Bitcoin Lightning Network Explained: How it Actually Works
How the lightning 2nd layer enables fast and cheap Bitcoin transactions, including demos, payment channels, multi-hop payments, and challenges.
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Resources:
Bitcoin Lightning Protocol Deep Dive (protocol and script line-by-line walkthrough): • Bitcoin Lightning Tran...
How Bitcoin Works Under the Hood: • How Bitcoin Works Unde...
bitcoin/lightning donation address: zbd.gg/scottyd
fiat support: / curiousinventor
0:00 Intro
0:28 Demonstration Sending Bitcoin via Lightning
0:44 Earning Bitcoin in eSports with Zebedee integration
1:46 Bar Tab Analogy
4:45 Payment Channel Setup & Operation
6:44 Protecting Initial Deposit
7:20 Invalidating Prior States
10:51 Individual Revocation Logic
12:15 Payment Channel Review
13:14 Multi-hop Payments & HTLCs (Hash Time Locked Contracts)
17:28 Privacy & Onion Routing
17:54 Conclusion and Challenges
Congratulations to this great work and thanks for sharing! I always wanted to create something similar but decided to get the messaging clearer and simpler by finishing our book that you mentioned. Now I don't have to do this. Great indirect collaboration! That's an amazing feeling! (though I am a tiny bit envious) btw sorry for never having reviewed the long version. Had the tab open ever since but was too busy with the path finding stuff
Thanks for the kind words and all the amazing content already in Mastering the Lightning Network (github.com/lnbook/lnbook). An invaluable resource for learning about Lightning, can't wait for the completion.
This is the best video on Lightning Network out there. It breaks down the whole complexities and explains them in a beautifully simple way. Newbies will have to watch it more than once.
the most clear technical explanation I have found on bitcoin and its lightning network. Layer 2 used to be just a buzzword for me but not any more thanks to you!
This video is amazing! Perfect depth to get an intuitive understanding! Would be great to hear a bit more about the practical implications of needing to be online, monitoring the blockchain and how routing the transaction works (finding good paths/nodes).
Like your video "How Bitcoin works under the hood", this one will be the one I will share to people searching for a clear explanation :) thanks a lot !
great video, thanks for the perfect explanation and real world examples
Yoo man thank You for sharing this video. You deserve so many more subs... Real quality content here!
Great explanation, really helps a lot! Much appreciated. I have a few questions.. So each person has their own payment channel? As in, I have my own payment channel with BTC deposited in it, and I'm sending my BTC to someone else's payment channel for it to be done on the Lightning network? When saying that a payment channel is “opened” or “closed”, this essentially refers to either depositing BTC to that channel from a standard BTC address or withdrawing from the channel back to a BTC address right? If I want to declare my BTC back on the main blockchain, can I validate *some* of the BTC on my Lightning channel or does it have to be all? Thanks for your time!
A channel has two people (at least for now). Simplest case is Alice and Bob setup a channel, but only one of them deposits funds into this. Under the hood, this is just like any other bitcoin transaction, except it requires signatures from both Bob and Alice to spend the money, instead of just one signature to spend. a "channel" is a bitcoin address just like any other address, it just has different spending requirements. Opening a channel means sending money to a lightning contract address. Closing a channel means spending it out of that special address and back to some other address, which could be a regular bitcoin address. right now it's all or nothing: all the money is in the channel or spent out of it and the channel is closed. This is a pain because you want to keep channels open for a long time, but that requires committing funds to the channel.
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Fantastic explanation and illustrations. Was a great help to help me revise/refresh the lower level technical details on how LN works at the Bitcoin protocol level after 3 years of not working with it.
How, before the initial funding transaction, I can reference this very same transaction without having it submitted?
Thank you very much, this was the exact explanation I was looking for.
Probably the best channel for btc technical explanations. Thank you for your work! :D
Question: When buying beers on the same payment channel, does each transaction create another multisig? Because when a revocation secret is created, it built around the previous transaction meaning a new multisig would have to be used given that the inputs this time are different.
