Welcome to Mastering the Lightning Network (LN)! This second layer technology is changing the way people exchange value online and it's one of the most exciting advancements to happen to the Bitcoin network over the past few years. Right now, LN is in its infancy. In concept it's about 5 years old, in implementation about 3 years old. We're only beginning to see the opportunities LN provides including improved privacy, speed, and scale. With core knowledge of LN, you can help shape the future of the network while building opportunities for yourself as well. Some basic knowledge about Bitcoin is assumed but can be readily acquired by reading the first two chapters of _Mastering Bitcoin_ which are available for free, online.
While the bulk of this book is written for programmers, the first two chapters are written to be approachable by anyone regardless of technical experience. In order to better understand how the technology actually works, and why people use it, we'll be following a number of users and their stories. In this chapter, you'll meet Alice and walk through her thought process as she selects an LN wallet and prepares to make her first LN transaction, to buy a cup of coffee from Bob's Cafe. But first, we'll introduce some of the key concepts in LN. Let's get started with why the Lightning Network was proposed in the first place.
As Bitcoin grows, and the demand for transactions grows, the number of transactions in each block will increase until eventually hitting the block size limit. When blocks are full, excess transactions are left to wait in a queue and many users increase the fees they're willing to pay in order to buy space for their transaction in the next block. However, simply increasing block size does not solve the problem because it has the undesirable effect of centralizing the network. Because blockchains are gossip protocols, each node is required to know and validate every single transaction that occurs on the network. As such, the greater the block size, the greater the processing and storage requirements for each individual node. The greater the requirements, the fewer the nodes that will ultimately be run. But what if each node wasn't required to know and validate every single transaction? What if there was a way to have scalable off-chain transactions, without losing the security of the Bitcoin network?
In February 2015, Joseph Poon and Thaddeus Dryja proposed a possible solution to the Bitcoin Scalability Problem, with the publication of _"The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments"_ footnote:[Joseph Poon, Thaddeus Dryja - "The Bitcoin Lightning Network:
Scalable Off-Chain Instant Payments" (https://lightning.network/lightning-network-paper.pdf).] In the whitepaper, Poon and Dryja estimate that in order for Bitcoin to reach the 47,000 transactions per second processed at peak by Visa, it would require 8GB blocks. This would make running a node completely untenable for anyone but large scale enterprises and industrial grade operations. The result would be a network in which only a few users can actually validate the state of the ledger, which ultimately breaks the trust model of Bitcoin.
The Lightning Network proposes a new network, a "second layer", where users can transact with each other peer-to-peer, without publishing every transaction to the Bitcoin blockchain.
Users may transact on the Lightning Network as many times with as many users as they want, making use of the Bitcoin blockchain only in order to load bitcoin onto the network initially and to "settle", that is: remove bitcoin from the Lightning Network.
The result is that many more Bitcoin transactions can take place "off-chain", with only the initial loading and final settlement transactions needing to be validated and stored by Bitcoin nodes.
Aside from reducing the burden on nodes, these transactions will be cheaper for users as they do not need to pay blockchain fees, and more private for users as they are not published to all participants of the network.
As we start exploring the Lightning Network, we will encounter some technical terminology that might, at first, be confusing and a bit difficult to understand. While all of these concepts and terms will be explained in detail as we progress through the book, and are defined in the glossary, we need some basic explanations to get started. Here are some of the concepts you will encounter in the first two chapters of this book:
Node:: A computer that participates in a network. An LN node is a computer that participates in the Lightning Network. A Bitcoin node is a computer that participates in the Bitcoin Network. Typically a Lightning Network user will run an LN node and a Bitcoin node.
Blockchain:: A distributed transaction ledger, produced by a network of computers. Bitcoin, for example, is a system that produces a blockchain. The Lightning Network does is not itself a blockchain, nor does it produce a blockchain, it is a network that relies on existing blockchains for its security.
Transaction:: A data structure that records the transfer of control over some funds (eg. some bitcoin). The Lightning Network relies on Bitcoin transactions (or those of another blockchain), to track control of funds.
Payment Channel:: a payment channel is a _financial relationship_ between two nodes on the Lightning Network, typically implemented by multi-signature Bitcoin transactions that share control over bitcoin between the two LN nodes.
On-Chain/Off-Chain:: a payment is "on-chain" if it is recorded as a transaction on the Bitcoin (or other underlying) blockchain. Payments sent via payment channels between LN nodes, and which are not visible in the underlying blockchain, are called "off-chain" payments.
