Bitcoin's Red Lightning: How the most promising scalability solution works

The problem that needed a solution

Bitcoin revolutionized the way we think about digital money. However, it has a weakness: speed. Blocks are generated approximately every ten minutes, and each can only contain a certain number of transactions. When the network gets congested — as it did in 2017 and again in 2021 — fees skyrocket. In April 2021, paying for a transfer on the Bitcoin main chain cost an average of over 60 dollars. Can you imagine paying for a 3 dollar coffee with a 10 dollar fee? It's not sustainable.

Red Lightning: The off-chain answer

To resolve this bottleneck, Layer 2 solutions were developed. These are networks that operate on Bitcoin without being exactly Bitcoin. The most notable is the Lightning Network.

The Lightning network allows users to make fast peer-to-peer transactions without waiting for block confirmations. You don't need every transaction to be recorded on the blockchain. Instead, you open a “payment channel” with another person, and both can exchange funds instantly thousands of times. Only when you close the channel does that final transaction get published on the main chain.

Understanding Payment Channels

Imagine that Alice and Bob plan to make many purchases together. Instead of having multiple on-chain transactions, they agree to open a channel. Both lock, say, 5 BTC each in a multisig address (multisig) — a special type of address that requires the signature of both parties to spend funds.

Within this private channel, they create a “mini-ledger” shared. When Alice wants to pay Bob, she simply updates the balances: she loses 1 BTC, Bob gains 1 BTC. Then, Bob can return 2 BTC to Alice. These changes occur instantly, without involving miners. At any time, they can publish the final state on the blockchain and withdraw with their respective balances.

Security through Cryptography: Multisignatures and HTLC

Here an obvious question arises: what prevents Alice from trying to cheat by publishing an old state where she had more money?

The system uses two security mechanisms:

1. Multisignature Addresses (Multisig)

A multisig address requires multiple signatures to spend funds. In a Lightning channel, a 2 of 2 scheme is used: both parties must sign to move money. This means that neither can act unilaterally while both cooperate.

2. Hash Timelock Contracts (HTLC)

This is the true genius of Lightning. It combines two technologies:

• Hashlock: A cryptographic condition where only someone who knows a specific secret can spend funds.
• Timelock: A time restriction that prevents spending before a certain moment.

When Alice and Bob open a channel, they exchange hashed secrets. If Bob tries to publish an old state where he has more funds, Alice immediately accesses her full balance because she now knows Bob's secret ( revealed when they created the new state ). Meanwhile, Bob must wait for the time limit to expire to access his funds. This punishes him for trying to cheat.

Routing: Connecting Channels

The true power of Lightning emerges when channels are interconnected. If Alice has a channel with Bob, and Bob has another with Carol, Alice can send money to Carol through Bob. Bob acts as a “router” and can charge a small fee for facilitating the transaction.

This scales rapidly. With enough channels, Alice could theoretically send funds to almost anyone on the network without needing a direct channel.

Practical example:

• Alice and Bob: capacity of 1 BTC, Alice has locally 0.7 BTC
• Bob and Carol: capacity of 1 BTC, Bob has locally 0.6 BTC

If Alice sends 0.3 BTC to Carol, she pushes those funds to Bob, who then pushes them to Carol. Bob's balance remains the same (+0.3 from Alice, -0.3 to Carol), but his flexibility decreases. He can now spend 0.6 BTC with Alice but only 0.3 BTC with Carol. Routers may charge fees for this, creating a liquidity market.

Clear advantages of the Lightning network

Unlimited scalability: Users can make millions of off-chain transactions with just two on-chain transactions (open and close the channel).

Viable micropayments: Bitcoin can send a minimum of approximately 0.00000546 BTC. Lightning reduces that to 0.00000001 BTC (1 satoshi). Fees disappear in closed channels, making penny payments possible without being economically unviable.

Enhanced Privacy: Channels can be private. No one knows what happens inside. They only see that a channel was opened, but not the details of the transactions.

Instant Speed: Forget waiting 10 minutes. In Lightning, payments are processed as fast as your internet connection.

The real challenges

Complicated usability: Setting up a Lightning node and opening channels requires certain technical knowledge. For beginners, the concepts of local/remote liquidity and channel management can be overwhelming.

Liquidity problem: You can only spend what you have locked in a channel. If both sides have all the balance on one side, it is impossible to send more money unless someone pays you first. This limits the flow and can frustrate new users.

Centralization risk: Liquidity-rich intermediaries (the “hubs”) become critical points. If the large routers disconnect, the network fragments. Additionally, there is a risk of censorship if a few actors control the routes.

How is the Lightning network today

As of March 2024, the Lightning network looks healthy:

• More than 13,000 active nodes operating globally
• More than 52,000 channels connecting the network
• Around 4,570 BTC of total capacity locked

There are multiple implementations: Blockstream's c-lightning, Lightning Labs' LND, and ACINQ's Eclair are the main ones. For less technical users, companies offer plug-and-play nodes that work as soon as you turn them on.

The future: A more accessible Bitcoin

Since its mainnet launch in 2018, Lightning has evolved significantly. Technical barriers are slowly being reduced thanks to continuous development. What started as an experimental solution has become a viable alternative for low-value, high-frequency payments.

The Lightning Network is not the solution to all of Bitcoin's problems, but it addresses the most urgent one: how to make Bitcoin practical for everyday transactions without sacrificing its security and decentralization features. As more developers build on it, the network will become more robust, easier to use, and more integrated into the cryptocurrency ecosystem.