Nope, all the transactions always spend the funds from the same UTXO. The revocation secret is only used in the public locking script of one of the outputs of the transactions that each party can unilateraly publish on the blockchain. If they need to change the state of the channel, they create a new transaction spending the same funds but they change the locking script to replace the revocation secret that must be revealed to claim the funds by a new one. Then they reveal the previous secret to each other so that if the other peer publish an old transaction that spend the funds later, the other will be able to claim all of them using the revocation secret that the other peer shared before.
Super good, thanks for the awesome work
Thank you for this! It's excellent.
Interesting. I'm wondering what proportion of BTC would be locked up in payment channels if it became the defacto global currency. I guess "layer 3" would consist of liquidity pools where even small hodlers can contribute to the network, much like mining.
Thanks, this explanation was very helpful
You explained to me bitcoin in 2013 and now the best explanation of LN is from you also! Would love if you could explain to us ''channel factories'' and ''multiparty channels''
Glad they’ve been helpful! There’s so much more in lightning to explore, will add those concepts to the todo list
If you need two signatures to spend the money, and the other party refuses to sign, how do you get the money out? That second party can always stop you from utilising the money?
Insanly good an clear video. Highly underrated. Should have way more likes and views!
Great video! Regarding the transaction size. What amount is ok to send via lightning and when should I consider to pay via on-chain? In terms of safety, fees etc. Is it like $100 or $1000? Am I even able to send sums like $1000 via lightning these days? Thanks a lot.
Here's an example of sending over $10k on lightning: twitter.com/renepickhardt/status/1418849788531990530 But the amount you can send depends on the size of the channels along the route, and the software you're running. That particular transaction was automatically split into many parts. I think a few hundred $ works well on lightning with large nodes these days, but at some point you'll pay more for fees on lightning than on-chain. The dream is that this is all just hidden by your wallet and at some point it will give you the best possible price or time. Still early days...
Hey, I requested my platform to pay my profits through direct deposit to bank. Do I still need crypto lightning network? Pls. advise
wonderful, absolutely wonderful explanation of how it works
The bar tab analogy is interesting, though I'm not sure I understand how it reduces the ultimate cost for individual transactions. If you would've spent $10 in a normal Bitcoin transaction, but only a few cents with lightning, who/what makes up for that $9 difference when the transactions are eventually broadcast on the Bitcoin network? The bartender? If so, what would incentivize the bartender to incur that cost on the customer's behalf?
Each channel requires an on-network transaction both to open and close it. The hope is that you keep the channel open and complete thousands of transactions through it. Both sides of the channel are more equal than in the bar analogy, however, currently, the person opening it pays the fees.
A quick question: when transactions are recorded in the Lightning network (Alice pays bob $5) does bob actually receive $5 in his wallet or it is just credited to his wallet in the smart contract and when they close the payment channel the $5 is sent to his wallet?
It‘s the latter, the $5 will not be in his wallet until the channel is closed.
Wow! Thank you so much!!!
Thank you for the best instructional Lightning Network video available presently … immensely helpful
Glad it’s helpful!
Wow, what a quality material. Thank you thank you thank you.
2:50 Did you just wrote (Bitcoin Transaction), Is every state is a transaction on the network? Then how does it saves fees?
Every state can be a transaction but only the first and the last will be visible and published in the chain. You can have almost an number of states between the two for which you pay no transaction fee to miners.
so does every customer visiting my e-shop for small transaction needs to open a channel with me and every store and start by transaction fund? is this applicable to the real world, what other options?
Ideally, everyone maintains long term channels with a few peers, and there are enough connections between everyone that you don't have to setup new channels. The money flows through multiple stops. And going further, the long term vision is that wallet software hides all of the complexity entirely--you just scan a code, see the fee, and hit send. The wallet figures out the fastest and cheapest route, channel management, etc.
This is amazing. Thanks
So it seems like lightning transactions are not "final" until settled on the main chain. The Bitcoin in a lightning wallet doesn't become "real" until then, and are more like Bitcoin cheques. Is this correct or am I missing something?
