Table of contents 1.
What is the Lightning Network? 2.
How do I use it? a)
Creating a payment channel b)
Sending and routing payments c)
Closing a channel 3.
Wallets and nodes 4.
Planned features 5.
Security risks 6.
Useful sources of information1. What is the Lightning Network?The Lightning Network is an alternative to the traditional Bitcoin on-chain transactions. It doesn’t replace them completely because on-chain transactions are still needed for closing and opening payment channels. The Lightning Network is a second layer solution and is fully opt-in. Transactions done between Lightning Network participants have no negative impact on the Bitcoin network. The Lightning Network allows for instant and extremely cheap P2P (micro)payments.
The Lightning Network consists of nodes which maintain payment channels with some of the participants of the network.
2. How do I use it?To start using the Lightning Network, you have to use a compatible software (see
Wallets and nodes section). Every wallet has a different setup process and features so you should look up a guide for the one you choose on your own.
a) Creating a payment channelWhat is exactly a payment channel?
Payment Channel is class of techniques designed to allow users to make multiple Bitcoin transactions without commiting all of the transactions to the Bitcoin block chain. In a typical payment channel, only two transactions are added to the block chain but an unlimited or nearly unlimted number of payments can be made between the participants.
Two people establish a payment channel by locking up funds in a multi-signature address which needs both signatures to spend from it. Payment channels can be used as long as both participants remain cooperative. The maximum size of a channel is about 0.16 BTC. All major implementations now allow node operators to lift this limitation manually.
b) Sending and routing paymentsBoth parties transact without broadcasting the current state of their trade to the blockchain. They both keep the copy of the channel information. Each time a channel is updated, both parties sign a commitment transaction which keeps a record of the current state of the channel. This transaction can be published to perform an uncooperative channel close.
Sending payments over the Lightning Network is possible as long as there is at least one path from you to the other person through other nodes which have open channels between themselves. All nodes in the path must have enough liquidity. Each node is rewarded for routing the payment accordingly to their fee policy. Large payments can be split and routed via different routes thanks to MPPs (multipart payments); while all implementations support them, most wallets don't.
Ensuring that there is enough liquidity is the most difficult thing for most beginners. When you open a channel to someone, you gain outbound capacity. You won't be able to receive any coins through that channel unless you spend the channel reserve (1-3% of the channel's capacity). The more coins you spend, the more you will be able to receive. If someone opens a channel to you then you will gain incoming capacity and be able only to receive through that channel unless you receive more coins than the value of the channel reserve.
Secure payment routing would not be possible without
Hashed Timelock Contracts (HTLCs). The example below explains why they are needed.
1. Alice opens a payment channel to Bob, and Bob opens a payment channel to Charlie.
2. Alice wants to buy something from Charlie for 1000 satoshis.
3. Charlie generates a random number and generates its SHA256 hash. Charlie gives that hash to Alice.
4. Alice uses her payment channel to Bob to pay him 1,000 satoshis, but she adds the hash Charlie gave her to the payment along with an extra condition: in order for Bob to claim the payment, he has to provide the data which was used to produce that hash.
5. Bob uses his payment channel to Charlie to pay Charlie 1,000 satoshis, and Bob adds a copy of the same condition that Alice put on the payment she gave Bob.
6. Charlie has the original data that was used to produce the hash (called a pre-image), so Charlie can use it to finalize his payment and fully receive the payment from Bob. By doing so, Charlie necessarily makes the pre-image available to Bob.
7. Bob uses the pre-image to finalize his payment from Alice
Mobile clients establish private channels which do not take part in the payment routing.
c) Closing a channelPayment channels can be closed either cooperatively or uncooperatively (forcefully).
Uncooperative channel close can be initiated at any time. Although, it doesn't make much sense to do it if the other node is online and fully cooperative. By default, one has to wait 144 blocks (~24 hours) before one will be able to spend the closing transaction. This value is decided during initial channel negotiations. Note that this value can be significantly higher in some cases. For example,
Eclair Mobile sets the delay to 2048 blocks (~2 weeks) if one enables receiving over the LN. The delay gives the other party time to come back online and check if the latest commitment transaction was published. If the other party broadcasts an old commitment transaction then one can revoke it and broadcast a penalty transaction within the delay.
Cooperative channel close can be initiated only when the other party is responsive. The closing transaction can be spent immediately if both parties agree on the current state of the channel.
3. Wallets and nodesThere are only few Lightning Network implementations and each of them might contain some bugs which may lead to the loss of funds. Keep in mind that the Lightning Network is still in beta. iOS and Android wallets are easy to use and don’t require much setup as opposed to LND, Eclair and c-lightning which are used to run stand-alone nodes.
ImplementationsDesktop clientsAndroid clientsiOS clients4. Planned features- Dual-funded channels - two users instead of one will be able to fund a payment channel as originally described in the Lightning Network Paper.
- Eltoo - eltoo will be an alternative to the current method of settling payments between users. Channel updates are done by building a chain of timelocked transactions. A soft fork is needed to make eltoo available on the Lightning Network (in order to avoid having to broadcast the whole transaction history between users). Here you can find out which opcodes need to be modified.
- Channel factories - existing Lightning Network channels could be used for creating new channels without broadcasting anything to the rest of the Bitcoin network. Normally, a channel is opened to only one person. In channel factories we have multiple people forming a group. Group members maintain channels between themselves. More interested users = higher savings. If one of the participants is uncooperative, existing channels are not affected - new channels can't be created, though.
- Splicing In/Out - currently, it is not possible to add or remove funds from channels without reopening them.
There are a few things which can be changed in the Bitcoin code in order to improve privacy. Introducing
Schnorr, MAST and Taproot would make transactions opening/closing channel indistinguishable from any other ordinal transaction.
5. Security risks- Improper timelocks - sufficient time should be given in case of interaction with non-cooperative or malicious channel counterparties.
- Forced expiration spam - closing many channels at the same time might lead to filling up the whole block completely. If the spam lasts enough time, some timelocked transactions might become valid.
- Data loss - most of the Lightning Network clients don’t provide reliable method of backup. Using an old copy of the database might be considered as cheating. The other party broadcasts a penalty transaction in such a case. Data Loss Protection is available in all implementations.
- Coin theft - most of the Lightning Network nodes work 24/7 and store their coins in hot wallets which makes it easier for an attacker to steal them.
- Colluding miner attacks - miners have power to decide which transactions they want to include in the block so they can refuse certain transactions selected by an attacker. This attack is very unlikely to happen due to high cost and complexity (all miners would have to cooperate).
6. Useful sources of informationbitcointalk:
The Lightning Network FAQ,
Electrum Lightning Network walkthrough,
Lightning Network Discussion ThreadLightning Network explorers:
1ml.com,
lightblock.meNews:
Telegram channel,
bitcoinlightning.com,
coindesk,
Cointelegraph
). Perhaps we can start another thread of this "Lightning series": "Lightning Network Experiences"?
Some people might even target these "scraps" because it is being discarded by the big boys? 
