The Lightning Network is a second-layer technological solution applied to the Bitcoin blockchain to solve low transaction speeds by introducing off-ledger transactions.
One of the foremost obstacles on Bitcon’s way to becoming a mainstream payment network is the fact that it can only process around seven transactions per second, which is significantly lesser than other electric payment networks such as credit cards. Joseph Poon and Thaddeus Dryja came up with the Lightning Network concept in 2015 to combat this issue.
The Lightning Network is essentially a transaction mechanism linking two sides of a transaction. The Lightning Network creates a second layer on the Bitcoin blockchain, made up of multiple payment channels connecting counterparties in a transaction. Using these channels, users can send payments to or receive funds from each other. The individual payment channels created by various users to conduct transactions form a network of lightning nodes capable of routing transactions among themselves. These interconnections formed between these payment channels are dubbed the Lightning Network.
The transactions conducted using any channel on the Lightning Network are not processed the same way as the transactions happening on the Bitcoin blockchain. These transactions are only recorded on the primary blockchain when two parties open a channel, trade funds between themselves (without requiring to inform the Bitcoin blockchain), and close the channel. This approach allows the Bitcoin blockchain to process more transactions per second because all transactions do not have to be approved by all nodes on the network.
Additionally, transactions made through channels on the Lightning Network are faster and more swiftly confirmed than those made on the main Bitcoin blockchain itself, and the trading fees are lesser.