They are final when the lightning transaction happens, because that paid amount can be used to send other lightning network transactions. You only need to settle onchain if your goal is to move the funds to cold storage.
how is the payment channel's security backed by the main chain? miners are on the main chain right
You don't need to get miners confirmation for the transactions that require your own signature to be valid. Here, given everything is shared multisig between senders and receivers, the only confirmation needed are for channel openning and closure.
you're the best thanks
This is very helpful
A Gentlemen of Crypto reference. Nice!!!
Can't send on your LN address
This might be a silly question. Why can't Alice share the commitment transactions to Bob with just her signature. This way Bob will only broadcast the final transaction after signing it (If he broadcasts the older transactions, he only gets paid less and he cant broadcast multiple transactions, as all of it uses the funding transaction as input). Alice can't broadcast any commitment transaction as all of it lack Bob's signature.
I'm not sure i completely understand your q. Alice needs to be able to broadcast those commitment updates, and so needs bob's sig. remember the balances can go up or down. Feel free to ask more!
Thanks a lot. Now it completely makes sense
I don't really understand the Lightning Network, but how does it solve anything fundamentally? The first and only reason why blockchain (+p2p network) has emerged as a technology with the idea of solving one major problem is centralised entities that can be corrupt. Now looking at what we have here is that we are adding another centralised layer on top of the decentralised assets of Bitcoin. This just adds another problem that we were trying to solve in the first place. Or I'm missing something here?
This layer is not centralized. You don't need special authorization of someone to open LN channels and publish them for others to use them to route payments. In practice big hubs makes routing much easier so yeah you may find some but they are not required and they can't claim your funds safely.
This tech is so smart and your vid is great
Hello sir,🙏 It would be good if you can share, after lightning network create funding for the both sender and receiver parties then this funding transection or settlement transection how to push in any miner pool because without any miner pool how to miner would get this funding and settlement transection and mine this two block in blockchain network..? and so how to connect lightning network with miner pool ...? so please suggest related any document….
The protocol includes a fee negociation. And now there is something called anchor output that allow you to bump fees of the commitment transaction if needed.
, I want to ask a question? Does this system need updates or improvements I see many people say it's perfect?
Nothing is perfect. However this protocol is much easier to upgrade than Bitcoin.
how can you efficiently find a path in multichannel scenario?
There is a network of publicly annonced channels you can use.
How to broadcast to layer 1 chain?
You close a channel or use a swap service: send LN BTC to get back BTC on the chain.
Few questions. I'm still not clear about the logistics of how all this works and potential fees that the consumer will incur. 1) How does one use lightening network? I keep hearing about lightening work but have no idea how to sign up or where to go to use it. I feel like I'm missing something here. 2) What's the fiat onramp for the lightening network? Is it linked to your bank? 3) What will be the transaction fee for consumer to purchase something with Bitcoin? Even if the transaction fee is small to purchase the Bitcoin why as a consumer will I pay a transaction fee to buy something when I pay zero fees using my credit card? I can see the benefit from a merchant's standpoint of saving fees but as a consumer I don't see the point of using Bitcoin if it's going to be associated with a transaction fee to purchase something. Everytime I buy Bitcoin as an investment I have to pay a transaction fee. Same goes true if I sell it. 4) I feel like I'm really missing something here. For a consumer what's the real benefit of using bitcoin versus using a credit card? I don't see any.
Currently, some businesses offer discounts if you pay with cash. They do this because credit cards charge them a ~2% fee per transaction, so they can just pass that 2% on to customers if they pay cash. I could see a similar situation for Lightning transactions. The discount they give you could easily cover the cost of the transaction. The cash discount probably isn't vary common because it is less convenient to handle cash than to transact with credit cards. In the case of lightning, It could be implemented to be just as convenient as credit cards, so there is even more incentive for businesses to offer the discount. In the end, businesses will pay fewer fees and therefore make more money if they get customers to pay with lightning, so they will probably find a way.
