The Lightning Network is a bitcoin scaling proposal. It divides transactions from the blockchain; all transactions are recorded on the underlying layer and handled by the underlying protocol.

The Lightning Network enables near-instantaneous money transfers and is free of charge, with no limit on throughput (as long as users can afford to send and receive money). To use the Bitcoin Lightning Network, two participants lock a certain amount of bitcoins to a special address that has the feature that the funds are unlocked only if both parties agree.

At this point, both parties share a private ledger; this ledger can allocate its own balance without notifying the main chain. Once the transaction is completed, the master chain can be notified and the master chain protocol updates the balances of both parties to the transaction. In this process, both parties do not need to trust each other. If either party tries to cheat, the protocol automatically detects it and imposes penalties.

Such a payment channel requires users to make only two on-chain transactions in total: the first to top up the address and the second to distribute the funds. As a result, thousands of transfers were able to take place between the two transactions. With future development and optimization, the second layer of technology could become a key component of the massive blockchain system.

 

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