[role="pagenumrestart"]
[[ch03_How_Lightning_Works]]
== How the Lightning Network Works

Now that we've followed Alice as she set up a Lightning Wallet and purchased a coffee from Bob, we'll look under the hood and unpack the different components of the Lightning Network involved in that process.
This chapter will give a high-level overview and will not delve into all the technical details.
The goal is rather to help you to become aware of the most important concepts and building blocks of the Lightning Network.

If you have experience in computer science, cryptography, Bitcoin, and protocol development, then this chapter should be enough for you to be able to fill out the connecting details by yourself.
If you are less experienced, this chapter shall give you a good enough overview so you will have an easier time understanding the formal protocol specifications, known as BOLTs (Basis of Lightning Technology).
In case you are a beginner, this chapter will help you better understand the technical chapters of the book.

We'll start with a one sentence definition of what the Lightning Network (LN) is and break it down in the remainder of this chapter.

**The Lightning Network (LN) is a peer-to-peer network of _payment channels_ implemented as smart contracts on the _Bitcoin blockchain_ as well as a communication protocol that defines how participants set up and execute these smart contracts**

=== Payment channels basics

We will see that a payment channel is simply a 2-out-of-2 multisignature address on Bitcoin, for which you hold one key and your channel partner holds the other key.
You and your channel partner negotiate a sequence of transactions that spend from this multisignature address. Instead of transmitting and recording these transactions on the Bitcoin blockchain, you both hold on to them, unspent.
The latest transaction in that sequence encodes the balance of the channel and defines how that balance is divided between you and your channel partner.
Thus, adding a new transaction to this sequence is equivalent to moving some part of the channel balance from one channel partner to the other, without the Bitcoin network being aware of it. As you negotiate each new transaction, changing the allocation of funds in the channel, you also revoke the previous transaction, so that neither party can regress to a previous state.
Each transaction in the sequence makes use of Bitcoin's scripting language, and thus the negotiation of funds between you and your channel partner is managed by a Bitcoin smart contract.
The smart contract is set up to penalize a channel member if they try to submit a previously revoked state of the channel.

[NOTE]
====
If you have an unpublished transaction from a 2-of-2 multisignature address, that pays you part of the balance, then a signature from the other party ensures that you can independently publish this transaction anytime by adding your own signature.

The ability to hold a partially-signed transaction, offline and unpublished, with the option to publish and own that balance at any time, is the basis of the Lightning Network.
====

=== Routing payments across channels

Once several participants have channels from one party to another, a payment can also be "forwarded" from payment channel to payment channel, by setting up a route across the network connecting several payment channels together.

For example, Alice can send money to Charlie if Alice has a channel with Bob and Bob has a channel with Charlie.

By the design of the Lightning Network, it is possible to extend the smart contracts which operate the channel so that Bob has no way of stealing the funds that are being forwarded through his channels.

In the same way that the smart contract protects the channel partners, so they don't need to trust each other, the entire network protects the participants so that they can forward payments without trusting any of the other participants.

Since the channels are constructed from multisignature addresses and the balance update transactions are pre-signed Bitcoin transactions, all the trust that is needed to operate the Lightning Network comes from the trust in the decentralized Bitcoin network!

The aforementioned innovations are certainly the major breakthrough that allowed the creation of the Lightning Network.
However, the Lightning Network is so much more than the cryptographic protocols on top of the Bitcoin scripting language.
It is a comprehensive communication protocol that allows peers to exchange Lightning messages to achieve the transfer of bitcoin.
The communication protocol defines how Lightning messages are encrypted and exchanged.

The Lightning Network also uses a "gossip" protocol to distribute public information about the  channels (network topology) to all the participants.

Alice, for example, needs the network topology information to be aware of the channel between Bob and Charlie, so that she can construct a route to Charlie.

Last but not least, it is important to understand that the Lightning Network is nothing more than an application on top of Bitcoin, using Bitcoin transactions and Bitcoin Script. There is no "Lightning coin" or "Lightning blockchain".
Beyond all the technical primitives, the Lightning Network protocol is a creative way to get more benefits out of Bitcoin by allowing an arbitrary amount of instant payments with instant settlements without the necessity to trust anyone else but the Bitcoin network.

=== Payment channels

As we saw in the previous chapter, Alice used her wallet software to create a payment channel between her and another Lightning Network participant.
From a computer science perspective, a payment channel is a cryptographic communication protocol between you and your channel partner.
It allows the channel partners to send funds back and forth as often as they wish.

A channel is only limited by two things:
First, the time it takes for the internet to transfer the few bytes of data that the protocol requires to move funds from one end of the channel to the other.
Second, the capacity of the channel, meaning the amount of bitcoin that is committed to the channel when it is opened.

Payment channels have a few very interesting and useful properties:

* Because the time to update a channel is primarily bound by the communication speed of the internet, making a payment on a payment channel is almost instant.

* If the channel is open, making a payment does not require the confirmation of Bitcoin blocks. In fact - as long as you and your channel partner follow the protocol - it does not require any interaction with the Bitcoin network or anyone else other than your channel partner.

* The cryptographic protocol is constructed such that there is little to no trust needed between you and your channel partner. If your partner becomes unresponsive or tries to cheat you, you can ask the Bitcoin system to act as a "court" resolving the smart contract you and your partner have previously agreed upon.

* Payments made in a payment channel are only known to you and your partner. In that sense you gain privacy compared to Bitcoin, where every transaction is public.  Only the final balance, which is the aggregate of all payments in that channel, will become visible on the Bitcoin blockchain.


Bitcoin was about 5 years old when talented developers first figured out how payment channels could be constructed and by now there are at least 3 different methods known.
This chapter will focus on the channel construction method first described in the Lightning Network whitepaper by Joseph Poon and Thaddeus Dryja in 2015. These are known as _Poon-Dryja_ channels, and are the channel construction method currently used in the Lightning Network.
The other two proposed methods are _Duplex Micropayment_ channels, introduced by Christian Decker around the same time as the "Poon-Dryja" channels and _eltoo_ channels, introduced in 2018 by Christian Decker, Rusty Russel and our co-author Olaoluwa Osuntokun.

Eltoo channels have some interesting properties and simplify the implementation of payment channels. However, eltoo channels require a change in the Bitcoin scripting language and therefore cannot be implemented on the Bitcoin mainnet at this time.

==== Multisig addresses

Payment channels are built on top of 2-of-2 multisignature addresses, timelocks and Segregated Witness transaction outputs. We will not revise these relatively advanced concepts of the Bitcoin system. Instead, in this section we will provide a high-level overview of multisignature scripts and how they allow us to construct payment channels.
If you have already studied Bitcoin and are familiar with multisignature addresses, feel free to skip this section.

[TIP]
====
A deep dive into the topic discussed here is presented in chapter 7 of Mastering Bitcoin which can be found at: https://github.com/bitcoinbook/bitcoinbook/blob/develop/ch07.asciidoc.
Also, in case you are not familiar with P2PKH addresses and the basic format and scripting language of Bitcoin we encourage you to study chapter 6 of Mastering Bitcoin which can be found at: https://github.com/bitcoinbook/bitcoinbook/blob/develop/ch06.asciidoc.
There is also a video on Rene's YouTube channel which dissects the bits and bytes of a transaction spending from a P2PKH output at: https://youtu.be/1n4g3eYX1UI
====

The Bitcoin scripting language provides a multisignature building block (primitive), that can be used to build escrow services and complex ownership configurations between several stakeholders. An arrangement that requires multiple signatures to spend Bitcoin is called a _multisignature scheme_, further specified as an _K-of-N_ scheme, where:


* N is the total number of signers identified in the multisignature scheme, and
* K is the _quorum_ or _threshold_ - the minimum number of signatures to authorize spending.

