What is Lightning Network?

A payment network built on top of Bitcoin in which two parties open a channel, exchange signed balance updates off-chain, and settle to the blockchain only when the channel closes.

Payments clear in seconds for a fraction of an on-chain fee. Funds in an open channel sit in a hot wallet; see on chain off chain.

A handful of exchanges support Lightning deposits and withdrawals for Bitcoin, which is where most people first encounter it. For small amounts the cost difference against an on-chain send is large enough to change what is practical.

How it works

Two parties fund a channel with an on-chain transaction that locks Bitcoin into an address requiring both signatures. From then on they can reassign the balance between themselves by exchanging signed updates, as many times as they like, with nothing touching the blockchain. Closing the channel publishes the final balance in one on-chain transaction.

You do not need a channel with everyone you pay. Payments route across the network through intermediaries, and each hop is made safe by a hashed timelock contract: a hop is paid only if the next hop was, and every hop can reclaim its funds if the payment stalls. The specification is published as the BOLT documents.

Routing fees are small and have two parts, a fixed base fee and a proportional fee quoted in millionths of the amount, each node setting its own. Total cost is the sum across the route.

Three constraints shape what actually works. Channel capacity caps any single payment, so a large amount may not route. Receiving requires inbound liquidity, meaning someone else's balance pointed at you, which is why a fresh wallet can send before it can receive. And a channel's funds are in an online wallet by necessity, since responding to an old-state channel close requires being available, which is what watchtower services exist to cover.

Example

Illustrative arithmetic. You withdraw 200,000 satoshis, about 0.002 BTC, from an exchange over Lightning. Routing across two hops costs a base fee of 1 satoshi per hop plus a proportional fee of, say, 100 parts per million, which is 20 satoshis on this amount per hop. Total routing cost is roughly 42 satoshis. The equivalent on-chain withdrawal would pay the exchange's own withdrawal fee plus a network fee, both of which are typically thousands of satoshis regardless of the amount sent. On a small withdrawal the difference is most of the cost.

Why it matters when you buy

If you buy small amounts regularly, the withdrawal fee can exceed the trading fee, and Lightning support is one of the few things that changes that arithmetic materially. Check which venues support it on the exchange pages and compare withdrawal costs on the fee comparison. For larger amounts held long term, an on-chain withdrawal to cold storage remains the usual route.

Related terms

• htlc: the contract making routed payments safe
• payment channel: the two-party structure underneath
• on chain off chain: the settlement distinction it rests on
• hot wallet: what an open channel necessarily is
• network fee: the on-chain cost it avoids
• satoshi: the unit Lightning amounts are quoted in

Questions

Why can I send but not receive?

Receiving needs inbound liquidity, meaning a channel with balance on the other side. A newly funded wallet has capacity pointed outward only until it receives some, or a service opens a channel toward it.

Is Lightning safe for large amounts?

Channel capacity limits large payments, and the funds sit in an online wallet by design. Most users treat it as a spending layer rather than storage.

What happens if my payment gets stuck?

The conditional payment is waiting for either the secret or its deadline. It resolves automatically when the timelock expires, which can take hours but does not lose the funds.