Step one, get Bitcoin. Step two, send the Bitcoin to a lightning wallet, such as muun. Then you can send Bitcoin transactions over the lightning network that are instant with negligible fees. Credit cards do have fees, the merchant pays them, and they end up raising prices as a result.
Hi. Can I translate your vídeo tô portuguese (pt-br)?
The Outputs are swapped at 13:00. The right commitment tx should pay Alice 70k (Output 2) and Bob 30k (Output 1).
Um... so where is your bitcoin while this is going on? What if I have a hardware wallet? I could start a transaction, move my bitcoin to another wallet and then walk out on the bill???? How does the lightning network know what's in my wallet? This means that a central authority has to have control over my bitcoin. It means that I have to have it on a "coinbase" account that is linked to the lightning network. We're back where we started with centralized banking.
I belive your BTC is held in the payment channel. The issue I forsea is Alice and Bob need to trust each other as they are pretty much using somthing thats similar to a joint bank account. I also believe originally many users lost ther BTC when payment channels were abrubptly closed (happy to be corrected on this). Last time I looked at this I didnt think it would work, and this video doesnt give me confidence that it would. Better off converting BTC in to fiat IMO, of one wants to use payments locally.
They are locked in an address that you and a untrusted peer control and you always have a transaction fully signed that allow you to claim them to an address you fully control if you want to. The point is that because your signature is required to claim the coins in a channel, your channel peer cannot double spend you so you can decide to not broadcast the transaction and replace it by a new one if your channel peer agrees. Only you and your channel peer know how much each of you have in the channel until you decide to close the channel. There is no global ledger in the lightning network. If you are not happy by one of your channel peer, you can always ask him to cooperate to close the channel cleanly with the last amounts you agreed on or publish the last signed transaction he gave you to claim the same amount of coins (force close case). The counterparty never controls the funds in this process, you always have the possibility to broadcast the last transaction to claim all your money even if the other party don't want you to do it. There is no trust here.
Although this explains well the "bar tab" and more complex use cases, I still don't understand the most attractive feature of the Lightning Network... how is this faster than a straight forward transaction between Alice and Bob without using Lightning? It looks like a simple, single transaction between Alice pays X to Bob would take the same time using Lightning, since at the end of such transaction, it must be recorded on the blockchain just like a normal transaction. Does Lightning only improves speeds on the bar tab or other complex examples, but not in a straight forward simple A pays X to B transaction?
If you don't already have a channel set up, you're right, it's worse to use lightning. But ideally everyone already has several channels set up and never closes them. Then as long as a path can be found between Alice and Bob, lightning doesn't require any on-chain transactions. Now if it's a large amount of money, it will still be cheaper to use an on-chain transaction.
@@CuriousInventor thank you for the reply. So basically if A send B 0.1BTC and they both have channels, instant transaction. But when B wants to send that 0.1 to C, and C is not on Lightning, then the transaction between A and B would need to be written in the blockchain, before B can send C the 0.1, correct? Assuming B only has 0.1 BTC to send
That’s right, the .1 is locked in a payment channel until another txn onchain is made. And since we’re talking about a relatively large amount, A and B might also run into channel balance issues. Lightning doesnt magically solve all the problems by any means.
We are still early, here before Million views.
Who calculate the cheapest path between two peer ?
Your lightning node based on a graph it constructs by gossip from other nodes.
@@baltakatei thx
Seriously how did you learn all this?
Beautiful!
One question, alice transmits a correct transaction. Now bob want to cheat, what keeps him from revoking the correct transaction and claim the output ?
Well ... I am not sure to understand what you mean but when it's Alice who sign a tx for Bob, it means it's Alice who wanted to send money to Bob so he doesn't have incentive to not accept it. However next time Bob will sign a tx to Alice to send her money, he will send the private key that allow Alice to take his funds if he ever broadcasts this old tx, that's what "revoking" means in LN.