The script for an K-of-N multisignature is:

----
K PubKey1 PubKey2 ... PubKeyN N CHECKMULTISIG
----

where K is the total number of listed public keys (Public Key 1 through Public Key N) and K is the threshold of required signatures to spend the output.

The Lightning Network uses a 2-of-2 multisignature scheme to build a payment channel. For example, a payment channel between Alice and Bob would be build on a 2-of-2 multisignature like this:

----
2 <PubKey Alice> <PubKey Bob> 2 CHECKMULTISIG
----

The preceding locking script can be satisfied with an unlocking script containing a pair of signatures:

----
0 <Sig Alice> <Sig Bob>
----
The two scripts together would form the combined validation script:

----
0 <Sig Alice> <Sig Bob> 2 <PubKey Alice> <PubKey Bob> 2 CHECKMULTISIG
----

==== Funding Transaction

The fundamental building block of a payment channel, is a 2-of-2 multisignature address. The two channel partners fund the payment channel by sending bitcoin to the multisignature address. This transaction is called the _funding transaction_, and is recorded on the Bitcoin blockchain.

Even though the funding transaction is public, it is not obvious that it is a Lightning payment channel until it is closed. Furthermore, channel payments are still not visible to anyone other than the channel partners, nor is the distribution of the channel balance between them.

The amount deposited in the multisignature address is the called the _channel capacity_ and sets the maximum amount that can be sent across the payment channel. However, since funds can be sent back and forth, the channel capacity is not the upper limit on how much value can flow across the channel. That's because if the channel capacity is exhausted with payments in one direction, it can be used to send payments in the opposite direction again.


[NOTE]
====
The funds sent to the multisignature address in the funding transaction are sometimes referred to as "locked in a Lightning channel". However in practice, funds in a Lightning channel are not "locked" but rather "unleashed". Lightning channel funds are more liquid than funds on the Bitcoin blockchain as they can be spent faster, cheaper and more privately. Opening a Lightning channel unleashes your Bitcoin!
====

===== Example of a poor channel opening procedure

If you think carefully about 2-of-2 multisignature addresses, you will realize that putting your funds into such an address seems to carry some risk. What if your channel partner refuses to sign a transaction to "release" the funds? Are they stuck forever? Let's look at that scenario and how the Lightning Network protocol avoids it, next.

Alice and Bob want to create a payment channel. They each create a private/public key pair and then exchange public keys. Now, they can construct a multisignature 2-of-2 with the two public keys, forming the foundation for their payment channel.

Next, Alice constructs a Bitcoin transaction sending a few mBTC to the multisignature address created from Alice's and Mallory's public keys. If Alice doesn't take any additional steps and simply broadcasts this transaction, she has to trust that Bob will provide his signature to spend from the multisignature address. Bob on the other hand has the chance to blackmail Alice by withholding his signature and denying Alice access to her funds.

In order to prevent this, Alice will need to create an additional transaction which spends from the multisignature address, refunding her mBTC. Alice then has Bob sign the refund transaction _before_ broadcasting her funding transaction to the Bitcoin network. This way, Alice can get a refund even if Bob disappears or fails to cooperate.

The "refund" transaction that protects Alice is the first of a class of transactions called _commitment transactions_, which we will examine  in more detail next.

==== Commitment Transaction

A _commitment transaction_ is a transaction that pays each channel partner their channel balance and ensures that the channel partners do not have to trust each other. By signing a commitment transaction, each channel partner "commits" to the current balance and gives the other channel partner the ability to get their funds back whenever they want.

By holding a signed commitment transaction, each channel partner can get their funds even without the cooperation of the other channel partner. This protects them against the other channel partner's disappearance, refusal to cooperate or attempt to cheat by violating the payment channel protocol.

The commitment transaction that Alice prepared in the previous example, was a "refund" of her initial payment to the multisignature address. More generally however, a commitment transaction splits the funds of the payment channel, paying the two channel partners according to the distribution (balance) they each hold. At first, Alice holds all the balance, so it is a simple refund. But as funds flow from Alice to Bob, they will each sign and exchange new commitment transactions that represent the new balance distribution, with some part of the funds paid to Alice and some paid to Bob.

Let us assume Alice opens a channel with a capacity of 10 mBTC with Bob.
Initially Alice owns 10 mBTC, the entirety of the funds in the channel. Here's how the payment channel protocol would work:

. Alice creates a new private / public key pair and informs Bob that she wishes to open a channel via the `open_channel` message (a message in the Lightning Network protocol).
. Bob also creates a new private / public key pair and agrees to accept a channel from Alice, sending his public key to Alice via the `accept_channel` message.
. Alice now creates a funding transaction from her wallet that sends 10 mBTC to the multisignature address with a locking script +2 <PubKey Alice> <PubKey Bob> 2 CHECKMULTISIG+.
. Alice does not yet broadcast this funding transaction but sends Bob the transaction ID in a `funding_created` message.
. Both Alice and Bob create their version of a commitment transaction. This transaction will spend from the funding transaction and send all the bitcoin back to an address controlled by Alice.
. Alice and Bob don't need to exchange these commitment transactions, since they each know how they are constructed and can build both independently. They only need to exchange signatures.
. Alice provides a signature for Bob's commitment transaction. This signature was already included in the `funding_created` message.
. Bob provides a signature for Alice's Commitment Transaction and sends this back to Alice via the `funding_signed` message.
. Now that signatures have been exchanged Alice will broadcast the funding transaction to the Bitcoin network.

By following this protocol, Alice does not give up ownership of her 10 mBTC even though the funds are sent to a 2-of-2 multisignature address for which Alice controls only one key.
If Bob stops responding to Alice she will be able to broadcast her commitment transaction and receive her funds back.
Her only costs are the fees for the two on-chain transactions.
As long as she follows the protocol this is her only risk when opening a channel.

After this initial exchange, commitment transactions are created each time the channel balance changes. In other words, each time a payment is sent between Alice and Bob, new commitment transactions are created and signatures are exchanged. Each new commitment transaction encodes the latest balance between Alice and Bob.

If Alice wants to send 3 mBTC to Bob, both would create a new version of their commitment transactions which would now pay 7mBTC to Alice and 3 mBTC to Bob. By encoding a new balance for Alice and Bob, the new commitment transactions are the means by which a payment is "sent" across the channel.

Now that we understand commitment transactions, let's look at some of the more subtle details. You may notice that this protocol leaves a way for either Alice or Bob to cheat.

==== Cheating with prior state

How many commitment transactions does Alice hold after she pays 3 mBTC to Bob? She holds two: the original one paying her 10 mBTC and the more recent one, paying her 7 mBTC and Bob 3 mBTC.

In the channel protocol we have seen so far, nothing stops Alice from publishing a previous commitment transaction. A cheating Alice could publish the commitment transaction which grants her 10 mBTC.
Since that commitment transaction  was signed by Bob he can't prevent Alice from transmitting it.

Some mechanism is needed to prevent Alice from publishing an old commitment transaction. Let us now find out how this can be achieved and how it enables the Lightning Network to operate without requiring any trust between Alice and Bob.

