The Lightning Network is a second-layer payment protocol that operates on top of a blockchain-based cryptocurrency.
It enables fast transactions among participating nodes and has been touted as a solution to the Bitcoin scalability problem.
This framework features a peer-to-peer (P2P) system for making micropayments of cryptocurrency via a network of bidirectional payment channels without delegating custody of funds.
Transactions on the Lightning Network are only added to the blockchain when the two parties that are involved in a payment channel open or close the channel.
Therefore, multiple transactions can be sent within a single channel without requiring the consensus of the entire blockchain, making the transaction process considerably faster.
Normalized use of the Lightning Network involves the opening of a payment channel by committing a funding transaction to the relevant base blockchain or first layer.
This in turn is followed by making any number of Lightning transactions that update the distribution of the channel's funds without broadcasting those to the blockchain.
Additionally, these may or may not be followed by closing the payment channel by broadcasting the final version of the settlement transaction to distribute the channel's funds.
How Does the Lightning Network Affect Everyday Users?
For example, one Lightning Network user, Jim, can open a payment channel with a local corner store and deposit $100 worth of Bitcoin in it.
Every time he visits the store, he can use his balance to instantly buy whatever he pleases.
At the same time, Jane, another Lightning Network user, has opened up a channel with the cafe next to the corner shop. She also buys things from the corner shop.
Because Jim has opened a channel with the corner store, Jane can also use the Lightning Network to pay for things there.
Similarly, Jim can use the Lightning Network at the cafe.