More detailed definitions of these and many other terms can be found in the <<gloassary>>. Throughout this book we will explain what these concepts mean and how these technologies actually work.
The Lightning Network is a network that operates as "second layer" protocol on top of Bitcoin and other blockchains. The Lightning Network enables fast, secure, private, trustless, and permissionless payments. Here are some of the features of the LN:
* Users of the Lightning Network can route payments to each other for very low cost and in real time.
* Users who transact on the Lightning Network do not need to wait for block confirmations for payments.
* Once a payment on the Lightning Network has completed, usually within a few seconds, it is final and cannot be reversed: like a Bitcoin transaction, a payment on the Lightning Network can only be refunded by the recipient.
* While "on-chain" Bitcoin transactions are broadcast and verified by all nodes in the network, transactions routed on the Lightning Network are transmitted between pairs of nodes and are not visible to everyone, resulting in much greater privacy.
* The Lightning Network uses onion routing, similar to the protocol used by The Onion Router (TOR) privacy network, so that even the nodes involved in routing a transaction are only directly aware of their predecessor and successor en route.
As an electronic cash system, Bitcoin preserves the three most important properties of money (medium of exchange, store of value, and unit of account).
Alice is a bitcoin user who wants to make fast, secure, cheap, and private payments for small retail purchases. She buys coffee with bitcoin, using the Lightning Network.
Bob owns a coffee shop, "Bob's Cafe". "On-chain" bitcoin payments don't scale for small amounts like a cup of coffee, so he uses the Lightning Network to accept bitcoin payments almost instantaneously and for very low fees.
Saanvi is a web designer and developer in Bangalore India. She accepts bitcoin for her work, but would prefer to get paid more frequently and so uses the Lightning Network to get paid for each small milestone she completes. With the Lightning Network, she can do more small jobs for more clients without worrying about fees or delays.
John is a 9-year-old boy from New Zealand, who wanted a games console just like his friends. However, his dad told him that in order to buy it, he had to earn the money by himself. Now John is an aspiring artist, so he knows that while he is still improving, he can't charge much for his artwork. After learning about Bitcoin, he managed to set up a website to sell his drawings across the internet. By using the Lightning Network, John was able to charge as little as $1 for one of his drawings, which would normally be considered a micro-payment and, as such, not possible with other payment methods. Furthermore, by using a global currency such as Bitcoin, John was able to sell his artwork to customers all over the world and, in the end, buy the games console he so desperately wanted.
Gloria is a teenage gamer from the Philippines. She plays many different computer games, but her favorite ones are those that have an "in-game economy" based on real money. As she plays games, she also earns money by acquiring and selling virtual in-game items. The Lightning Network allows her to transact in small amounts for in-game items as well as earn small amounts for completing quests.
Farel is an immigrant who works in the Middle East and sends money home to his family in Indonesia. Remittance companies and banks charge very high fees, and Farel prefers to send smaller amounts more often. Using the Lightning Network, Farel can send bitcoin as often as he wants, with negligible fees.
Wei is an entrepreneur who sells information services related to the Lightning Network, as well as Bitcoin and other cryptocurrencies. Wei is monetizing his API endpoints by implementing micro-payments over the Lightning Network. Additionally, Wei has implemented a liquidity provider service that rents inbound channel capacity on the Lightning Network, charging a small bitcoin fee for each rental period.
In this section, we will start by choosing software to demonstrate the Lightning Network and learn by example. We will examine the choices of two users who represent a common use-case for the Lightning Network. Alice, a coffee shop customer, will be using a LN wallet on her mobile device to buy coffee from Bob's Cafe. Bob, a merchant, will be using a LN node and wallet to run a point-of-sale system at his cafe so he can accept payment over the Lightning Network.
The Lightning Network is accessed via software applications that can speak the Lightning Network protocol. A _Lightning Network Node_ (or simply "node") is a software application that communicates on a peer-to-peer basis with other LN nodes, forming the Lightning _Network_ itself. Nodes also include "wallet" functionality, so they can send and receive payments over the Lightning Network and on the Bitcoin network.
Lightning network nodes also need access to the Bitcoin blockchain (or other blockchains for other cryptocurrencies). Users have the highest degree of control by running their own Bitcoin node and LN node.
However, LN nodes can also use a lightweight Bitcoin client (commonly referred to as Simplified Payment Verification (SPV)) to partially validate the correctness of their blockchain.
The term "Lightning Wallet" is somewhat ambiguous, as it can describe a broad variety of components combined with some user interface. The most common components of lightning wallet software include:
A lightning wallet may contain all of these functions, acting as a "full" wallet, with no reliance on any third-party services. Or, one or more of these components may rely (partially or entirely) on third-party services that mediate those functions.
