Illustrating Lightning By Example

We can illustrate the Lightning Network through a simple example. Bob wants to buy a coffee from a cafe. Bob opens a payment channel with the Cafe and deposits some BTC to create a balance sheet between them. 

When Bob buys a coffee the Cafe issues an Invoice via QR code which Bob pay through this Lightning Wallet on his phone.

The balance sheet between Bob/The Cafe gets updated; with every coffee Bob buys the relevant amount of BTC gets subtracted from Bob’s balance, added to the coffee shop’s balance. 

Both parties sign each updated balance sheet with their unique signature key. All this happens instantly, solving the issue of slow on-chain confirmations.

To close the payment channel and release the funds, either party can broadcast the latest agreed balance sheet to the Bitcoin main-chain network and get the transactions verified by Bitcoin’s consensus mechanism. 

• The Cafe will then receive the proceeds of Bob’s coffee purchases
• Bob will retain any unspent balance

Thus we can see how the Lightning Network significantly reduces the transactional load on the bitcoin blockchain. Thousands of transactions can occur within the micropayment channels between two parties. 

Only two transactions have to be processed by the blockchain – the micropayment channel’s (balance sheet) opening and closing. 

The Lightning Network structure is designed to connect individual users through micropayment channels in the most efficient way possible. Therefore, it isn’t unnecessary to open a payment channel with every individual actor you want to use. 

A may only know B, but if B knows C, then A can connect to C via B acting as a kind of router or hub.

All of this not only means faster transactions – some estimates put the upper limits of lightning network capability at nearly 1 million transactions per second – it also means lower transaction costs. The fewer transactions that have to be processed by bitcoin’s consensus mechanisms, the fewer fees have to be paid. 

The hope is that as the Lightning Network expands and the UX of wallets improves, you’ll be able to use just a few taps to buy a coffee by opening a channel with a coffee shop and scanning a QR code.