How to send and receive payments on the Lightning Network
Learn how to use the Lightning Network by creating a wallet, replenishing it and using it to make and receive payments.
To send and receive payments on the Lightning Network, users must first create a Lightning wallet and top it up with Bitcoin.
After that, you can create payment channels and start making transactions.
In this article, we will tell users how to go through this process, starting with creating a Lightning wallet and ending with making the first payment on the Lightning network.
What is the Lightning Network?
The Lightning Network (abbreviated LN or simply Lightning) is a decentralized system of instant micropayments of large volume, which does not allow users to transfer the rights to store funds to trusted third parties.
This is a second-level protocol – a computer network built on top of the Bitcoin base layer (level 1), the blockchain itself.
To ensure the security of the Lightning Network, high standards of protection of the Bitcoin base level are used.
Bitcoin is a payment system designed for slow payments, transactions in which are completed within an hour.
This is due to the fact that Bitcoin collects transactions in blocks arranged on average with an interval of 10 minutes, and payments are considered safe after confirming six blocks, which is about an hour.
This is not an ideal option for micropayments and small transfers, which are usually inefficient due to high base-level fees.
Imagine people waiting for an hour to pay for a coffee or a train ticket when they scan their phone through the station gates.
High fees in total make the entire payment process clumsy, inefficient and too expensive for everyday transactions on the Bitcoin network.
The Lightning Network solves these problems by being one of the first implementations of a multi-party smart contract using embedded Bitcoin scripting. In the Lightning Network, payments are instantaneous, atomic and are not recorded in the blockchain, so no block confirmation is required to complete them.
The Lightning network can be used by retailers for terminals at points of sale, by individuals for transactions between devices, for example, for money transfers, or in any other cases where instant payments are required without third-party confirmation.
To meet the growing demand for payments and micropayments in Bitcoin, the network will need to support a much larger volume of transactions that cannot be scaled on the first-level chain.
That is why the Lightning Network is considered by many to be a solution for scaling Bitcoin in such a way as not to disrupt its decentralization and not to delegate trust and ownership.
What is the story behind the evolution of the Lightning Network?
It is important to realize how the Lightning Network came into being as well as how it was formed to be what it is today. In February 2015, Joseph Poon, as well as Taj Draya, got together to solve 1 of the most acute difficulties as well as pressing problems of the Bitcoin ecosystem: the increase in transaction fees.
Adopting a sample along with Satoshi Nakamoto’s work on payment channels, the ensemble of innovators began to function to reduce transaction fees. In January 2016, a detailed industrial act was issued, and the activity of Lightning Network accumulated expressions: all without exception more creators began to contribute together with the two.
Two years after the publication of the important document and the partnership of the creators, Lightning Labs (the company supporting Lightning Network) published a beta version for testing developers. This allowed the interest of the main agents of the scientific and technical industry in the projects of Lightning Labs and also to this, the one or another importance of the 2nd degree resolution can contribute to the ecosystem.
One of them, who exactly supported Lightning Labs, was the former Twitter CEO Beetle Dorsey, who was going to merge Lightning Network into Twitter. Eventually, 2020, the time of the COVID-19 pandemic, became a recognized year to point out Lightning Labs that published such important releases as Keysend as well as Wumbo Channel. Wumbo was a major release that increased the volume of transactions that could be performed through the Lightning Network.
Nowadays, the Lightning system period can boast a large number of products, plans, conclusions as well as studies according to verticals as well as functionality, including entertainment, wallets as well as payments, node management, infrastructure as well as fees. Listed below are several interesting functions as well as merchandise formed at the core of the Lightning Network:
Loop allows users to make Lightning transactions to Bitcoin addresses on the chain or send bitcoins on the chain directly to a Lightning channel.
Pool helps manage the liquidity needs of Lightning Network users.
Taro helps issue or mine assets on the Lightning Network.
Faraday is a data analytics tool that helps node operators optimize channels and fund flows.
