Post by @harfang • Hey

How does Lightning Network work? A thread 🧵 👇

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Lightning network is a routed network for Bidirectional payment channels. Because Lightning network involves a lot of technology, on this thread we will see only payment channels. The lightning network will be seen in another thread. Payment channels are trustless mechanisms to exchange bitcoin with low latency and low fees between two parties. But transactions are held off-chain and will only be settled on the blockchain at the end. By a channel, we mean the relation between two parties. A state channel is established between two parties, through a transaction that locks a shared state on the blockchain. This is called the funding transaction or anchor transaction. It is the initial balance of the channel. Parties exchange signed transactions off-chain called committing transactions that could be settled on the chain. Those transactions update the state and invalidate the old state so you can’t roll back. The channel can be closed on-chain cooperatively by creating a settlement transaction or by submitting the last committing transaction. During all channel lifetime, only two txs are needed on the bitcoin network.