Deciphr Academy
Track 1 · Module 3 · Lesson 6 of 6 · 5 min read

What is the Bitcoin Lightning Network?

Short answer

Lightning lets two people lock bitcoin into a shared channel, pay each other many times off the main chain, and settle the final balance on Bitcoin later.1,2 Channels link up into a network, so you can pay people you have no channel with.1

Bitcoin blockchainPayerRouterPayeechannelchannelopenclosepayments hop along channels, off-chainOnly opening and closing a channel touch the chain
Fig. 6. Opening and closing a channel are the only steps that reach the blockchain. Payments in between, including ones that hop through a router in the middle, happen off-chain.

Why it exists

Every Bitcoin node has to learn about every transaction, and blocks have limited room.2 In 2016, the Lightning paper said Bitcoin could handle fewer than 7 transactions per second.2

Its authors, Joseph Poon and Thaddeus Dryja, proposed moving most payments off the main chain.2,1 They first described the idea in 2015.1

A payment channel

Two people open a channel with one on-chain transaction, called the funding transaction. It locks their coins so that spending them needs both their signatures.2,1

They then pay each other by swapping signed transactions that update the balance. These are valid, but they are kept off the chain.1 Updates can happen as fast as the two sides can sign and send them.1

When they are done, they close the channel and the final balance goes on the chain. In the whole life of a channel, only two transactions need to be mined: the opening one and the closing one.1

Either side can close the channel alone if the other disappears.1 To stop cheating, anyone who tries to close with an old balance can lose all the funds in the channel as a penalty.2

A network of channels

You don't need a channel with everyone. A payment can hop through other people's channels to reach someone you aren't connected to.1

Each hop is locked to a secret and a time limit, so the people in the middle can't steal the payment.2,1 They earn a small fee for passing it on.1 They only see the hop before them and the hop after, not the whole route.1

A route only works if every channel on it has enough capacity.1 Several independent teams build Lightning software, kept compatible by shared specifications called BOLTs.1

The trade-offs

  • You, or someone you pay, should keep watching the chain, in case the other side tries to close with an old balance.2
  • Nodes that pass payments along keep their keys online, so they should not hold large amounts in that "hot wallet".2
  • The design needed a fix for a flaw called transaction malleability. The SegWit upgrade provided one.2,3
Our viewLightning suits small, frequent payments. For a large, one-off transfer, a normal on-chain payment is simpler, with no channel to keep an eye on.
Sources
  1. Mastering Bitcoin, 3rd edition, chapter 14: Second-Layer Applications (payment channels and Lightning). Andreas M. Antonopoulos and David A. Harding (CC BY-SA 4.0), GitHub, December 2023.
  2. The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments (draft 0.5.9.2). Joseph Poon and Thaddeus Dryja, 14 January 2016.
  3. BIP 141: Segregated Witness (Consensus layer). Bitcoin Improvement Proposals (github.com/bitcoin/bips), Assigned 21 December 2015.
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General education built from the publicly available sources listed above. Not financial, legal, tax or investment advice. Naming a company, project or regulator is not an endorsement either way. Last checked 2026-10-22. Terms and disclaimer.