With new projects being developed and several big names supporting Bitcoin and the Lightning Network, this ecosystem is becoming one of the most thriving in the cryptocurrency world.
How does the Lightning Network work?
As was announced earlier, Lightning Network applies the theory of payment channels described by the famous Satoshi Nakamoto. The act makes it possible to form a peer-to-peer payment path among 2 edges.
Already after the formation of counterfeit edges have the chance to send a limitless number of transactions, which are executed almost instantly and also at an affordable price. Someone functions as a personal small account worker, allowing users to pay including minor products and services, such as expresso, without affecting the Bitcoin line.
To form a payment path, the taxpayer must block a specific number of bitcoins in the bond. As soon as only Bitcoin is blocked, the addressee can demonstrate the immense amount according to his discretion. In case the consumer wants to keep the path not closed, someone can regularly add Bitcoin.
Applying the Lightning Network path, these two edges have a chance to carry out operations together with each other. Unlike simple transactions in the Bitcoin blockchain, certain procedures are handled differently. For example, if two edges open and also close a path, they are only updated in the main blockchain.
The 2 edges can transfer resources to each other an infinite number of times without telling the main blockchain. Since all transactions according to the layer-2 protocol without exception do not require the consent of absolutely all structures, this greatly stimulates the implementation of transactions.
The Lightning Network sections, which can carry out transactions, arise through the organization of single payment channels among the participating edges. Similarly, the Lightning Network line is the result of organizing a large number of payment channels.
At the end of the points, if 2 edges decide to finish the transaction, they have all chances to cover the way. After that, all transactions of counterfeit without exception are combined into 1 transaction, which is sent to the main line of Bitcoin to register. Unification makes it possible to exclude synchronous pollution of the bond by a large number of small transactions.
Combining them into 1 transaction will require less time and effort to prove. In the absence of payment channels small transactions prevent the largest ones, overloading the line and also increasing the load in the areas of control presence.
For example, in case Michael goes to the neighborhood coffee shop any period and also wants to pay with bitcoins, someone can pick up a small transaction for any cup of expresso, but because of the scalability difficulties of bitcoin, it can take more than a minute to prove the transaction. Mike will also need to pay large commissions to the Bitcoin bond, even though someone makes a tiny transaction.
Minor transactions function together with classic payment methods, such as playing cards, because such firms as Visa have the infrastructure to handle more than 24,000 TPS. In contrast to this, Bitcoin can prove 7 transactions per second in a simple period.
With the Lightning Network, Mike can open a payment channel with a coffee shop. Every coffee purchase is recorded in this channel and the store still gets paid. The transaction is cheap or perhaps even free, as well as instant. When Mike runs out of bitcoin deposits, he can either close the channel or refill it. When the channel closes, all of his transactions are recorded on the main Bitcoin blockchain.
The Lightning Network creates a smart contract between two parties. The rules of the agreement are written into the contract when it is created and cannot be broken. The smart contract code also ensures that the contract is automatically enforced, as contracts are initially entered into with predetermined requirements that all parties involved agree to.
When these requirements are met and the customer pays the right amount for the coffee, the contract is automatically fulfilled without the involvement of third parties. The Lightning Network anonymizes transactions within the payment channel once they are confirmed. All anyone can see is the overall transfer of value, not the individual transactions within it.
It is quite possible to conduct transactions without any restrictions outside the blockchain. Off-chain transactions can be entrusted to the blockchain because once the payment channels are closed, they end up on the mainnet. The minet is the arbiter of all transactions. Although off-chain protocols have their blockchain, this blockchain is always integrated back into the main chain, which is the basis of the Lightning Network design.
How to pay on the Lightning Network
To make payments on the Lightning network and users need to get a bitcoin wallet with support for the lighting network, in which funds are placed on a two-way “channel” bitcoin address with multiple signatures.
It is clear that a person or will undertake who needs to pay, will use bitcoin with access to Lightning for just as long and for sure.