Because Bitcoin is censorship resistant, no one can prevent someone from publishing an old commitment transaction. To prevent this form of cheating, we construct commitment transactions so that if an old one is transmitted, the cheater can be punished. By making the penalty large enough, we create a strong incentive against cheating and this makes the system secure.

The way the penalty works is by giving the cheated party an opportunity to claim the balance of the cheater. So if someone attempts to cheat by broadcasting an old commitment transaction, in which they are paid a higher balance than they are due, the other party can punish them by taking *both* their own balance and the balance of the cheater. The cheater loses everything.

Let us go through the channel construction scenario again, adding a penalty mechanism to protect against cheating:

* Alice creates a channel with Bob and put 10 mBTC into it.
* Alice send 3 mBTC to Bob.
* Alice tries to cheat Bob out of his earned 3 mBTC by publishing an old commitment transaction claiming the full 10 mBTC for herself.
* Bob detects the fraud and punishes Alice by taking the full 10 mBTC for himself.
* Bob ends up with 10 mBTC, gaining 7 mBTC for catching Alice cheat.
* Alice ends up with 0 mBTC.
* Trying to cheat Bob out of 3 mBTC, she loses the 7 mBTC she owned.

With a strong penalty mechanism, Alice is not tempted to cheat by publishing an old commitment transaction as she risks losing her entire balance.

[NOTE]
====
In Mastering Bitcoin Andreas states it very elegantly:
A key characteristic of bitcoin is that once a transaction is valid, it remains valid and does not expire. The only way to cancel a transaction is by double-spending its inputs with another transaction before it was mined. That's why we used timelocks [...] to ensure that more recent commitments could be spent before older commitments were valid.
====

Now that we understand _why_ a penalty mechanism is needed and how it will prevent cheating, let's see _how_ it works in detail.

Usually, the commitment transaction has at least two outputs, paying each channel partner. We change this to add a _timelock delay_ and a _revocation secret_, to one of the payments. The timelock prevents the owner of the output from spending it immediately once the commitment transaction is included in a block. The revocation secret, allows either party to immediately spend that payment, bypassing the timelock.

So, in our example, Bob holds a commitment transaction which pays Alice _immediately_, but his own payment is delayed and revocable. Alice also holds a commitment transaction, but hers is the opposite: it pays Bob immediately but her own payment is delayed and revocable.

The two channel partners hold half of the revocation secret, so that neither one knows the whole secret. If they share their half, then the other channel partner has the full secret and can use it to exercise the revocation condition. When signing a new commitment transaction, they revoke the previous commitment by exchanging the signature for the revocation secret.

In simple terms, Alice signs Bob's new commitment transaction only if Bob offers his half of the revocation secret for the previous commitment. Bob only signs Alice's new commitment transaction if she gives him her half of the revocation secrect from the previous commitment.

With each new commitment, they exchange the necessary "punishment" secret that allows them to effectively _revoke_ the prior commitment transaction by making it unprofitable to transmit. Essentially, they destroy the ability to use the old commitments as they sign the new ones.

The timelock is set to a number of blocks, up to 2016 (approximately two weeks). If either channel partner publishes a commitment transaction without cooperating with the other partner, they will have to wait for that number of blocks (e.g. 2 weeks) to claim their balance. The other channel partner can claim their own balance at any time. Furthermore, if the commitment they published was previously revoked, the channel partner can *also* immediately claim the cheating party's balance, bypassing the timelock and punishing the cheater.

The timelock is adjustable and can be negotiated between channel partners. Usually, it is longer for larger capacity channels, and shorter for smaller channels, to align the incentives with the value of the funds.

For every new update of the channel balance, new commitment transactions and new revocation secrets have to be created and saved. As long as a channel remains open, all revocation secrets _ever created_ for the channel need to be kept as they might be needed in the future. Fortunately, the secrets are rather small and it is only the channel partners who need to keep them, not the entire network.
Nevertheless, managing and storing the revocation secrets is one of the more elaborate parts of Lightning nodes that require node operators to maintain backups.

[NOTE]
====
Technologies such as Watchtower services or changing the channel construction protocol to the "eltoo" protocol might be future strategies to mitigate these issues and reduce the need for revocation secrets, penalty transactions and channel backups.
====

Alice can close the channel at any time if Bob does not respond, claiming her fair share of the balance.
After publishing the *last* commitment transaction on-chain Alice has to wait for the time lock to expire before she can spend her funds from the commitment transaction. As we will see later, there is an easier way to close a channel without waiting, as long as Alice and Bob are both online and cooperate to close the channel with the correct balance allocation. But the commitment transactions stored by each channel partner act as a failsafe, ensuring they do not lose funds if there is a problem with their channel partner.

==== Announcing the channel

Channels partners can agree to announce their channel to the whole Lightning Network, making it a _public channel_. To announce the channel, they use the Lightning Network's gossip protocol to tell other nodes about the existence, capacity and fees of the channel.

Announcing channels publicly allows other nodes to use them for payment routing, thereby also generating routing fees for the channel partners.

By contrast, the channel partners may decide to keep the existence of the channel private and not announce it, making it a _private channel_.

[NOTE]
====
While a private channel will not be known to others while it is in use, it's existence and capacity will be revealed when the channel closes, because those details will be visible on-chain in the final settlement transaction.
====

Private channels are still used to route payments but only by the nodes which are aware of their existence, or given "routing hints" about a path that includes a private channel.


When a channel and its capacity is publicly announced using the gossip protocol, the announcement can also include information about the channel (metadata), such as it's routing fees and timelock duration.

When new nodes join the Lightning Network they collect the channel announcements propagated via the gossip protocol from their peers, building an internal "map" of the Lightning Network. This map can then be used to find paths for payments, connecting channels together end-to-end.

==== Closing the channel

The best way to close a channel is... to not close it! Opening and closing channels requires an on-chain transaction, which will incur transaction fees. So it's best to keep channels open as long as possible. You can keep using your channel to make and forward payments, as long as you have sufficient capacity on your end of the channel. But even if you send all the balance to the other end of the channel, you can then use the channel to receive payments from your channel partner. This concept of using a channel in one direction and then using it in the opposite direction is called "re-balancing" and we will examine it in more detail in another chapter. By re-balancing a channel, it can be kept open almost indefinitely and used for thousands of payments.

However, sometimes closing a channel is desirable or necessary. For example:

* You want to reduce the balance held on your Lightning channels for security reasons and want to send funds to "cold storage"
* Your channel partner becomes unresponsive for a long time and you cannot use the channel anymore.
* The channel is not being used often because your channel partner is not a well-connected node, so you want to use the funds for another channel with a better-connected node.
* Your channel partner has breached the protocol either due to a software bug or on purpose forcing you to close the channel to protect your funds.

There are 3 ways to close a payment channel:

* The good way - Mutual close
* The bad way - Force close
* The ugly way - Protocol breach


Which way you close a channel will depend on the circumstances. For example, if your channel partner is offline you will not be able to follow "the good way" because a mutual close cannot be done without a cooperating partner.
Usually, you Lightning Network software will automatically select the best closing mechanism available under the circumstances.

Whether you (the user) issue a command to close a channel or the Lightning Network software automatically closes a channel due to a detected anomaly (e.g. cheating partner), it is usually the Lightning Network software that chooses the appropriate way to close the channel.


