How the Lightning Network works

Every channel lives through three moves.

1. Open. One side sends bitcoin to a 2-of-2 multisig output that needs both signatures to spend. This funding transaction is an ordinary Bitcoin transaction.
2. Update. For each payment, both sides sign a new commitment transaction that splits the funds differently. Nobody broadcasts it: it just sits ready, and the old one is revoked.
3. Close. When they are done, the latest split goes on-chain, either together (a cooperative close) or by one side alone.

Only moves 1 and 3 touch the blockchain. Everything in between is just messages.

Step 1: Alice opens a channel to Bob

Alice needs Bob's node id (his public key) and his address on the network. Then she funds 500,000 sats:

⚡Alice opens a channel to Bob

CLI

NodeAlice · LNDBob · c-lightningChan · c-lightningDina · LNDNo node

# 1. Find Bob's node id (his public key). BOB=$(JIFUNZE_NODE=bob lightning-cli getinfo | jq -r .id) echo "Bob is $BOB" # 2. Connect to Bob, then fund a 500,000-sat channel. lncli connect "$BOB@bob:9735" lncli openchannel --node_key "$BOB" --local_amt 500000

▶ RunCheckReset lessonRestore starter code

These exercises need a laptop with the lab running. You can read the lesson on your phone.

The output includes a funding_txid. The channel exists, but it is pending: the funding transaction is in the mempool, not yet in a block.

Step 2: Confirm it

On regtest you are the miner. Six blocks give the funding transaction six confirmations, and the channel becomes active:

⚡Confirm the channel by mining blocks

CLI

NodeAlice · LNDBob · c-lightningChan · c-lightningDina · LNDNo node

# The funding transaction needs confirmations before the channel can be used. bitcoin-cli -generate 6 sleep 3 JIFUNZE_NODE=alice lncli listchannels | jq '.channels[] | {remote_pubkey, capacity, active}'

▶ RunCheckReset lessonRestore starter code

These exercises need a laptop with the lab running. You can read the lesson on your phone.

Step 3: Bob gets paid

Bob runs c-lightning, so his invoice command is different, and c-lightning counts in millisatoshis. Make the invoice on Bob, then pay it from Alice:

⚡Bob requests a payment, Alice pays

CLI

NodeAlice · LNDBob · c-lightningChan · c-lightningDina · LNDNo node

# c-lightning counts in millisatoshis: 20,000 sats = 20000000 msat. # Every invoice needs a unique label. lightning-cli invoice 20000000 chai-1 "Chai ya Bob" # Then switch the node to Alice and run: lncli payinvoice --force <bolt11>

▶ RunCheckReset lessonRestore starter code

These exercises need a laptop with the lab running. You can read the lesson on your phone.

Alice opened the channel with all 500,000 sats on her side. After paying 20,000 sats, Bob has 20,000 on his side and can now pay her back. That balance on each side is the channel's liquidity.