Most wallets are mobile, because it is easy and often possible to make instant payments using a phone.
Applications for Bitcoin Wallets Lightning, Satoshi wallet, Phoenix and Cash, which can be downloaded on both iOS and Android.
Muun allows you to perform underwater swaps – fast trading between digital assets on the chain and off the chain.
An underwater swap is a type of off-chain cryptocurrency transaction that allows you to exchange one cryptocurrency for another.
The Lightning Network is used to ensure fast and inexpensive transactions.
Phoenix (non-custodial wallet) and Wallet of Satoshi provide almost instant secure payments with minimal fees.
Most wallets are not custodial, i.e. Bitcoin funds are only under the control of their owners, and have the function of multiple signatures as an additional level of protection of the private key.
By depositing BTC into the Lightning wallet, users open a channel, and this is their entry into the network.
Even if it is impossible to see, every time a user pays with a new person or a new enterprise using the Lightning Network, he opens a channel with this counterparty.
This channel can be direct, specially created between the two parties for the convenience of making transactions. Or it can be a routable payment via Lightning, which allows Lightning transactions between two unrelated parties to use a number of already existing channels.
After creating a channel, users get access to the public channels of the entire network, stitched together and ready for routing payments, and lightning nodes are looking for the best route to conduct a transaction.
That is why when a user pays with a new seller, he can do it instantly by simply scanning a QR code, without having to open a direct channel.
Payments pass through the channel instantly, with virtually zero fees, without constantly going through the Bitcoin base layer.
How to fund your Lightning Network wallet with BTC?
In order to open a channel or make a payment, the user needs to have a certain amount of BTC on the wallet. To top up a Bitcoin wallet, you need to perform the following usual actions:
- It is necessary to configure the wallet to use the basic Bitcoin chain (Bitcoin wallet) or the Lightning Network (Lightning wallet). Select the wallet network you want to use.
- Go to the “Get” item and click on it.
- Check that the transaction details are correct.
- Scan the QR code or copy and paste the receiving address to the wallet from which you receive funds.
- You have the option to add an invoice for payment. Click on the “Account” button to continue.
After receiving BTC and opening a channel, you can send and receive Bitcoin without time and amount restrictions.
The Lightning Network is still considered experimental and needs to be finalized, so it is not recommended to store significant amounts of BTC in the Lightning wallet.
Who runs the Lightning Network?
Lightning Network is an open source project, the idea of which belongs to research scientists Joseph Poon and TadgeDryjain 2015.
The project was conceived as a way to solve the problem of a significant increase in the commission for Bitcoin transactions and was a new payment system built on the basis of the Bitcoin blockchain.
In January 2016, the duo published a technical document, and the project began to gain momentum among developers and investors.
In the same year, Elizabeth Stark co-founded Lightning Labs, a company engaged in the development and support of the Lightning Network. The company has released a beta version of the ecosystem for testing by developers, demonstrating the value of second-level solutions for the entire ecosystem.
With the growth of funding and interest in the Lightning Network, such an ecosystem is gaining more and more popularity among bitcoin enthusiasts, especially in light of the creation of the Lightning Network smart contract, which can open up opportunities for decentralized finance and other applications.
How to receive Bitcoin on the Cash App?
To top up your Cash App account, you need to enable the withdrawal and input of bitcoins in the application by following these steps:
- Go to the “Money” tab on the main screen of CashApp.
- Select “Bitcoin”.
- To get started, click on the “Top up your account” button.
- Copy the address of your Bitcoin wallet to the appropriate sender field.
The unique wallet address can be used to receive Bitcoin from third parties to your account and will change after each successful deposit to ensure greater privacy. Within seven days, users can top up their account with up to $10,000.
Since the Bitcoin transfer takes place along the basic level chain, the confirmation of the transfer may take several hours.
How to use the Cash App Lightning Network?
In October 2022, Cash App added Lightning Network to the Bitcoin wallet to enable faster Bitcoin transactions with minimal fees.