A key distinction (pun intended), is whether the keystore function is internal or outsourced. In blockchains, control of keys determines custody of funds, as memorialized by the phrase "your keys, your coins; not your keys, not your coins". Any wallet that outsources management of keys is called a "custodial" wallet, because a third party (custodian) has control of the user's funds, not the user themselves. A "non-custodial" or "self-custody" wallet, by comparison, is one where the keystore is part of the wallet, and keys are controlled directly by the user.
Blockchains, especially open blockchains like Bitcoin, attempt to minimize or eliminate trust in third parties and empower users. This is often called a "trustless" model, though "trust-minimized" is a better term. In such systems, the user trusts the software rules, not third parties. Therefore, the issue of control over keys is a principal consideration when choosing a lightning wallet.
Every other component of a lightning wallet brings similar considerations of trust. If all the components are under the control of the user, then the amount of trust in third parties is minimized, bringing maximum power to the user. Of course, this is a direct tradeoff, as with that power comes the responsibility to manage complex software.
Every user must consider their own technical skills before deciding what type of lightning wallet to use. Those with strong technical skills should use a lightning wallet that puts all of the components under the direct control of the user. Those with less technical skill but a desire to control their funds, should choose a _non-custodial_ lightning wallet, even if some of the components (other than the keystore) rely on some trusted third parties.
Finally, those seeking simplicity and convenience, even at the expense of control and security, may choose a custodial lightning wallet. This is the least challenging option, but it _undermines the trust model of cryptocurrency_ and should, therefore, be considered only as a stepping stone towards more control and self-reliance.
Lightning wallets can be installed on a variety of devices, including laptops, servers, and mobile devices. To run an LN node and a Bitcoin node, you will need to use a server or desktop computer, as mobile devices and laptops are usually not powerful enough in terms of capacity, processing, battery life, and connectivity.
Lightning wallets have to strike a careful balance between complexity and user control. Those that give the user the most control over their funds, the highest degree of privacy and the greatest independence from third party services are necessarily more complex and difficult to operate. As the technology advances, some of these trade-offs will become less stark and users may be able to get more control without more complexity. However, for now, different companies and projects are exploring different positions along this control-complexity spectrum and hoping to find the "sweet spot" for the users they are targeting.
When selecting a wallet keep in mind that even if you don't see these trade-offs they still exist. For example, many wallets are attempting to remove the burden of channel management from users. To do so, they are introducing central "hub" nodes that their wallets all connect to automatically. While this trade-off simplifies the user interface and user experience, it introduces a Single Point of Failure (SPoF) and a potential privacy compromise, as these "hub nodes" become both indispensable and can see all the user's transactions.
In the next section we will introduce our first user and walk through their first LN wallet setup. We have chosen a wallet that is not as easy to use as some others currently available. This is because we want to show some of the underlying complexity and introduce some of the inner workings of the wallet during our example. You may find that your ideal wallet is further towards "ease of use", by accepting some of the control and privacy trade-offs. Or perhaps you are more of a "power user" and want to run your own LN and Bitcoin nodes as part of your wallet solution.
Alice is a long time Bitcoin user. We first met Alice in Chapter 1 of _"Mastering Bitcoin"_ footnote:["Mastering Bitcoin 2nd Edition, Chapter 1" Andreas M. Antonopoulos (https://github.com/bitcoinbook/bitcoinbook/blob/develop/ch01.asciidoc).], when she bought a cup of coffee from Bob's cafe, using a bitcoin transaction. Now, Alice is eager to learn about and experiment with the Lightning Network. First, she has to select an LN wallet that meets her needs.
Alice does not want to entrust custody of her bitcoin to third parties. She has learned enough about cryptocurrency to know how to use a wallet. She also wants a mobile wallet so that she can use it for small payments on-the-go, so she chooses the _Eclair_ wallet, a popular non-custodial mobile LN wallet.
When looking for a new cryptocurrency wallet, you must be careful to select a secure source for the software.
There are many fake wallet applications that steal your money, and some of these even find their way onto reputable and supposedly vetted software sites, like the Apple and Google application stores. Whether you are installing your first or your tenth wallet, always exercise extreme caution. A rogue app can not only steal money any money you entrust it with, it might also be able to steal keys and passwords from other applications by compromising your mobile device operating system.
[WARNING]
====
Always exercise great care when installing software on any device. There are many fake cryptocurrency wallets that will not only steal your money but might also compromise all other applications on your device.