===== The good way - Mutual close

The good way to close a channel is the mutual close and this way is always preferred, if possible. When you decide that you want to close a channel, your Lightning Network node will inform your channel partner about your intention. Now both your node and the channel parter's node work together to close the channel.  No new routing attempts will be accepted from either channel partner and any ongoing routing attempts will be settled or removed after they time-out. Finalizing the routing attempts takes time, so a mutual close can also take some time to complete.

Once there are no pending routing attempts, the nodes cooperate to prepare a _closing transaction_. This transaction is similar to the commitment transaction, in that it distributes the channel balance to each channel partner according to their last commitment. Unlike the last commitment transaction, the outputs are not encumbered with a time lock.

The on-chain transaction fees for the closing transaction are paid by the channel partner who opened the channel and not by the one who initiated the closing procedure. Using the on-chain fee estimator, the channel partners agree on the appropriate fee and both sign the closing transaction.

Once the closing transaction is broadcast and confirmed by the Bitcoin network, the channel is effectively closed and each channel partner has received their share of the channel balance. A mutual close is usually the fastest way to close a channel.

===== The bad way - Force close

Mutual close is not always possible. Sometimes, for example if your channel partner cannot be reached, you have to unilaterally close the channel in order to "free" the funds. Closing the channel unilaterally is called a _force close_. To do a force close, Alice can simply publish the last commitment transaction. After all, that's what commitment transactions are for - they offer a guarantee that Alice doesn't need to trust Bob to retrieve the balance of the channel that belongs to her.

Once Alice broadcasts the last commitment transaction she has to the Bitcoin network and it is confirmed, it will create two spendable outputs, one for Alice and one for Bob. As we discussed previously, because this commitment transaction is held by Alice, it gives a slight "advantage" to Bob.  Alice's output will have a timelock delay and Bob's will be spendable immediately. This is to protect Bob, so that Alice can't broadcast an old commitment transaction and steal some of the balance. The timelock delay gives Bob the opportunity to "dispute" the transaction using the revocation secret and punish Alice for cheating.

When publishing a commitment transaction during a force close, the on-chain fees will be higher than a mutual close for several reasons:

1. When the commitment transaction was negotiated, the channel partners didn't know how much the on-chain fees would be at the future time the transaction would be broadcast. Since the fees cannot be changed without changing the outputs of the commitment transaction (needs both signatures) and since the force close happens when a channel partner is not available to sign, the protocol developers decided to be very generous with the fee rate included in the commitment transactions. It can be up to 5 times higher than the fee estimators suggest at the time the commitment transaction is negotiated.
2. The commitment transaction includes additional outputs for any pending routing attempts (HTLCs), which makes the commitment transactio bigger than a mutual close transaction. Bigger transactions incur more fees.
3. Any pending routing attempts will have to be resolved on-chain causing additional on-chain transactions. These additional transactions don't have to overestimate the fees but they nonetheless incur fees.

[NOTE]
====
Hash Time-Locked Contracts (HTLCs) will be covered in detail in <<htlcs>>. For now, assume that these are payments that are routed across the Ligntning Network, rather than payments made directly between the two channel partners. These HTLCs are carried as additional outputs in the commitment transactions, thereby increasing the transaction size and on-chain fees.
====

In general, you should not do a "force close" unless absolutely necessary. Your funds will be locked for a longer time and the person who opened the channel will have to pay higher fees. Furthermore, you might have to pay on-chain fees to abort or settle routing attempts even if you haven't opened the channel.

If the channel partner is known to you, you might consider contacting that individual or company and inquire why their Lightning Node is down and request that they restart it so that you can achieve a mutual close of the channel.

You should consider a force close, only as the last resort.

===== The ugly way - Protocol breach

If your channel partner broadcasts an old (revoked) commitment transaction - whether deliberately or not - your node should be able to detect this protocol breach. Your node must be online and watching new blocks and transactions on the Bitcoin blockchain to detect this. Because your channel partner's payment will be encumbered by a timelock, your node has some time to act, before your channel partner can spend the payment and profit from the protocol breach.

During the timelock, your node can broadcast a _punishment transaction_ that uses the revocation secret to take the balance of your channel partner, as well as your own balance.

In this scenario the channel closure will be rather fast. You will have to pay on-chain fees to publish the punishment transaction, but your node can set these fees according to the fee estimation and not overpay. Furthermore, you will be taking the funds from your channel partner's balance too, so in a way the fees are unlikely to be a factor.

If your node is not online and the timelock expires, your channel partner will be able to take whatever balance was allocated to them in that old commitment, perhaps as much as the entire channel balance. If there is any balance allocated to you, you will have to pay on-chain fees to collect that balance.

Also all pending routing attempts will have to be resolved just as we saw in the force close scenario.

The "ugly way" of channel closure can be executed faster than both the "good" and "bad" ways, because you can immediately publish the punishment transaction and collect all the funds.

Game theory predicts that cheating is not a successful strategy because it is easy to detect a cheater and the cheater will lose all funds committed in the channel.

Hence, we do not recommend cheating. We do, however, recommend that anyone catching a cheater punish them by taking their funds.

So, how do you catch a cheat or a protocol breach in your day-to-day activities?

You do so by running software that monitors the public Bitcoin blockchain for on-line transactions that correspond to any commitment transactions for any of your channels. This software is either:

* A properly maintained Lightning node, running 24x7.
* A single-purpose _watchtower_ node that you run to watch your channels.
* A third-party watchtower node that you pay to watch your channels.

We will look at watchtowers in more detail in <<watchtowers>>.

Remember that the commitment transaction has a timeout period specified in a given number of blocks, up to a maximum of 2016.
As long as you run your Lightning node once before the timeout period is reached, it will catch all cheats. It is not advisable to take this kind of risk; it is just as easy to keep a well maintained node running continuously.

=== Invoices

Most payments on the Lightning Network start with an invoice, generated by the recipient of the payment. In our previous example, Bob creates an invoice to "request" a payment from Alice.

[NOTE]
====
There is a way to send an "unsolicited" payment without an invoice, using a work-around in the protocol called _keysend_. We will examine this in <<keysend>>.
====

An invoice is a simple payment instruction containing information such as a unique payment identifier, called a payment hash, a recipient, an amount, and an optional text description.

The most important part of the invoice is the payment hash, that allows the payment to travel across multiple channel in an _atomic_ way. Atomic, in computer science, means any action or state change that is either completed successfully or not at all - there is no possibility of an intermediate state or partial action. In the Lightning Network that means that the payment either travels the whole path or fails completely. It cannot be partially completed such that an intermediate node on the path can receive the payment and keep it.
There is no such thing as a "partial payment" or "partly successful payment".

Invoices are not communicated over the Lightning Network. Instead, they are communicated "out of band", using any other communication mechanism. This is similar to how Bitcoin addresses are communicated to senders outside the Bitcoin network, as a QR code, over email, or a text message. For example, Bob can present a Lightning invoice to Alice as a QR code, or send it via email, or any other message channel.

Invoices are usually encoded either as a long bech32-encoded string or as a QR code, to be scanned by a smartphone Lightning wallet. The invoice contains the amount of bitcoin that is requested and a signature of the recipient. The sender uses the signature to extract the public key (also known as the node ID) of the recipient so that the sender knows where to send the payment.

