How to send and receive payments on the Lightning Network

To send and receive payments on the Lightning Network, users must first set up a Lightning wallet and fund it with Bitcoin. From there, they can create payment channels and start transacting. This article will guide users through the process, from setting up their Lightning wallet to making their first Lightning payment.

What is the Lightning Network

The Lightning Network (LN for short, or simply “Lightning”) is a decentralized system for instant, high-volume micropayments that prevents users from delegating custody of funds to trusted third parties. It is a layer-2 protocol — a computer network built on top of the Bitcoin base layer (layer 1), the actual blockchain. The Lightning Network uses the Bitcoin base layer’s high protection standards to secure the network.

Bitcoin is a payment system designed to be slow, and its transactions are finalized in as long as one hour; this is because Bitcoin assembles transactions into blocks spaced on average 10 minutes apart, and payments are considered secure after confirmation of six blocks, which is about one hour. This is not ideal for micropayments and smaller transfers that are typically inefficient due to high base-layer fees.

Imagine people waiting one hour to pay for a coffee or a train ticket when they scan their phone through the station gate. The high fees add up to make the whole payment process clunky, inefficient and too costly for everyday Bitcoin network transactions.

The Lightning Network solves these problems as one of the first implementations of a multi-party smart contract using Bitcoin’s built-in scripting. On the Lightning Network, payments are instant, atomic and are not recorded on the blockchain; therefore, they don’t require block confirmations to finalize. Lightning can be used by retailers for their point-of-sale terminals, by individuals for device-to-device transactions such as remittance payments, or whenever instant payments are needed without the validation of third parties.

The Lightning Network allows users to quickly send and receive Bitcoin (BTC) with virtually no or minimal fees while achieving a throughput (message delivery rate) of approximately 1 million transactions per second (TPS). Compared to Solana, with 65,000 TPS, or even Visa, which has the infrastructure to process around 24,000 TPS, the Lightning Network is by far the fastest payment method available.

To meet the increasing demand for Bitcoin payments and micropayments, the network will need to support a much higher volume of transactions, which would be impossible to scale on the layer-1 chain. This is why the Lightning Network is considered by many the solution to scale Bitcoin in a way that doesn’t affect its decentralization and without delegation of trust and ownership.

Related: Bitcoin vs. Satoshi: Key differences explained

How to pay on the Lightning Network

Users need to get a Lightning Network-enabled Bitcoin wallet — where funds are placed into a two-party, multisignature “channel” Bitcoin address — to make Bitcoin Lightning Network payments. Understandably, the person or the business to be paid will also have a Bitcoin wallet with access to Lightning.

Most wallets are mobile due to a phone’s ease and frequency of performing instant payments. Examples of Bitcoin Lightning wallet apps include Muun, Wallet of Satoshi, Phoenix and Cash App, and they can be downloaded on both iOS and Android devices. Muun facilitates submarine swaps, a fast trade between on-chain and off-chain digital assets.

Submarine swap is a type of off-chain cryptocurrency transaction that allows for the exchange of one cryptocurrency for another. It uses the Lightning Network to facilitate fast and low-cost transactions. Phoenix (a non-custodial wallet) and Wallet of Satoshi provide nearly instantaneous safe payments with minimal fees.

Most wallets are non-custodial, meaning that the Bitcoin funds are under the custody of the owners only, and they have a multi-signature feature as an extra layer of protection for the private key.

By depositing BTC into a Lightning wallet, users open a channel, and that is their entry into the network. Even if it’s impossible to see, every time a user pays a new person or a new business with the Lightning Network, the user opens a channel with that counterparty.

This channel can be direct and created on purpose between two parties to transact easily. Alternatively, it can be a routing payment over Lightning, allowing Lightning transactions between two unconnected parties to use a series of pre-existing channels.

Once users establish a channel, they will access the entire network’s public channels, all stitched together and ready to route payments, with lightning nodes searching for the best route to perform the transaction. This is why when users pay a new retailer, they can do it instantly just by scanning the QR code, without having to open a direct channel.

Payments occur through a channel instantly, with near-zero fees, without going through Bitcoin’s base layer all the time.

Making a payment through the Lightning Network is as simple as any other digital payment method and can be done by following these steps:

  1. Open the payer’s wallet on the Lightning page.
  2. Click on “Send.”
  3. Scan the merchant’s or an individual’s QR code button or enter the address manually.
  4. Confirm everything is correct and proceed with the checkout.

Similarly, to receive Bitcoin with Lightning, the following steps may help:

  1. Open your wallet on the Lightning page.
  2. Click on “Receive.”
  3. Scan your QR code button on the payer’s device or have the person enter the address manually.
  4. Confirm everything is correct and proceed with the checkout.