Great video. But there's one thing I don't understand, since your node always has to be online monitoring for fraud, how are non-custodial mobile wallets like Phoenix supposed to work? Since it's very likely that you sometimes won't use the app for more than 24 hours or even weeks, isn't the risk of your peer broadcasting an old state transaction quite high?
Great question. I'm not 100% sure on this one. Their faq mentions several privacy trade-offs, but I believe you're still in complete control even if Acinq disappeared. You only ever connect to Acinq peers, but that doesn't mean that they wouldn't necessarily try to spend a revoked transaction... it doesn't make sense that you would want to rely on them running a watchtower to protect you from them. medium.com/@ACINQ/introducing-phoenix-5c5cc76c7f9e#b94c
Hard to understand
What exactly?
cry about it
nice but can you suggest me another crypto to start investing? I mean with a little low price but great potential?
Recently I see people talking a lot about Luminos coin, I also want to learn about them
@@antonkight638 me too dude
I’ve heard that the Satoshi is supposed to be just as good as bitcoin, but right now it’s less than a penny, totally decentralized and non-confiscatable! It’s pretty much guaranteed to go up! It’s a no-brainer!
The problem LN will never solve is the cost of opening & closing channels
The problem is, if you buy any amount of bitcoin, you have to let the IRS know you bought bitcoin, on your tax return. So there are tax ramifications. Right?
In the US, i believe only when you sell, but you have to keep track of what you paid originally and use a consistent method of linking buys to sells (first in first out, etc). Pretty annoying, and potentially terrible if you’re executing millions of micro transactions. Not an accountant!
good video
0:44 It cost you more in transaction fee than the transaction you actually sent. Hmm... Bad example of lightning being affordable.
$.05 sent, cost $.0006
Thanks really good explanation. I suppose the only downside is to get your funds into a Lightning Network wallet you will need to pay a CEX on the base level to do the transfer. On the positive side once it is there it's possible to pay small amounts with very little fees.
This is excessively complicated. I think it would be better if they just used a fast and cheap altcoin to do the transactions. For example, solana. Let's say sender wants to send 10 bitcoin transactions to recevier. The sender could convert the bitcoin to solana. Send the equivalent amount of solana in 10 solana transactions to the recevier. Then once the 10 solana transactions are done, the recevier can then convert that solana into bitcoin. Then in total you have done 2 bitcoin transactions and 10 solana transactions. Which is cheaper than just doing 10 bitcoin transactions. Basically lightning could just use solana instead of trying to create their own lightning ledger. There are already tons of altcoins with fast and cheap ledgers. Solana, dogecoin, etc. Why make a new ledger?
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So if I want to do 10 Bitcoin transactions over the course of a year, I need to keep my money in some random altcoin instead of Bitcoin? Then I risk losing money if the altcoin price falls against Bitcoin, thus not being cheap at all. From what I can tell, lightning is pretty straightforward.
Lightning is a game-changer
Why not use a simple solution as only possible to broadcast the latest balance?
Cause you don't know which one is the latest.
You cannot prevent someone to broadcast a valid Bitcoin transaction, that's the whole point of Bitcoin. However with eltoo update it is possible to "unilateraly correct" the published state by a more recent one before a time period (it will spend the funds of the wrong state and force them to be spend with the more recent state). This allows to only store the very last state (for which there is no more recent state) to be safe. But the transactions are build very differently (.... and it requires eltoo softfork)
This is too confusing for most people when you can just whip out your credit card and pay for things. Additionally even though credit cards charge interest, at least if you're overcharged or have a problem you can call them and get it taken care of. What if you wake up the next day and realized that when you were drunk the bartender overcharged you? Now what do you do? At least with a centralized platform like credit cards you have options.
fair points! A lot of benefits are for the merchant (lower fees, no charge-back risk). Maybe merchants could give a discount. Apps will have to be as seamless as credit cards for end users.
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While this is awesome, and cheap, security is of concern!
