Lightning Network is a network of personal payment channels that bitcoin users can use without immediately adding the payments to the main bitcoin blockchain. They can simply create a channel between them and use the channel for transactions. The only time they need to interact with the main Bitcoin blockchain is when they need to close a channel.
The introduction of the Lightning network solves a number of problems. First, the users do not have to pay the fees associated with the transactions on the main Bitcoin blockchain. While these fees are not mandatory, when the Bitcoin network has a lot of transactions, it is likely that the miners will be processing the transactions that come with fees first, causing a delay in processing of the transactions that do not come with fees included in them. Second, the network solves the issue of speed. A transaction on the Bitcoin network needs at least 6 confirmations. A confirmation is when at least one block on the main blockchain references the transaction, be it directly or via a linked hash. Because the Bitcoin network aims at creating a block of the Bitcoin blockchain every 10 minutes by design, it may take up to an hour for users to receive six confirmations. While this may work for those who transact in Bitcoins occasionally, it doesn’t work for points of sale that process a lot of transactions and prefer to convert the cryptocurrency into fiat money quickly to avoid the risks associated with Bitcoin volatility.
The Lightning Network is a peer-to-peer network, which means that if John has a channel with Tom and Tom has a channel with Ann, John can send money to Ann using the John-Tom and Tom-Ann channels, also without touching the main Bitcoin blockchain.
Because the participants of the transactions on the Lightning Network do not have to interact with the mail blockchain, the transactions can happen almost instantly. The users are paying each other directly, so the network allows the individuals and organizations send payments without using a third party such as a bank. The lightning network also reduces the amount of work that the miners on the main blockchain have to do.
Channels on the network can stay open for any amount of time, meaning that if two parties believe that they will need to participate in a transaction with each other in the future, they can simply keep the channel open. There are no fees or mandatory waiting periods associated with channels on the Lightning Network.
At the same time, if the parties choose to do so, they can choose a channel between them immediately. In this case, the parties will have to wait for confirmations from the main Bitcoin blockchain to make sure that the channel closes in a manner acceptable to both parties. If one party tries to close a channel and steal money from it, the other party has a period of time during which it can act and block the transaction. Users can also choose to introduce a third party to this step for the purpose of transaction verification but they don’t have to do so.
Just like the Bitcoin network itself, the Lighting Network treats security of the users, the funds and the transactions extremely seriously. Users can encrypt the routing information, preventing nodes processing the transaction from knowing anything about the participants of the transaction.
The network also gives its users an opportunity to route payments over several blockchains, including altcoin blockchains and altcoin destinations. The only condition here is that all the participants of the route need to support the same hashing algorithm and be able to use and create hash locks and time locks.
Finally, the Lighting network can support payments that are less than one satoshi. Satoshi is the smallest unit of bitcoin. It is equal to one hundred millionth of a coin on the Bitcoin network. While this may seem like a really small number (at the price of Bitcoin at USD$15,000, a Satoshi would be USD$0.00015, meaning that 1 cent is 66.6 Satoshis), as the value of Bitcoin keeps going up, people may need to use amounts less than one Satoshi and the Lighting Network would be able to accommodate such payments, too.