Did you notice how this contrasts with Bitcoin and how different terms are used? In Bitcoin, the recipient passes an address to the sender. In Lightning, the recipient creates an invoice and sends an invoice to the sender. In Bitcoin, the sender sends funds to an address. In Lightning, the sender pays an invoice and the payment gets routed to the recipient. Bitcoin is based on the concept of an "address", and Lightning is a payment network and based on the concept of an "invoice". In Bitcoin we create a "transaction" whereas in Lightning we send a "payment".

==== Payment Hash and Preimage

The most important part of the invoice is the _payment hash_. When constructing the invoice, Bob will make a payment hash as follows:

1. Bob chooses a random number +r+. This random number is called the _preimage_ or _payment secret_.
2. Bob uses +SHA256+ to calculate the hash +H+ of +r+ called the _payment hash_

latexmath:[H = SHA256(r)].

[NOTE]
====
The term _preimage_ comes from mathematics. In any function _y = f(x)_, the set of inputs that produce a certain value _y_ are called the preimage of _y_. In this case, the function is the SHA256 hash algorithm and any value _r_ that produces the hash _H_ is called a preimage.
====

Since the value +r+ is secret, only Bob knows it's value. No one can guess the value +r+, but once Bob reveals +r+, anyone who has the hash +H+ can check that +r+ is the correct secret, by calculating +SHA256(r)+ and seeing that it matches +H+.

The payment process of the Lightning Network is only secure if +r+ is chosen completely randomly and is not predictable. This security relies on the fact that hash functions cannot be inverted or feasibly brute-forced and therefore no one can find +r+ from +H+.

==== Additional Meta Data

Invoices can optionally include other useful meta data such as a short text description. If a user has several invoices to pay, the user can read the description and be reminded what the invoice is about.

The invoice can also include some _routing hints_, which are private channels that have not been publicly announced, but can be used by the sender to construct a route to the recipient. Routing hints can also be used to suggest public channels, for example channels known by the recipient to have enough inbound capacity to route the payment.

In case the sender's Lightning node is unable to send the payment over the Lightning Network, invoices can optionally include an on-chain Bitcoin address as a fallback.

[NOTE]
====
While it is always possible to "fall back" to an on-chain Bitcoin transaction, it is actually better to open a new channel to the recipient instead. If you have to incur on-chain fees to make a payment, you might as well incur those fees to open a channel and make the payment over Lightning. After the payment is made, you are left with an open channel that has liquidity on the recipient's end and can be used to route payments back to your Lightning node in the future. One on-chain transaction gives you a payment and a channel for future use.
====


Lightning invoices contain an expiry date. Since the recipient must keep the preimage +r+ for every invoice issued, it is useful to have invoices expire so that these preimages do not need to be kept forever. Once an invoice expires or is paid, the recipient can discard the preimage.

=== Delivering the payment

You have already learnt that payments start with the payee creating an invoice which includes a Payment Hash to make sure that payments are atomic and that no one on the path of payment channels can withhold the transferred money to their benefit.
In this section we will dive into the ideas and methods that are being used to deliver a payment over the Lightning Network and utilize everything that we have presented so far.
We need to introduce one missing protocol of the Lightning Network which is the gossip protocol.

==== The peer-to-peer gossip protocol

As mentioned payment channels can be announced to the network after they are established.
This is happening via a peer-to-peer gossip protocol.
After opening a channel a node will send out an announcement of the channel via the `channel_announcement` message to its peers.
Every peer can validate the information from the `channel_announcement` message and verify that the funding transaction was indeed confirmed by the Bitcoin network.
Upon verification the node will forward the gossip message to its peers.
In order to avoid spam this will only be done if the message was not forwarded by that node already.
Similarly nodes can be announced via the gossip protocol with the `node_announcement` message.
For this message to be forwarded a node has to have at least one public channel that was announced on the gossip protocol.
This again is a spam reduction measure of the gossip protocol.
Payment channels have various meta data that are useful for other participants of the network.
This meta data is mainly used for making routing decisions.
As nodes might want to change the meta data of their channel occasionally this information is shared in a `channel_update` message.
These messages will only be forwarded about four times a day for every channel to prevent spam.
The gossip protocol also comes with a variety of queries and tools to initially synchronize a node with the view of the network or to update the node's view after being offline for a while.
We will investigate the details of the gossip protocol in a later chapter.
For now it is only important to know that it exists and that it is used to share topology information of the Lightning Network with its participants.
This topology information is crucially needed for delivering payments through the network of payment channels.

[NOTE]
====
A major challenge for the participants of the Lightning Network is that the topology information that is being shared by the gossip protocol is only partial.
For example, the capacity of the payment channels is shared on the gossip protocol via the `channel_announcement` message.
However, this information is not as useful as the actual distribution of the capacity into the local balance between the two channel partners.
A node can only forward the amount of bitcoin via a particular payment channel that it actually owns within that channel.
While Lightning could have been designed to share balance information of channels and a precise topology, this has not been done for several reasons:
1. To protect the privacy of the users and not shout out every financial transaction and payment that is being conducted.
2. To be able to scale the amount of payments that can be conducted with the Lightning Network. Remember that the Lightning Network was created in the first place because notifying every participant about every payment does not scale well. Thus for simple technical reasons the Lightning Network cannot be designed in a way that the current balance updates of channels are being shared among participants.
3. The Lightning Network is a dynamic organism. It changes constantly and frequently. Nodes are being added, other nodes are being turned off, balances change, etc. Even if everything is always communicated, the information will be valid only for a short amount of time. As a matter of fact, information might be already outdated by the time it is received.
====

==== Finding a path

Payments on the Lightning Network are forwarded along a path of channels from one participant to another.
Thus, a path of payment channels has to be selected.
If we knew the exact channel balances of every channel we could easily compute a payment path using any of the standard path finding algorithms taught in any computer science program.
This could even be done in a way to optimize the fees that would have to be paid by the payer to the nodes that kindly forward the payment.
However, as discussed the balance information of all channels is and cannot be available to all participants of the network.
Thus, we need to have one or more innovative path finding strategy.
These strategies must relate closely to the routing algorithm that is used.
As we will see in the next section, the Lightning Network uses a source based onion routing protocol for routing payments.
This means in particular that the sender of the payment has to find a path through the network.
With only partial information about the network topology available this is a real challenge and active research is still being conducted into optimizing this part of the Lightning Network implementations.
The fact that the path finding problem is not fully solved for the case of the Lightning Network is a major point of criticism towards the technology.
The path finding strategy currently implemented in Lightning nodes is to probe paths until one is found that has enough liquidity to forward the payment.
While this is not optimal and certainly can be improved, it should be noted that even this simplistic strategy works well.
This probing is done by the Lightning node or wallet and is not directly seen by the user of the software.
The user might only realize that probing is taking place if the payment is not going through instantly.
The algorithm currently also does not necessarily result in the path with the lowest fees.

[NOTE]
====
On the Internet we use the internet protocol and the IP forwarding algorithm to forward internet packages from the sender to the destination.
While the TCP/IP protocol stack allows reliable communication by resending packages that are not acknowledged this mechanism could not be reused directly in the Lightning Network.
A payment that is not being forwarded would effectively mean that the money was stolen by a router and the sender cannot just send out another payment.
While the routing protocol together with the Border Gateway Protocol which are used for data and information transport on the internet have the nice property of allowing the internet hosts to collaboratively find a path for the information flow through the internet, we cannot reuse and adopt this protocol for forwarding payments on the Lightning Network.
====

Of course, path finding is trivial if we want to pay our direct channel partner and we have enough balance on our side of the channel to do so.
In all other cases information from the gossip protocol is used to help with path finding.
This includes currently known public payment channels, known nodes, known topology (how known nodes are connected), known channel capacities, and known fee policies set by the node owners.