Here’s how to Send BTC using the Lightning Network Cash App:
- Click on the “$” payment tab in the Cash App to view the home screen.
- Select the QR scanner in the upper left corner of the screen.
- Point the camera at the QR code of the Lightning invoice to scan it.
- Follow the instructions to confirm and pay for the request.
Similarly, the following steps show how to get Bitcoin using the CashApp Lightning network:
- Open the Cash App and go to the “Money” tab.
- Select “Bitcoin”.
- Click on the “Get” Bitcoin button.
- Tell the sender the QR code or link and scan it.
To receive Bitcoin using the Lightning Network, the sender does not need an account in the Cash App to pay for the user’s request, however, the sender will need a Bitcoin wallet with Lightning support.
What is Lightning Network?
Lightning Network is a payment protocol for utxo-based cryptocurrencies such as Bitcoin or Litecoin. As a “layer 2” protocol, it only uses the underlying layer to resolve disputes or to place capital in channels. With the Lightning Network, users can make instant payments with low fees without consuming the scarce resources of the underlying blockchain. Lightning Network helps realize the promise of efficient payments without compromising the security model of the underlying.
What token does Lightning Network use?
Lightning Network does not have its token. Instead, Lightning Network uses the token of the underlying network/blockchain. The Bitcoin Lightning Network is the most well-known. It uses Bitcoin and its smaller denomination, the Satoshi. There is also the Litecoin Lightning Network, and there could theoretically be other Lightning Networks.
Is the Lightning Network centralized?
The Lightning Network is made up of Lightning nodes. Anyone can start a Lightning node and anonymously join the network. There is no centralized authority controlling the network or denying users access to the network. Payments on the Lightning Network are encrypted to make it difficult to enumerate recipients or payers and censor transactions.
Is the Lightning Network custodial?
In cryptocurrency, non-custodial systems allow the user to have full control over their funds. This gives the advantage of full ownership but requires the user to manage their keys (i.e. the saying Not your keys, Not your coins). Each peer in the Lightning Network stores the keys to its funds in the channels along with its peer, which is called multi-signature. Security mechanisms ensure that funds are not lost if a peer leaves the network and that every balance change requires cooperation from both nodes. Payments are sent atomically, meaning that they either fail or succeed. Thus, there is no need for trust or prior relationship between nodes. With this in mind, the Lightning Network is considered optional.
What is a node?
Like other networks, the Lightning Network consists of nodes and routes (e.g., links) connecting those nodes. Individuals run compatible software, Lightning Network nodes, which communicate with each other and facilitate basic network functions such as opening and closing channels, and making, receiving, and routing payments.
What is a payment channel?
Two nodes can open a payment channel with each other, which requires at least one of them to contribute capital to a transaction on the circuit. The initially allocated capital determines the capacity of the channel for the duration of its existence. Once the channel is established, it can be used by the two parties for transactions with each other and as part of a route for other transactions through it.
What is a route?
While a Lightning Network node may have multiple peers, every member of the network can’t be connected to all others. Instead, payments on the Lightning Network pass through multiple nodes to their final destination. In this arrangement, intermediaries are considered routing nodes and may charge a fee.
Is the Lightning Network worth the money?
To join the Lightning Network, you or a peer must make at least one transaction on the blockchain, which is subject to the usual transaction fees on the underlying blockchain. Both parties can then transact with each other indefinitely at no cost. However, for a peer to send payments onward to its peer users, it usually charges a small fee. For payments going through multiple hops, this fee is charged multiple times by each router. The fee is known in advance of the payment, and since the payer chooses a route based on the fee as well, competition ensures that the network is cost-competitive.
Do I need to start a node to use the Lightning Network?
A Lightning Network node is required to send and receive payments on the Lightning Network. However, these nodes do not need to be on the network at all times. They can be turned on and off at will. These customers typically use private channels that are not reported on the larger network. In addition, they cannot direct payments on their own. They can be downloaded as apps or bundled with other apps.
