Lately, I’ve seen many claims that the Lightning Network requires third-party trust or custodial services or similar nonsense. This shows some have not yet understood how it works. Here’s a brief description to clear that up.
Lightning is, very simply put, nothing more than two Bitcoin multi-sig transactions, signed by two people. The opening transaction and the closing transaction.
Two people pay an amount each into an initial Bitcoin multi-sig transaction and broadcast it to the Bitcoin blockchain. This is called “opening a channel”. For example, each one of the two adds .5 BTC to it.
After a channel is opened, at any time the two people can create a so-called “closing transaction” where the balance is modified, say .4 BTC/.6 BTC. But here’s the brilliant trick. They both hold onto this closing transaction without broadcasting it to the Bitcoin blockchain.
This means they could claim the funds using the most recent closing transaction at any time, or they can refrain from broadcasting it and simply keep exchanging closing transactions for a very long time.
This makes the lightning network nearly infinitely scalable since any two transaction-intensive parties can handle the workload amongst themselves. Up to this point, the Bitcoin blockchain still only knows about the .5BTC/.5BTC multi-sig transaction.
At any time, one of the two can decide to broadcast the final closing transaction to the blockchain, thus settling the payment amounts. This means Lightning requires zero third-party or custodial trust. It’s a pure peer-to-peer process.
The final piece to the puzzle is the question: what if one of the two broadcasts an older closing transaction instead? This is handled by a mechanism called payment revocation.
Whenever the two sign a new closing transaction, they also reveal to each other a secret to the old closing transaction which would allow the other party to sweep the funds completely, were the old closing transaction to be broadcast.
If the other party broadcasts an old closing transaction, you have 3 days to stop it by revealing the secret before they can redeem the funds. The cheater gets cheated. The only downside is you have to be online at least once every 3 days. But there are solutions to that too.
And that’s it. That’s all the Lightning Network is. It’s just a brilliant way to use Bitcoin’s multi-sig capabilities to safely move transactions off-chain, making it infinitely scalable and almost fee-less while sacrificing none of the security.
If you liked this and want to learn more about Bitcoin in an easily-digestible way, check out my book, A brief introduction to Bitcoin.