==== Onion routing

If the sending node of a payment has selected a path that is supposed to be used to make the payment, the Lightning Network uses an onion routing scheme similar to the famous TOR-network.
The routing scheme is called the "SPHINX mixformat" and will be explained in detail in a later chapter.
Note that Lightning Onion routing via "SPHINX mixformat" is only similar to the TOR network routing in concept, but as a protocol as well as in implementation it is definitely different from the TOR network.
For now we want to focus on its properties for the transport of payments.
A payment package used for routing is called an "onion".
footnote:[The term "onion" was originally used by the TOR project.
The acronym TOR stands for "The Onion Router".
Moreover, the Tor network is also called the Onion network.
The Tor project uses an onion as its logo and the top level domain name used by TOR services on the internet is ".onion".]
As a simplified physical analogy imagine the payment package as a sealed box with a onion inside.
On its route from payer to payee the sealed box is handed from node to node.
Sealed just means that the box is encrypted and only the receiving node can open it.
As will be explained, each node opens the box, takes out the onion, and peals off the outermost layer of this onion by using a cryptographic key.
The receiving node can only read this outermost layer, no further layers, achieved through cryptography.
This outermost layer tells the node if the box needs to be routed further and along which channel which implies the next node.
The node than places the remaining, but one layer smaller, onion into the box and sends the box to the next node on the routing path.
This continues until the receiving node is the payee and the routing stops and the payee can read the information encrypted in the innermost layer of the onion.
Why use a box?
The box is used in this analogy to express that the size of the "package" sent along the route is always the same.
The first recipient receives a box of the same size as the last recipient, the payee.
This is done to create privacy.
If not done, an observer could analyze the size of the communication and deduce how many hops there are on the route.
If the size does not change there is no way to tell if this is the first or the last hop in the route.
The box in our analogy is what technically is called an "onion" in the Lightning network.

1. The most important property is that a routing node can only see on which channel it received an onion and on which channel to set up an HTLCs and thus to which peer to forward the onion.
This means that no routing node can know who initiated the payment and to whom the payment is destined.
The exception is the payee.
The payee knows that it is the final destination.
This is one of the many factors that help in the quest for a high degree of privacy.
2. The onions are small enough to fit into a single TCP/IP package and actually even a link layer frame.
This will make traffic analysis of the payments significantly more difficult, increasing privacy further.
3. The onions are constructed in a way that they will always have the same length independent of the position of the processing node along the path.
This is also done to augment privacy.
4. Onions can have up to 20 hops or onion layers if you prefer. This allows for sufficiently long paths.
5. The encryption of the onion for every hop uses different ephemeral encryption keys with every single onion. Should a key (in particular the private key of the public node key) leak at some point in time an attacker who collected onions cannot decrypt other onions.
In simpler terms, keys are never reused in order to achieve more security.
6. Errors can be sent back from the erring node in an encrypted way to the original sender. This is particularly useful as we have seen that Lightning nodes who initiate the onions select a path without knowing whether every node has enough liquidity along their channels to forward the payment.

We will discuss the details of the Onion Format later. But we note already that the `Payment Hash` which is required to set up the HTLCs for the payment is not transported within the onions.
The `Payment Hash` is rather included in the Lightning Message alongside the onion.
This makes the Payment Hash obtainable without the need to decrypt any onion.

==== Payment Forwarding Algorithm

In stark contrast to the Internet Protocol Forwarding Algorithm on the Lightning Network it is only the sender of a payment that decides the path it takes to the recipient.
Forwarding nodes can only reject a path.
This can happen either on purpose or because they are not able to fulfill the request.
The payment forwarding algorithm is initiated by the sender of a payment who selects a path through the Lightning Network and constructs an onion.
It contains information about the payment for the recipient, routing hints for the intermediary nodes.
Routing fees which those nodes will earn if (and only if) the payment is successfully delivered and settles with the release of the `Payment Hash` are also included to the onion.

All Lightning Nodes must follow the payment forwarding algorithm.
Upon receiving a Lightning Message called `update_add_htlc` which contains the `Payment Hash` and the onion package it needs to follow through X steps:

1. It needs to decrypt the outer layer of the onion and use the HMAC to make sure that the onion was not corrupted.
2. It will check that it can fulfill the routing hints in the way that the fees are respecting its fee announcements and that it has enough liquidity on the outgoing channel or is even owner of the specified channel.
3. It needs to work with its peer on the incoming channel to update the channel state to include the offered HTLC.
4. It will have to add some padding data to the end of the onion to keep it as a constant size even though it removed some data from the beginning.
5. It will then follow the routing hints from its layer of the onion to forward the modified onion package on its outgoing payment channel by also sending and `update_add_htlc` message which includes the same `Payment Hash` and the onion.
6. Obviously it also has to collaborate with its peer on the outgoing channel to move forward the state to also include the offered `HTLC`.

Of course those steps will be interrupted and aborted if an error is detected.
In most of those cases an error message will be send back to the originator of the received `update_add_htlc` message.
If for example in the first step the node detects that the onion was corrupted it will not proceed to the second and subsequent steps to move forward the channel state on the receiving channel to include the HTLC.
Similarly if in the second step the node discovers that it won't be able to fulfill the routing request or that not enough fees have been included it will also abort the payment forwarding algorithm and rather send back an error.

We note that the error is also an onion reply package.
Even though the node sending the error does not know who initially sent out the payment the error message will be encrypted with the key that was used to encrypt the forwarding nodes layer.
The reply onion is then sent back on the incoming channel.
The node on the other side knows on which channel it received an onion and with which other channel it has an HTLC with the same `Payment Hash`.
Thus the error can safely propagate back towards the originator.
Nodes that are sending back an error Onion must on their way remove the HTLCs from their payment channels to make sure that they cannot be enforced.

[Note]
====
It is important to understand that HTLCs have a time measured in absolute blockheight through which they are valid.
Once the sender of a payment sends away the onion it is completely out if their control what happens.
Honest nodes SHOULD either forward the onion as quickly as possible or send an error back the original.
While sender expects nodes along the path to be honest it has according to the protocol no power of making sure that nodes act quickly.


Thus payments can currently get stuck if nodes want to behave maliciously.
While the likelihood for a payment to fail is pretty high if it does not settle quickly a node SHOULD never initiate another payment attempt along a different path before the onion returned with an error as a node might just have delayed the forwarding of the payment.
Nodes which act maliciously by delaying the forwarding of payments or errors are actually hard to detect due to the privacy properties that are gained with the onion routing scheme.


