Module 4 of 4
The Lightning Network
How Lightning scales Bitcoin for everyday payments without compromising base-layer settlement, in concrete terms.
Film · The Lightning Network · 1:32
Block ———A short film in the language of this site's homepage: bitcoin's base layer, built for final settlement; Lightning on top, as Joseph Poon and Thaddeus Dryja set it out in 2016, where two people open a shared channel, pay each other again and again off the chain and settle the final balance on it; payments that hop across the network for tiny fees; sats, and pricing things in bitcoin; the honest limits; and a card payment's intermediaries against paying the person, final. It loops while on screen; use Pause to stop it. Turn on Narration to hear it explained aloud. A transcript follows.
Read the film, with its sources
- Module 4 of 4The Lightning Network. How do you buy a coffee with money whose base layer is built for final settlement?
- The base layerBitcoin’s base layer is built for final settlement: every node checks every transaction, so it adds blocks at a steady pace, about 6 an hour on average, and each block has limited room. It was never meant to carry every coffee in the world on its own.Joseph Poon and Thaddeus Dryja, The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments (14 January 2016, draft 0.5.9.2)
- 2016The Lightning Network is a second layer on top, set out by Joseph Poon and Thaddeus Dryja in 2016: payments move over a network of channels, “without a single custodial third party holding funds”. Two people open a channel with one bitcoin transaction that locks funds into an output both of them must sign to spend.Joseph Poon and Thaddeus Dryja, The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments (14 January 2016, draft 0.5.9.2)
- Off the chainThen they can pay each other again and again, nearly instantly, without touching the chain: each payment is a new balance that both of them sign and keep between themselves.Joseph Poon and Thaddeus Dryja, The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments (14 January 2016, draft 0.5.9.2)
- CheatingEach new balance cancels the ones before it. If one side tries to cheat by publishing an old balance on the chain, the other can claim every coin in the channel as a penalty, as long as they, or someone watching for them, catch it in time. Cheating does not pay.Joseph Poon and Thaddeus Dryja, The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments (14 January 2016, draft 0.5.9.2)
- SettlingWhen they are done, one more transaction settles the final balance on the chain. However many payments passed between them, the chain records two transactions: the opening and the close.
- RoutingYou don’t need a channel with everyone. If Alice has a channel with Bob, and Bob has one with Carol, Alice can pay Carol through Bob. The payment either arrives in full or not at all, and no one along the way can keep it. Each hop charges a small fee: the median advertised fee was about 0.01 per cent of the amount plus half a sat a hop. On 25 August 2026 the public network counted 16,405 nodes and 33,283 public channels holding about 3,843 bitcoin. These figures change all the time, and private channels are not in them.mempool.space Lightning network statistics (public channels it can see), 25 August 2026
- RoutingThe design paper describes payments across a chain of channels, enforced by contracts so that no one in the middle has to be trusted.Joseph Poon and Thaddeus Dryja, The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments (14 January 2016, draft 0.5.9.2)
- SatsOne bitcoin is 100,000,000 sats, so small payments are natural. Measured in fiat, bitcoin’s price moves, but one bitcoin is always one bitcoin: you don’t price bitcoin, you price things in it, down to the sat.
- The limitsIt has real limits. To receive, you need room on your side of your channels. Few prices are set in bitcoin yet. And Lightning is for spending: savings belong on the base layer, and keeping bitcoin safe takes care.
- Fiat or bitcoinA card payment in fiat currency runs through your bank, the card scheme that licenses it and the shop’s bank, which settle between themselves, and it can later be reversed by a chargeback. On Lightning you pay the person: no one holds the money in between, and once it arrives it is final.Payment Systems Regulator, Market review of scheme and processing fees, interim report (MR22/1.9), Appendix B: Glossary (May 2024)
- The Bitcoin TransitionSpend on Lightning, settle on the chain.
The Bitcoin base layer is optimised for final settlement. It does not scale to billions of daily payments, and it was never designed to. The Lightning Network is a second layer that handles high-volume, low-value payments off-chain, settling only the net result back to the base layer when necessary.
Payment Channels
Two parties open a Lightning channel by creating a bitcoin transaction that locks some funds into a multi-signature output — an output that requires both parties to sign before the funds can move. Once the channel is open, the two parties can update their respective balances by exchanging signed transactions back and forth between themselves, privately, without touching the base layer.
Each update revokes all previous states, so either party can always force the latest state onto the base layer if the other tries to cheat. This is enforced by penalty transactions — a cheater who tries to publish an old state loses the entire channel balance to the honest counterparty. The game theory makes cheating unprofitable.
Routing
You do not need a direct channel with everyone you want to pay. If Alice has a channel with Bob, and Bob has a channel with Carol, Alice can pay Carol by routing a payment through Bob. Bob never takes custody of the funds; the routing is atomic, enforced by cryptographic hash-locked contracts. Either the full payment completes across all hops, or none of it does.
This turns the Lightning Network into a global graph of channels. A payment from London to Lagos might route through a dozen different nodes, each operated independently, none of them knowing the full path or holding funds as an intermediary. The protocol finds the cheapest route automatically.
What This Enables
- Instant settlement — Lightning payments confirm in about one second, regardless of geographic distance
- Low fees — routing fees are usually a small fraction of a percent (well under a cent on a $10 payment), with many routes costing effectively zero
- No chargebacks — once a payment completes, it is final; there is no intermediary who can reverse it
- Micropayments — it is practical to pay a cent or less, enabling use cases (streaming payments for content, per-API-call billing) that were economically impossible with traditional payment rails
- No identity requirement — Lightning payments do not require the payer to identify themselves; there is no KYC at the protocol level
What It Does Not Do
Lightning is not a replacement for base-layer settlement. For large payments, for final settlement, for long-term holding, the base layer is the correct place. Lightning is for the transactions that would otherwise happen on credit card rails — small amounts, many per day, where speed and cost matter more than the absolute finality of base-layer confirmation.
The two layers together form a complete payment system. The base layer is the reserve and the final settlement network. Lightning is the spending layer. Neither works alone, and neither needs to do everything. The architectural decision to separate them is what allows Bitcoin to scale without compromising its base-layer guarantees.