Is it possible to make money on the Lightning Network?
On the Lightning Network, nodes that can efficiently route payments to their destination are rewarded. With care and diligence, it is possible to earn a small return on investment. Unlike other mechanisms, this return is not related to counterparty risk, but it is not risk-free.
What is BOLT Protocol
The BOLT protocol, also known as the Binary Open Lightning Transport protocol, is a communication protocol designed for the Lightning Network, which is a layer 2 scalability solution for blockchain-based cryptocurrencies like Bitcoin. The Lightning Network aims to address the scalability limitations of traditional blockchain networks by enabling fast and low-cost transactions off-chain, while still leveraging the security of the underlying blockchain.
BOLT protocol is specifically used for communication between Lightning Network nodes. It defines the rules and specifications for how Lightning Network nodes establish connections, negotiate channel parameters, exchange messages, and route payments. The protocol is binary-based, meaning it uses a binary format for efficient data transmission.
The BOLT protocol consists of a series of numbered specifications, each known as a BOLT. Each BOLT addresses a specific aspect of the Lightning Network protocol, such as routing, onion routing, channel management, and payment negotiation. These specifications provide a standardized way for different implementations of the Lightning Network to interoperate with each other.
By adhering to the BOLT protocol, Lightning Network implementations can ensure compatibility and interoperability across different software implementations. This allows Lightning Network nodes and wallets developed by different teams to communicate and transact with each other seamlessly, fostering the growth and adoption of the Lightning Network ecosystem.
The history of BOLT Protocol
The BOLT protocol has its roots in the development of the Lightning Network, which was first proposed by Joseph Poon and Thaddeus Dryja in a whitepaper titled “The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments” in February 2015. The paper outlined the concept of a second-layer protocol that could enable faster and more scalable transactions on top of the Bitcoin blockchain.
Following the publication of the whitepaper, various developers and contributors in the Bitcoin community started working on implementing the Lightning Network. As part of the development process, the need for a standardized communication protocol became apparent to ensure compatibility between different implementations. This led to the creation of the BOLT protocol.
The development of the BOLT protocol took place in an open and collaborative manner. Multiple teams and developers participated in its design and refinement, with input from various stakeholders in the Lightning Network ecosystem. The protocol was designed to be robust, secure, and efficient, enabling Lightning Network nodes to communicate and interact effectively.
The BOLT protocol specifications were initially released as a series of numbered documents, with each document referred to as a “BOLT.” These specifications provided detailed guidelines for different aspects of the Lightning Network protocol, including message formats, channel management, routing, and payment negotiation.
Over time, the BOLT protocol went through several iterations and revisions as the Lightning Network and its implementations evolved. New BOLTs were introduced, while existing ones were updated to address issues, improve efficiency, and incorporate new features.
The BOLT protocol has played a crucial role in the growth and adoption of the Lightning Network. It has facilitated interoperability between different Lightning Network implementations, allowing users to create channels, route payments, and transact seamlessly across various wallets and nodes in the network.
How BOLT Protocol works
The BOLT protocol, which stands for Binary Open Lightning Transport protocol, is the communication protocol used by Lightning Network nodes to interact with each other. It defines the rules and specifications for establishing connections, negotiating channel parameters, exchanging messages, and routing payments within the Lightning Network. Here’s an overview of how the BOLT protocol works:
- Channel establishment: To create a payment channel between two Lightning Network nodes, the BOLT protocol specifies a process called channel establishment. This involves the exchange of several messages between the nodes to negotiate channel parameters, such as the channel capacity, transaction fees, and other relevant details. The BOLT protocol defines the specific message formats and procedures for this negotiation process.
- Message exchange: Once a channel is established, Lightning Network nodes use the BOLT protocol to exchange messages. These messages include information about the state of the channel, such as updates to the channel balances, fee updates, and signatures required for channel closure or settlement. The BOLT protocol specifies the structure and content of these messages, enabling nodes to communicate effectively.
