Bitcoin is a digital currency that uses a globally replicated public ledger to record transactions. Participating computers receive, validate, and store all transactions. This generates a significant amount of data and is challenging to scale.
Built on top of the Bitcoin blockchain, the Lightning Network is an off-chain, routed payment channel network. While Bitcoin allows users to “send” transactions, the Lightning network is a “routing network”. The network is made up of nodes that are linked through peer-to-peer (P2P) channels. This enables low-cost, private, and trustless near-instant payments to be transmitted throughout the network in a secure manner via connected lightning nodes. When value is exchanged on the Lightning network it is referred to as a “payment”. The Bitcoin Network stores transactions permanently. The Lightning Network uses much fewer resources, which allows it to be cheaper and offers privacy benefits.
The Lightning Network is a "Layer 2" payment system supported by the Bitcoin network to provide security. Each time you open or close a channel, you have to execute an on-chain transaction. But once you open a channel, you can make and receive payments with that channel many many times without any need to interact with the Bitcoin base layer. As a result, the Lightning Network bypasses the standard proof-of-work security mechanism’s linear scalability issues. Payments that are referred to as “on-chain” are recorded transactions on the public Bitcoin ledger. Layer 2 payments via lightning are “off-chain” which are not visible on the underlying Bitcoin ledger.
The Lightning protocol allows for micropayments through a low latency environment without a need for middlemen. Lightning allows users to not give custody of their funds to a third party which reduces transaction costs and counterparty risk. Lightning operates via a payment channel between two nodes. Payment channels are the key building block for the Lightning network.
Through an initial opening and closing on-chain transactions, Lightning uses the Bitcoin base layer on-chain security to initialize multi-signature transactions allowing any participant to pay anyone else within the Lightning ecosystem. Unlike Bitcoin which allows transactions to be “sent” and broadcasted to all of the nodes on the network, Lightning “routes” payments across one or more channels following a path from the sender to the recipient.
The beauty in the Lightning Network is that time-locked transactions and cryptography allow for two-party payments can be made without needing to trust intermediaries. It is impossible for nodes in the Lightning Network to seize funds traveling through their channels even if they refuse to forward payments or take any actions. Lightning provides a decentralized, scaling micropayments solution on top of the Bitcoin blockchain.
You may have heard of the Lightning Network as “trustless”. This means that users can send payments to others without needing to rely on a 3rd party like a bank, PayPal, or credit card provider. The system is made so that you can transact with others because the system is built to prevent cheating. Bitcoin and the Lightning Network create a fairness protocol. A fairness protocol is the backbone of decentralized systems like Bitcoin, as it allows players who do not need to trust each other to produce fair outcomes without the need for a central authority.