=== Missing bits
From a computer science perspective the Lightning Network protocol is mainly a peer to peer protocol between its participants.
All communication between participants is sent via so called Lightning Messages.
Most importantly communication is needed to open and close payment channels, to send and receive onions, to set up and settle or fail HTLCs and for exchanging gossip information.
The Lightning messages are sent in an encrypted way after a peer connection has been established.
Establishing the peer connection follows a cryptographic handshake following the Noise Protocol Framework.
The Noise Protocol Framework is a collection of templates for cryptographic handshakes and is also used by WhatsApp and Wireguard.
Using the Noise Protocol Framework makes sure that every message that is sent via Lightning is encrypted and authenticated.
This makes development a little bit tricky as one cannot easily monitor one's own traffic on a tool like wireshark for debugging. footnote:[Luckily tools exist to make developer's lives easier: https://github.com/nayutaco/lightning-dissector]

=== some thoughts that were supposed to be at other places but didn't make it to the text yet
* network of payment channels
* different scope of the network
** global path finding (entire knowledge of the network necessary)
** multihop routing (onion necessary only a subset of nodes involved)
** locally setting up and settling HTLCs (only peers involved)

=== Thoughts about Trust
As long as a person follows the protocol and has their node secured, there is no major risk of losing funds when participating in the Lightning Network.
However, there is the cost of paying on-chain fees when opening a channel.
Any cost should come with a corresponding benefit.
In our case the reward for Alice for bearing the cost of opening a channel is that Alice can send and receive payments of bitcoin on the Lightning Network at any time and that she can earn fees in bitcoin by forwarding payments for other people.
Alice knows that in theory Bob can close the channel immediately after opening resulting in on-chain closing fees for Alice.
Alice will need to have a small amount of trust in Bob.
Alice has been to Bob's Cafe and clearly Bob is interested in selling her coffee, so Alice can trust Bob in this sense.
There are mutual benefits to both Alice and Bob.
Alice decides that the reward is enough for her to take on the cost of the on-chain fee for creating a channel to Bob.
In contrast, Alice will not open a channel to someone unknown in a foreign country who just sent her an uninvitedly email asking her to open a channel to him.

=== Comparison with Bitcoin

While the Lightning Network is built on top of Bitcoin and inherits many of its features and properties, there are important differences that users of both networks need to be aware of.

==== Addresses vs Invoices, Transactions vs Payments

Bitcoin and Lightning have different terminology.
In Bitcoin, a typical operation is that a user receives a Bitcoin address (e.g. he reads it on a webpage, or he received it in an instant message from a friend).
He then uses his Bitcoin wallet to create a transaction to send funds to this address.

In the Lightning Network all starts at the payee.
The payee creates an invoice.
A Lightning "invoice" could be seen as an analogy to a Bitcoin "address".
The payee provides the Lightning invoice to the payer.
This is similar to Bitcoin, the payee places it on the webpage at checkout, or the payee is a friend and sends it via instant message or email.
The payer uses his Lightning wallet to make the invoice payment (e.g. by scanning a QR code).
In Lightning, "payment" is the analog term for a Bitcoin "transaction".

Along the same lines, in Lightning some users prefer to use "payer" and "payee" to what Bitcoin often refers to as "sender" and "receiver".
This is merely a matter of convention.
These terms just underline that Lightning is a very specific network, it is a "payment" network.

==== Selecting Outputs vs Finding a Path

In order to make a payment on the Bitcoin network, a sender needs to consume one or more Unspent Transaction Outputs (UTXOs).
If a user has multiple UTXOs, they need to select which one to send.
For instance, a user making a payment of 1 BTC can use a single output with value 1 BTC, two outputs with value 0.25 BTC and 0.75 BTC, or four outputs with value 0.25 BTC each.

On Lightning, payments do not require inputs to be consumed but rather for the channel balance to be updated.
This is done by finding a path of channels with sufficient capacity from the sender to the receiver.
As many paths may exist, the choice of path to the Lightning Network payer is somewhat analogous to the choice of UTXO to the Bitcoin payer.

==== Change Outputs on Bitcoin vs No Change on Lightning

In order to make a payment on the Bitcoin network, a sender needs to consume one or more Unspent Transaction Outputs (UTXOs).
The entire UTXO needs to be spent, so if a user wishes to spend 0.8 BTC, but only has a 1 BTC UTXO, then they need to send 0.8 BTC to the receiver, and 0.2 BTC back to themselves as change.
This 0.2 BTC creates a new UTXO called a 'change output'.

On Lightning, the UTXO is consumed during the Funding Transaction, which leads to the creation of a channel.
Once the bitcoin is locked within that channel, portions of it can be sent back and forth within the channel, without the need to create any change.
This is because the channel partners simply update the channel balance and only create a new UTXO when the channel is eventually closed using the Bitcoin network.

==== Mining Fees vs Routing Fees

On the Bitcoin network, users pay fees to miners to have their transactions included in a block.
These fees are paid to the miner who mines that particular block.
The amount of the fee is based on the _size_ of the transaction in _bytes_ that the transaction is using in a block, as well as how quickly the user wants that transaction mined.
As miners will typically mine the most profitable transactions first, a user who wants their transaction mined immediately will pay a _higher_ fee-per-byte, while a user who is not in a hurry will pay a _lower_ fee-per-byte.

On the Lightning Network, users pay fees to other users to route payments through their channels.
In order to route a payment, a routing user will have to move the funds in two or more channels they own, as well as transmit the data for the sender's payment.
Typically, the routing user will charge the sender based on the _value_ of the payment, as well as setting their own fees they established to route the payment.
Higher value payments will thus cost more to route, and a market for capacity will exist where different users will charge different fees for routing through their channels.

==== Varying Fees Depending Traffic vs Announced Fees

On the Bitcoin network, miners are profit-seeking and will typically include as many transactions in a block as possible, while staying within the block size limit (actually, a modified form called the block weight limit).
If there are more transactions in the queue (called the mempool) than can fit in a block, they will begin by mining the transactions that pay the highest fees per byte (highest fee per weight).
Thus, if there are many transactions in the queue, users will have to pay a higher fee to be included in the next block, or they will have to wait until there are fewer transactions in the queue.
This naturally leads to the creation of a fee market where users pay based on how urgently they need their transaction included in the next block.

The scarce resource on the Bitcoin network is the space in the blocks. Bitcoin users compete for block space. And the Bitcoin fee market is based on available block space. The scarce resource in the Lightning network is the capacities on the channels and channel connectivity. Lightning users compete for capacity and connectivity. The Lightning fee market is driven by capacity and connectivity.

On the Lightning Network, users are paying fees to the users routing their payments. Routing a payment in economic terms is nothing else than providing and assigning capacity to the payer.
Different routers will charge different fees for routing through their channels.
Naturally, routers who are charging lower fees for the same capacity will be more attractive to route through.
Thus a fee market exists where routers are in competition with each other over the fees they charge to route payments through their channels.
Following general economic principles, the more capacity and connectivity is provided the more competition there will be and as a result the lower the fees will be.

The growth of the Lightning Network might lead to lower Lightning fees, while the growth in the Bitcoin Network likely leads to higher Bitcoin fees.


==== Public Transactions on the Blockchain vs Secret Payments

On the Bitcoin network, every payment is publicly visible on the ledger, i.e. the blockchain.
While the addresses involved are pseudonymous and are not typically tied to identity, they will still be collected and validated by every other user on the network.
Professional companies collect and analyse this data en-masse and sell it to interested parties such as exchanges or governments.

Lightning Network payments, on the other hand, are completely private.
Typically only the sender and the receiver will be fully aware of the source, destination, and amount of bitcoin transacted in a particular payment.
However, it is not required for the receiver to even know the source of the payment.
As payments are onion-routed, the users who route the payment will only be aware of the amount of the payment, but neither the source nor the destination.
This is because the security model of Lightning only requires users to control the balances in their channels.
They are not required to be aware of the state of the entire network.

In summary, Bitcoin transactions are broadcasted publicly and stored forever. Lightning payments are executed between a few selected peers and information about is privately stored and only until the channel is closed.
Creating en-masse analysis tools equivalent to the ones on the Bitcoin network will be impossible on Lightning.