- Payment routing: One of the key features of the Lightning Network is its ability to route payments through a network of interconnected channels. The BOLT protocol provides the specifications for payment routing, allowing nodes to discover and select routes for forwarding payments. It includes mechanisms for pathfinding, fee calculations, and handling payment failures or timeouts.
- Security and privacy: The BOLT protocol incorporates security and privacy measures to ensure the integrity and confidentiality of Lightning Network transactions. It includes mechanisms for secure message authentication, cryptographic signatures, and onion routing to obfuscate payment routing information. These features help protect the privacy of users and prevent unauthorized access or manipulation of funds.
- Compatibility and interoperability: The BOLT protocol is designed to promote compatibility and interoperability between different Lightning Network implementations. By adhering to the protocol’s specifications, developers can ensure that their implementations can communicate and transact with other nodes in the network. This fosters a robust and decentralized Lightning Network ecosystem.
It’s important to note that the BOLT protocol is a living and evolving standard. As new features, optimizations, and enhancements are developed for the Lightning Network, the BOLT protocol specifications may be updated and revised to accommodate these changes.
Overall, the BOLT protocol plays a critical role in enabling efficient and secure communication among Lightning Network nodes, facilitating fast and scalable off-chain transactions while leveraging the security guarantees of the underlying blockchain.
Can BOLT Protocol be trusted
Yes, the BOLT Protocol can be trusted. The protocol has been developed collaboratively by a diverse group of contributors in the Lightning Network community. It has undergone extensive review, refinement, and testing by various developers, researchers, and stakeholders in the cryptocurrency space.
The BOLT Protocol’s design focuses on security, efficiency, and compatibility, aiming to facilitate interoperability between different Lightning Network implementations. It incorporates cryptographic mechanisms, message authentication, and privacy features to protect the integrity and confidentiality of Lightning Network transactions.
Moreover, the BOLT Protocol has been implemented by multiple independent Lightning Network software clients, which have been audited and scrutinized by the broader community. This extensive implementation and testing process helps ensure that the protocol functions as intended and is resilient to vulnerabilities or exploits.
It’s worth noting that no protocol or software is entirely immune to bugs or vulnerabilities. However, the open and collaborative nature of the BOLT Protocol’s development allows for continuous improvement and prompt addressing of any discovered issues. This iterative process helps enhance the protocol’s security and reliability over time.
When using the Lightning Network or any related software, it’s crucial to follow best practices, such as using trusted and regularly updated implementations, keeping software up to date, and taking appropriate security measures, such as securing private keys and using secure channels for communication.
In summary, while no system can provide absolute guarantees, the BOLT Protocol has been designed, tested, and implemented with security and interoperability in mind. It is trusted within the Lightning Network community and has been instrumental in the growth and adoption of the Lightning Network ecosystem.
Does BOLT Protocol charge a fee
The BOLT Protocol itself does not charge any fees. It is a communication protocol that facilitates the operation and interaction of Lightning Network nodes. However, within the Lightning Network, fees may be incurred for channel operations and payment routing.
In the Lightning Network, fees are typically determined by the participants of a payment channel and are negotiated during the channel establishment process. These fees can include channel opening fees, channel closing fees, and transaction fees for routing payments through the network. The specific fee structure and amount can vary depending on the policies set by the participating nodes.
The fee structure within the Lightning Network aims to incentivize channel operators to provide liquidity and routing services while ensuring the overall efficiency and scalability of the network. Fees are generally much lower compared to on-chain Bitcoin transactions, which makes the Lightning Network an attractive solution for microtransactions and frequent, low-value transfers.
It’s important to note that the determination and collection of fees within the Lightning Network are handled by the participating nodes or the Lightning Network wallet software being used. The BOLT Protocol itself does not dictate or enforce fee amounts or policies.
When using the Lightning Network, it’s recommended to review and understand the fee structure of the channels and routing nodes involved to make informed decisions about the costs associated with your transactions.