s a powerful tool to bring Bitcoin to the masses. 

However, I’ve never really written about it in much detail, so I want to do a deep dive into the Lightning Network today and give you an insight into the best scaling solution Bitcoin currently has. 

Lightning Network Deep Dive ⚡

 The Bitcoin network is the most secure and decentralized blockchain in the world, thanks to the ingenious way it has been designed. 

No single entity can easily gain control of the network, making it an excellent foundation for an open monetary network. 

However, Bitcoin’s high degree of decentralization and security comes at the cost of scalability. This is where scaling solutions in the form of Bitcoin layers come into play. 

By building layers on top of Bitcoin and enabling off-chain transaction processing, Bitcoin can scale.

Suppose you compare the Bitcoin ecosystem to the Internet. In that case, the blockchain is the foundation, just as the TCP/IP stack with the Internet, and all the solutions on top are layers that enable specific use cases.

We saw this with messengers, web applications, and email in the early 2000s. These layers are built on top of the TCP/IP foundation, allowing us to engage meaningfully with each other. The same principle can be applied to the Lightning Network, which is the Layer-2 solution of Bitcoin. However, there is one key difference to that of the Internet stack. 

With Bitcoin, we can own everything from the ground up. Each user can control their Bitcoin by holding the private keys and, from there, also control their Lightning stack. 

Lightning’s Infrastructure

The Lightning Network was first introduced in 2015 and has been in a more extensive test pool for the first four years. It was cumbersome initially, but since late 2019, more implementations and solutions have emerged. 

This is the first difference between Lightning and other blockchain scalability solutions. With other ecosystems, each Layer-2 protocol has its own token. You have to use the token to engage with the protocol. 

This is different from the Lightning network; the only thing you send on there is Bitcoin in the form of Satoshis, the smallest unit in Bitcoin. There are 100,000,000 Satoshis in one Bitcoin, which makes divisibility easy and allows users to spend their Bitcoin for everyday situations. 

Users must engage with Lightning channels, which are settlement layers on top of the Bitcoin blockchain. Payments settle much quicker because they don’t need to engage with the blockchain directly, but with the peer, you pay directly.

Routing and Channels

All these transactions occur in Lightning channels, and they must find their way through the network to settle. This is why you often read that your payment has to find a route through the network.

You have a few security features built in to ensure that the network is safe to use and that no one in it is breaking it. 

For starters, all channels are always in a multisig between the peers who use it. Meaning both parties have to add liquidity to the channel. 

To open such a channel, there has to be a regular Bitcoin transaction on the blockchain. However, this is one transaction, while millions (if not billions) of payments can occur in the Lightning channel. 

Once all of these payments are settled, or there is no more need to use Lightning, you can close the channel by sending another transaction back onto the main chain. 

This way, you take a lot of load off the main Bitcoin network. Users can pay with Bitcoin in smaller amounts, and the payment settles instantly, not every 10 minutes like on-chain. 

Hence, the name Lightning Network because Bitcoin transactions are lightning-fast. ⚡

https://medium.com/softblocks/lightning-network-in-depth-part-2-htlc-and-payment-routing-db46aea445a8 

The second security feature is Hashed Timelock Contracts (HTLCs), which are smart contracts that lock a certain amount for a specific time until the owner of that lock is able to provide a key to unlock the secret. 

Participants in the network do this by running a node and adding more security to the network. As you can see from the image above, the rules are the same for everyone in the network. To encourage them to do this work, there has to be a small incentive, which is the routing fee node runners demand. That means network participants who operate Lightning channels receive the fees channel users pay to send Bitcoin. 

Wallets, Invoices, and Payments

Now that we’ve looked at how the Lightning Network works, let’s talk about how you can use it. There are Lightning-enabled wallets out there that allow you to spend your Bitcoin. Most even allow you to receive on-chain Bitcoin and convert it to Lightning channels. 

However, just like any Bitcoin wallet, you must know a few points. One of the most accessible Lightning wallets is the Wallet of Satoshi. It’s a custodial wallet and has emerged as the go-to source for people to “orange pill” (i.e., introduce new people to Bitcoin and the Lightning Network).

In the spirit of ‘Don’t trust. Verify,’ however, you have to be careful with using a custodial wallet as the wallet provider holds your private keys. I’m sure Wallet of Satoshi is doing a fantastic job. However, we want to take trust out of the equation. 

Therefore, look for alternatives where you can own and verify your private key. The Phoenix wallet is a great alternative and allows you to be more in control of your Bitcoin. 

Secondly, although there are options for you to use a public address in Lightning and have people send sats to, this is done through a LNPAY address; most of the time, you need to create a Lightning Invoice and send this to the person you want to receive sats from. 

Prepare yourself to send and receive Bitcoin instantly (yes, instantly!) and with a tiny fee once you start using Lighting. 

Scaling the Lightning Network 

The Lightning Network is still relatively small but has grown in the last two years. This doesn’t mean it’s perfect, and we need to solve UX/UI issues to make it easier for people to get on. 

But better wallets and simpler onboarding are only one part of the story. The other is implementing Lightning into modern technology and life as easily as possible. There are a few ways of doing so. 

One of the easiest is to use a Lightning Service Provider (LSP). These companies or a group of people allow you to plug into their infrastructure and use it to build apps, have liquidity in the channels, or have an easier way to get started. These service providers operate as intermediaries and help grow the Lightning network. 

However, there is one more scalability feature I’m super excited about. That’s the ability for additional layers on top of Lightning. Those will use the underlying technology and allow us to build new use cases. 

These can be things such as fiat currencies, tokenized assets, or even NFTs. All of them will be available and use Lightning to facilitate the transaction process. 

In the past, people used to dismiss Bitcoin because you couldn’t build anything on top of it, and it was too slow and expensive to use as money.

However, Lightning has changed the game.

Samara Donated $10,000 to a Bitcoin Education Initiative for Women in Kenya 👩🏾

One of the main benefits of Bitcoin is the ability for anyone on earth to have a bank account.

As I learned in my recent interview with Lorraine Marcel from Bitcoin DADA, having a bank account often isn’t the case for women in Kenya. It’s still common for them not to have a bank account and to rely on their husbands to manage the household funds.  

This is why Loraine started Bitcoin DADA, an education initiative to support women in Kenya focused on teaching financial literacy and the transformative power of Bitcoin. 

She’s running the project and has so far survived thanks to donations from fellow Bitcoiners. For example, the Human Rights Foundation (HRF) donated $10,000 to Bitcoin DADA earlier this year. 

I was moved by Lorraine’s story and wanted to help out as well. So, Samara Asset Group matched HRF’s donation and pledged $10,000. 

This is the best thing we can do as a company to help support a fantastic grassroots initiative that is helping to bring Bitcoin to more people in parts of the world where Bitcoin can have a massive positive impact. 

I Went on Pomp’s Podcast to Talk About Why European Regulators Love Bitcoin 🎙️

September was a busy month for me, but I managed to sneak in a few interviews on other people’s podcasts. 

One of those was a great discussion with Anthony Pompliano on his podcast. We discussed Bitcoin, the current regulatory landscape, and why Europe is much ahead of the U.S. 

It was a great conversation! Pomp was a fantastic host. You should definitely tune in!

Your stacker in sats,

Patrick Lowry

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