==== Waiting for Confirmations vs Instant Settlement

On the Bitcoin network, transactions are only 'settled' once they have been included in a block, in which case they are 'confirmed' in that block.
As more blocks are mined on the Bitcoin network thereafter, the transaction acquires more 'confirmations' and is considered more secure.

On the Lightning Network, confirmations only matters for opening and closing channels on-chain.
Once a Funding Transaction has reached a suitable number of confirmations (e.g. 3), the channel partners consider the channel open.
As the bitcoin in the channel is secured by the smart contract that manages that channel, payments settle instantly once received by the receiver.
In practical terms, instant settlement means that payments take on the order of a few seconds to execute.
And as on Bitcoin, Lightning payments are not reversible.
When the channel is closed, a transaction will be made on the Bitcoin network and, only once that transaction is confirmed will the channel be considered closed.

==== Sending Arbitrary Amounts vs Capacity Restrictions

On the Bitcoin network, a user can send any amount of bitcoin that they own to another user, without capacity restrictions.

On the Lightning Network, a user can only send as much bitcoin as currently exists on their side of a particular channel to a channel partner.
For instance, if a user owns one channel with 0.4 BTC on their side, and another channel with 0.2 BTC on their side, then the maximum they can send with one payment is 0.4 BTC.
This is true regardless of how much bitcoin the user currently has in their Bitcoin wallet.

At the time of writing, Atomic Multi-Path Payments (AMPs) are in development which, in the above example, would allow the user to combine both their 0.4 BTC and 0.2 BTC channels to be able to send a maximum of 0.6 BTC with one payment.

In a direct payment where payer and payee are connected via a channel, the limit is stated as above.
If the payment gets routed, every routing node along the routing path must have at least the amount of funds as indicated in the payment.
If person A pays person C via person B, the payment follows the route A-B-C.
Say, person A wants to pay C the amount of 0.4 BTC.
Then both A as well as B must have 0.4 BTC available in their respective channels A-B and B-C.
The same holds true for longer routes.
There must be enough liquidity available on the channel for the node that wants to forward the payment.
This must hold true for every single channel that the payment is routed through.
The lowest capacity of a channel set the upper limit of the full route through this channel.
Hence, capacity and connectivity are crucial resources in the Lightning network.

==== Incentives for Large Transaction Value vs. Incentives for Small Transaction Values

The fee structure in Bitcoin is independent of the transaction value.
A $1 million transaction has the same fee as a $1 transaction on Bitcoin.
In Lightning the fee is a fixed base fee plus a percentage of the transaction value.
Hence, in Lightning the payment fee increases with payment value.
These opposing fee structures create different incentives and lead to different usage in regards to transaction value.
A transaction of enough value will be cheaper on Bitcoin and hence users will prefer Bitcoin for large value transactions.
Similarly, on the other end of the spectrum, users will prefer Lightning for small value transactions.

==== Using the Blockchain as a Ledger vs Using the Blockchain as a Court System

On the Bitcoin Network, every transaction is eventually recorded in a block on the blockchain.
The blockchain thus forms a complete history of every transaction since Bitcoin's creation, and a way to fully audit every bitcoin in existence.
Once a transaction is included in the blockchain it is final.
Thus, no disputes can arise and it is unambiguous how much bitcoin is controlled by a particular address at a particular point in the blockchain.
(The only possible dispute is if the blockchain forks into two or more different blockchains.)

On the Lightning Network, the balance in a channel at a particular time is known only to the two channel partners, and is only made visible to the rest of the network when the channel is closed.
When the channel is closed, the final balance of the channel is submitted to the Bitcoin blockchain, and each partner receives their share of the bitcoin in that channel.
For instance, if the opening balance was 1 BTC paid by Alice, and Alice made a payment of 0.3 BTC to Bob, then the final balance of the channel is 0.7 BTC for Alice and 0.3 BTC for Bob.
If Alice tries to cheat by submitting the opening state of the channel to the Bitcoin blockchain, with 1 BTC for Alice and 0 BTC for Bob, then Bob can retaliate by submitting the true final state of the channel, as well as create a penalty transaction that gives him all bitcoin in the channel.
For the Lightning network, the Bitcoin blockchain acts as a court system.
Like an arbitrer Bitcoin records the initial and final balances of each channel, and approves penalties if one of the parties tries to cheat.

==== Offline vs Online, Asynchronous vs Synchronous

When a Bitcoin user sends funds to a destination address he does not need to know anything about the recipient.
The recipient could be logically speaking "online" (e.g. run a node) or could be "offline" (e.g. does not run a node, does not use any wallet currently).
The transaction is registered in the blockchain, and at any later point in time the recipient can have a look at it and see that has has received funds in the past.
In Bitcoin, the recipient can be "offline" and the interaction is asynchronous, sender and receiver do not need to synchronize in any way.

In Lightning, this is different.
The node that represents the payee must be "online" during the transaction.
The payee must run a node or have someone that runs a node for him.
That node must be "online" at the time of the payment.
To be precise, both nodes, the payer's and the payee's must be online at the time of payment.
The payer and payee must cooperate, i.e. in some fashion one could say "synchronize" , during the payment.
If the payee's node is down the payer cannot make the payment.

==== Satoshis vs. Milli-Satoshis
On Bitcoin the smallest amount is a "satoshi" which cannot be divided any further.
Lightning can be more flexible.
Lightning nodes can optionally be configured to work with "milli-satoshis".
So, within Lightning even smaller amounts can be exchanged.
When settled on-chain, it must be settled in "satoshis".

==== Blockchain Space as Scarcity vs. Channel Capacity as Scarcity
Bitcoin and Lightning have different scarce resources.
The scarce resource for operating on the Bitcoin protocol is the space in the blockchain.
The scarce resource for operating on Lightning is the channel capacity, or in other words the liquidity.

=== Commonality of Bitcoin and Lightning

==== Monetary Unit

Both the Bitcoin network and the Lightning network use the same monetary units: bitcoins.
Lightning payments use the very same bitcoins as Bitcoin transactions.
As an implication, because the monetary unit is the same, also the economic monetary limit is the same: 21 million bitcoins.
From these 21 million bitcoins, some are locked in 2-out-of-2 multisig addresses so that they can enable a payment channel on the Lightning Network.

==== Irrevocability

Both, Bitcoin transactions and Lightning payments are irrevocable.
There is no "undo" operation for either one.
As a user of either one you have to act responsibly.

==== Trustlessness

Just as Bitcoin, Lightning requires the user only to trust mathematics, encryption and that the Lightning code does not have any critical bugs.
Neither Bitcoin nor Lightning require the user to trust a person, a company, an institution or a government.
Since Lightning sits on top of Bitcoin and relies on Bitcoin as its underlying base layer, it is clear that the security model of Lightning reduces to the security of the base blockchain.
In other words, Lightning can never be more trustless than Bitcoin.

==== Permissionlessness

Both Bitcoin and Lightning can be used by anybody with access to the Internet and to the appropriate software, e.g. node and wallet.
The user of neither network requires permission from third-party persons, companies, institutions or a government.
The user does not need permission from anybody as long as he has access to Internet and can run his node or wallet.
Governments can only outlaw Bitcoin or Lightning locally in their jurisdiction, but they cannot prevent their global use.

==== Open Source

Both, Bitcoin and Lightning are open source software and are built by a decentralized global community on open source principles.
