Lightning Network
The Lightning Network is a payment protocol that was created on top of blockchain-based cryptocurrencies such as example Bitcoin. It reduces the number of interactions on the blockchain and thus enables faster transactions and thus higher levels of scalability. It is a series of off-chain payment channels where two people can conduct a very fast low-cost transaction or series of transactions, which are later settled on-chain. It adds another layer to Bitcoin’s blockchain enabling users to create payment channels between any two parties on that extra layer.
The Lightning Network (LN) is a "layer 2" payment protocol layered on top of Bitcoin (and other blockchains and cryptocurrencies). It is intended to enable fast transactions among participating nodes and has been proposed as a solution to the bitcoin scalability problem. It features a peer-to-peer system for making micropayments of cryptocurrency through a network of bidirectional payment channels without delegating custody of funds.
Normal use of the Lightning Network consists of opening a payment channel by committing a funding transaction to the relevant base blockchain (layer 1), followed by making any number of Lightning Network transactions that update the tentative distribution of the channel's funds without broadcasting those to the blockchain, optionally followed by closing the payment channel by broadcasting the final version of the settlement transaction to distribute the channel's funds.
To settle the payments the channel must be closed. To initiate this process one node broadcasts the most up to date settlement transaction to the network. The next events can broadly be thought of in two ways, a cooperative closure in which both parties confirm a distribution and funds are immediately settled and an uncooperative closure. Uncooperative closes may be legitimate for example if one node is no longer part of the network or fraudulent with one node broadcasting an outdated, incorrect distribution. In uncooperative closures the funds are not settled instantly but there is a dispute period within which nodes may contest the broadcast distribution. If the second node broadcasts a more up to date distribution then the funds are transferred entirely to them. This punitive act, known as the breach remedy transaction, prevents nodes from attempting to defraud the network by broadcasting out-of-date transactions.