The regulators are going to have a field day with this...After using Algorand, this doesn't even come close to the functionality Algo has. All these extra steps just to make a simple transaction cheaper for general use is kind of ridiculous and if "Bob" isn't reporting transactions this could definitely bite someone in the ass come tax season, unless I'm missing something here...but I guess it briefs well lol
Of course not, Algo is a full fledged L1 network meant for both individual and Enterprise use. BTC is old news. Only name recognition and whales keeping it alive.
Lightning seems expensive and complicated.
Did you used it ? Wallet software can handle lot of complexity for you if needed.
Bitcoin isn't a currency, its digital property & digital energy.
Well satoshi made it to be a digital currency payments system but obviously that has failed.
LBTC is a future hidden GEM🎉
Drink for 10K sats ?. Someone watching this in year 2088 will get mental stroke as even sats would be expensive let alone Bitcoin
this is the future
nyc
Alice might have a drinking problem!
Went over my head
Buy Bitcoin!
Man am I ever stupid. This is way beyond my limited sense of comprehension. I can't even figure out how to cast a movie to the TV, let alone this.
Lol, this is def only for programmer level understanding. On the other hand, it's so complex compared to the original bitcoin it makes you wonder if it will survive in the end.
yeah umm, this aint gonna work how you explained it. people want to swipe a card , not learn their money. best case store of value. Sorry, lightning wont work for day to day single transactions. I realize that this is how money works in the digital world, but, it aint gonna functionally work in the real world. Sorry, it just wont.
The hope is that all the complexity will be hidden in a wallet app, and lightning will just work like venmo. Still a ways to go.
@@CuriousInventor I'd say thats gonna be the only way the masses do it, and then the people that care about self custody will take action. Thats the beauty of it. It gives the basest form of privacy without compromising security, then allows layer 2's to branch in wide arrays of "maximalism to afk brain dead cashapp." Which is a good thing. If this is utilized, it encourages a new class of bankers, but with a check to balance it by being able to remove bitcoin from the liquidity pool.
That's a silly comment: it's like going on a video about computer programming and claiming computers won't ever work because most people are not programmers. None of this information is required for people to spend money through Lightning. No one has to "learn about their money" to spend it.
That is a hack in Bitcoin network Funding and closing transaction so no full truth is recorded on chain
Oh My God! Just use a different blockchain that can actually be used for micropayments! Ever heard of Doge or Solana? Polkadot or Cardano? Bitcoin and Ethereum are not the only Cryptos in this world.
That's a fair point, and competition for better money is good... but this is a great upgrade for bitcoin if the complexities can be hidden by apps.
@@CuriousInventorOr just increase the blocksize & make bitcoin usable in P2P transactions
OK. But why not just use a more functional, 1 layer protocol like XRP. Faster, more secure, and with none of the problems that this entire video is based on.
Because xrp relies on trusting a central coordinator for the network.
@@SAL-fs1mr Who/What is that central coordinator? Can you be more specific?
@@TreverSwelland the Ripple company. They manage the primary UNL, which is the list of trusted validator nodes the network follows.
80% of the total nodes are run by third party entities. So even if ripple stopped operating thier nodes, the XRPL would continue to function normally.
@@TreverSwelland you've just highlighted how it's a federated system of trusted nodes. The idea of Bitcoin and lightning is that there are no trusted nodes.
Bitcoin sucks.
Spoken like a true shitcoiner.
Too much jargon. Stop using any form of technical terminology . Ur mixing high level technical terminology with stupid condescending examples using "Bob and Alice" . When are the fees incurred? What is a funding transaction? How would a regular 100 IQ person interact with and set such a thing up to begin with? with A phone? What app? How much will that cost ?tell them what the green will say... What will they see ? Are the things you are referring to in the computer logic all happening without my input? Does the contract run and update itself without me remembering anything? What is my responsibility when using the network, what do I need to write down? if anything?... I hope u understand what I am saying. Like... don't say "decentralization" say " without the influence of a government or bank" . That's what it means to the average person . Talk like a regular person or you will always be a shit teacher. I understand you but regular people definitely don't and that's why ur video has 15k views.
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