The Lightning Network is a system that allows for extremely fast Bitcoin transactions off-chain.

Lightning Network is a smart contract protocol that uses existing blockchains to mediate transactions off-chain to increase the speed at which they can be finalized. Such a technology is much sought-after in the Bitcoin community, where transactions can take hours to clear if the workflow for miners gets backed up. With the fast pace of business today, the emergence of many other options for faster settlement, such as Ethereum and Ripple, developers know that something like Lightning Network may be needed to keep Bitcoin relevant and make it more scalable.

The blockchain is only updated from Lightning Network transactions when the final transaction between two parties has been settled between them. Lightning Network’s website characterizes the Bitcoin blockchain as the court that can rule if there is any dispute regarding Lightning Network transactions, but, like many of the contractual arrangements that happen in real-life, very few of them end up in court. This may seem like a dilemma: how could transactions use the technology requiring blockchain technology to exist happen outside of the blockchain? The answer is simply that the balances of the wallets cannot be manipulated in a way that allows the users to double-spend the coins and the updates to the blockchain ledger are completed in the most efficient manner possible, but well after the Lightning transactions have been completed. Basically, two users that want to transact with one another establish a channel in which they post balances that they are likely to spend with each other. Multiple transactions can take place, off-chain, with at least two signatures accompanying the transactions, and the final balance when the channel closes is the only one that is posted to the Blockchain ledger.

Litecoin, which can be categorized as a Bitcoin fork, was the first cryptocurrency to successfully use the Lightning Network in 2017. Lightning Network is not a fork of Bitcoin, it just uses its own protocol as a sidechain and then updates the Bitcoin ledger accordingly. In a recent development, in November 2017, Lightning Network has successfully executed Atomic Swaps, which are transactions across different blockchains, such as Bitcoin and Litecoin. It was possible to do atomic swaps on-chain in the past, but the time constraints of the blockchain validation and clearing requirements was still there. Off-chain transactions are superior in several ways, according to Litecoin founder Charlie Lee: they are faster, more private, and have lower fees.