====
Alice uses an Android device, and will use the Google Play Store to download and install the Eclair wallet.
Searching on Google Play, she finds an entry for "Eclair Mobile", as shown in <<eclair-playstore>>.
[[eclair-playstore]]
.Eclair Mobile in the Google Play Store
image:images/eclair-playstore.png["Eclair wallet in the Google Play Store"]
Alice notices a few different elements on this page, that help her ascertain that this is, most likely, the correct "Eclair Mobile" wallet she is looking for. Firstly, the organization "ACINQ" footnote:[ACINQ: Developers of the Eclair Mobile LN wallet (https://acinq.io/).] is listed as the developer of this mobile wallet, which Alice knows from her research is the correct developer. Secondly, the wallet has been installed "10,000+" times and has more than 320 positive reviews. It is unlikely this is a rogue app that has snuck into the Play Store. Satisfied by these findings, Alice installs the Eclair app on her mobile device.
==== Creating a New Wallet
When Alice opens the Eclair Mobile app for the first time, she is presented with a choice, to "Create a New Wallet" or to "Import an Existing Wallet". Alice will create a new wallet, but let's first discuss why these options are presented here and what it means to "import an existing wallet".
As we mentioned in the beginning of this section, Eclair is a _non-custodial_ wallet, meaning that Alice has sole custody of the keys used to control her bitcoin. This also means that Alice is responsible for protecting and backing up those keys. If Alice loses the keys, no one can help her recover the bitcoin and it will be lost forever.
With the Eclair Mobile wallet, Alice has custody and control of the keys and therefore full responsibility to keep the keys safe and backed up. If she loses the keys, she loses the bitcoin and no one can help her recover from that loss!
====
===== Mnemonic Words
Similar to most Bitcoin wallets, Eclair Mobile provides a _mnemonic phrase_ for Alice to back up. The mnemonic phrase consists of 24 English words, selected randomly by the software, and used as the basis for the keys that are generated by the wallet. The mnemonic phrase can be used by Alice to restore all the transactions and funds in the Eclair Mobile wallet in the case of a loss, for example because of a lost mobile device, software bug, or memory corruption.
[TIP]
====
The _mnemonic phrase_ is often mistakenly called a "seed". In fact, a seed is constructed _from the mnemonic_ and is something different.
====
When Alice chooses to "Create a New Wallet", she will be shown a screen with her mnemonic phrase, which looks like the screenshot in <<eclair-mnemonic>>.
[[eclair-mnemonic]]
.Eclair Mobile: New Mnemonic Phrase
image:images/eclair-mnemonic.png["Eclair Mobile: New Mnemonic Phrase"]
In <<eclair-mnemonic>> we have purposely obscured part of the mnemonic phrase to prevent readers of this book from reusing the mnemonic.
[[mnemonic-storage]]
==== Storing the Mnemonic Safely
Alice needs to be careful to store the mnemonic phrase in a way that balances the need to prevent theft and accidental loss. The recommended way to properly balance these risks is to write two copies of the mnemonic phrase on paper, with each of the words numbered (the order matters!).
Once Alice has recorded the mnemonic phrase, after touching "OK GOT IT" on her screen she will be presented with a _quiz_ to make sure that she correctly recorded the mnemonic. The quiz will ask for three or four of the words at random. Alice wasn't expecting a quiz, but since she recorded the mnemonic correctly she passes without any difficulty.
Once Alice has recorded the mnemonic phrase, and passed the "quiz", she should store each copy in a separate secure location such as a locked desk drawer, or a fireproof safe.
[WARNING]
====
Never attempt a "DIY" security scheme that deviates in any way from the best practice recommendation in <<mnemonic-storage>>. Do not cut your mnemonic in half, make screenshots, store on USB drives or cloud drives, encrypt it, or try any other non-standard method. You will tip the balance in such a way as to risk permanent loss or theft. Many people have lost funds, not from theft, but because they tried a non-standard solution without having the expertise to balance the risks involved. The best practice recommendation is carefully balanced by experts and suitable for the vast majority of users.
==== Getting Your First bitcoin on the Lightning Network
* Trade fiat for bitcoin (as in Mastering Bitcoin)
[[using_own_bitcoin]]
==== Process for people who already own bitcoin ====
* send bitcoin to lightning wallet (1 onchain transaction - soon nodes / wallets may support funding a channel directly without sending bitcoin to the lightning network wallet first)
* find a node to open a channel with (Node explorer / Autopilots / ...)
* open a connection
* open a channel
* wait confirmations for the channel to become operational
