[role="pagenumrestart"]
[[ch02_How_Lightning_Works]]
== How the Lightning Network Works

=== Payment channels

* trustless between peers
* operation takes place off chain
* throughput bound by TCP/IP traffic
* have capacity which is split into a balance sheet
* instant payments between peers

==== Multisig address
* short review of bitcoin transactions
* review of segwit multisig addresses

==== Funding Transaction
* opens the payment channel
* encodes the capacity of the channel
* not clear who owns what fraction of the capacity
* visible onchain transaction (even for private channels)

==== Commitment Transaction
* encodes the balance of the payment channel
* kept secretly between channel partners
* everyone has their own set of transactions
* encumbered with a time lock to give time to penalize protocol breach
* smart contract inside which gives possability to penalize protocol breach

==== Announcing the channel
* gossip protocol
* option to have private channels

==== closing the channel
* the good way - mutal close
* the bad way - force close
* the ugly way - protocol breach

=== Invoices

an alternative structure for the subsections of the invoice section (while covering the same topics) could be: (creating, decoding, paying as 3 sub chapters)

* creating invoices
* decoding invoices
* bech32 encoding and human readable part of invoices

==== Payment Hash
* `pre_image` as proof of payment
* random numbers and selecting the pre_image

==== Meta Data
* Description
* routing hints
* fallback address
* expire time
* signature

=== Delivering the payment

* gossip protocol
* 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 setteling htlcs (only peers involved)

==== Finding a path

* trivial case / channel partner as destination with enough funds in the channel
* topology information from the gossip protocol
* fees and pathfinding from destination to source

==== Onion routing

* construct an onion using
** SPHINX
** payment hash
** path

==== Payment Forwarding Algorithm

* receive an incoming HTLC
* forward an HTLC
* BOLT 02 channel update protocol
* sending back errors

=== Comparison with Bitcoin

* select outputs vs select payment channels / finding a path
* change outputs vs no change on lightning
* mining fees vs routing fees
* public transactions on the blockchain vs. secret payments
* waiting for confirmations vs instant settlement (if everything works smoothly)
* arbitrary amounts vs capacity restrictions
* variying fees depending on the traffic vs announced fees (might become dynamic too?)
* blockchain to save all transactions vs blockchain as a court system