Lightning Network

The Lightning Network (LN) is a "layer 2" payment protocol built on the Bitcoin blockchain and those of other cryptocurrencies. It is intended to enable fast transactions among participating nodes (independently run members of the network) and has been proposed as a solution to the bitcoin scalability problem. It is a peer-to-peer system for making micropayments of cryptocurrency through a network of bidirectional payment channels, without delegating custody of funds.

Transacting parties use the Lightning Network by opening a payment channel and transferring (committing) funds to the relevant layer-1 blockchain (e.g. Bitcoin) under a smart contract. The parties then make any number of off-chain Lightning Network transactions that update the tentative distribution of the channel's funds, without broadcasting to the blockchain. Whenever the parties have finished their transaction session, they close the payment channel, and the smart contract distributes the committed funds according to the transaction record.

To initiate closing, one node first broadcasts the current state of the transaction record to the network, including a proposed settlement, a distribution of the committed funds. If both parties confirm the proposal, the funds are immediately paid on-chain. The other option is uncooperative closure, for example if one node has dropped from the network, or if it is broadcasting an incorrect (possibly fraudulent) transaction state. In this case settlement is delayed during a dispute period, when nodes may contest the proposal. If the second node broadcasts a more up-to-date timestamped distribution, including some transactions omitted by the first proposal, then all committed funds are transferred to the second node: this punitive breach remedy transaction thwarts attempts to defraud the other node by broadcasting out-of-date transactions.