The Lightning Network wallets may be suitable for keeping a small amount of Bitcoin for everyday expenses. However, it is important to note that manually entering a payment address on the Lightning Network can be error-prone and time-consuming. In contrast, scanning a QR code provides a more accurate and faster way of entering the payment address and, therefore, completing the transaction.

How to fund your Lightning Network wallet with BTC

In order to open a channel or process a payment, a user will need some BTC funds in the wallet. To upload Bitcoin to a wallet, here are the usual steps to follow:

  1. You should set up your wallet to use the Bitcoin base chain (Bitcoin wallet) or the Lightning Network (Lightning wallet). Select the wallet network you want to use.
  2. Go to “Receive” and click on it.
  3. Check the transaction details are correct.
  4. Scan the QR code or copy and paste the receiving address onto the wallet you’re getting your funds from.
  5. You have the option to add an invoice for the payment. Click on the “Invoice” button to proceed.

Once you’ve received BTC and opened a channel, you can send and receive Bitcoin with no time or amount limits. The Lightning Network is still considered experimental and must be refined, and it is therefore recommended not to store a significant amount of BTC in a Lightning wallet.

Who runs the Lightning Network

The Lightning Network is an open-source project that was ideated by research scientists Joseph Poon and Tadge Dryja in 2015. Starting as a way to address the significant increase in Bitcoin’s transaction fees, the project developed a new payment system built on top of the Bitcoin blockchain. In January 2016, the duo published the white paper, and the project started gaining more traction among developers and investors.

The same year, Lightning Labs — the company developing and maintaining the Lightning Network — was co-founded by Elizabeth Stark. The organization released a beta version of the ecosystem for developers to test, highlighting the value that layer-2 solutions can bring to the greater ecosystem.

With increasing amounts of funding and interest around the Lightning Network, such an ecosystem is gaining growing traction among Bitcoin enthusiasts, especially in light of the Lightning Network smart contract set up, which may open opportunities in decentralized finance and other applications.

How to receive Bitcoin on the Cash App

To deposit Bitcoin into Cash App, Bitcoin withdrawals and deposits must be enabled within the app by taking the following steps:

  1. Click on the “Money” tab on your Cash App home screen.
  2. Select “Bitcoin.”
  3. Click on “Deposit Bitcoin” to get started.
  4. Copy your Bitcoin wallet address onto the sender’s relevant box.

A wallet’s unique address can be used to receive Bitcoin from a third party to your account and will change after each successful deposit to ensure more privacy. Users can deposit up to $10,000 worth of Bitcoin in any seven-day period. As transferring Bitcoin occurs in the base-layer chain, it may take hours for transfers to be confirmed.

How to use the Cash App Lightning Network

In October 2022, Cash App added the Lightning Network to the Bitcoin wallet to enable Bitcoin’s faster transactions with little to no fees. Here’s how to send BTC using the Cash App Lightning Network:

  1. Click on the payments “$” tab on Cash App to view the home screen.
  2. Select the QR scanner on the top left corner of the screen.
  3. Hold your camera over the Lightning invoice QR code to scan it.
  4. Follow the instructions to confirm and pay the request.

Similarly, the following steps illustrate how to receive Bitcoin using the Cash App Lightning Network:

  1. Open Cash App and click on the Money tab.
  2. Select “Bitcoin.”
  3. Click on “Receive” Bitcoin.
  4. Share the QR code or link with the sender and scan.

To receive Bitcoin with the Lightning Network, the sender doesn’t need a Cash App account to pay a user’s request, but the sender will need a Lightning-enabled Bitcoin wallet.

Related: Beyond Bitcoin Lightning Network: Altcoins with Lightning Network support

Moving funds with Lightning addresses (LNURLs)

The Lightning Network is gradually being adopted across the crypto community and service providers, including exchanges. Kraken was one of the first to implement Lightning in March 2022. Moreover, in April 2023, Coinbase CEO Brian Armstrong announced a Coinbase-Lightning Network partnership, meaning one of the most popular exchanges in the world will be adopting Bitcoin’s instant payment network soon.

In December 2022, Lightning addresses were added to the Lightning Network. A Lightning address is like an email address but for Bitcoin, a straightforward way for anyone to send Bitcoin instantly on the Lightning Network, ushering in a new standard for how value moves around the world.

LNURLs gained a lot of traction recently when Armstrong apparently failed to recognize the Lightning address of Cointelegraph journalist Joe Hall, missing a payment due to the writer and stirring some debate on Twitter. Lightning addresses are a crucial addition to Lightning payment services, even though they will take time to be fully adopted.

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Written by Emi Lacapra on 2023-05-09 09:07:00.

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