In our previous article, we explored all about Bitcoin Lightning Network, what is, why it was created, and the main challenges it addresses.
If you think of the first article as learning what the Lightning Network promises, this article is about understanding how the Lightning Network works in practice—how it delivers on speed, scalability, and real-world utility.
Bitcoin’s Limitations and the Need for a Second Layer
While Bitcoin has revolutionized the way we think about money, it also faces significant limitations in terms of transaction speed, cost, and scalability.
Each transaction on the Bitcoin network must be confirmed by miners and permanently recorded on the blockchain.
This ensures a high level of security and decentralization, but it comes at a cost: the network can handle only around seven transactions per second, and fees can become prohibitively expensive during periods of high demand.
These constraints make Bitcoin less practical for small, frequent payments—such as buying a coffee, tipping online, or subscribing to digital services.
To overcome these issues, developers proposed the Lightning Network: a second-layer protocol that operates on top of the Bitcoin blockchain.
This solution allows users to create off-chain payment channels that enable fast, low-cost, and scalable transactions, all while preserving the underlying security of Bitcoin.
Think of Bitcoin’s main blockchain like a busy highway where each vehicle (transaction) must stop at toll booths (miners) for verification. The Lightning Network acts like a network of express lanes, where traffic flows freely and only exits back to the highway when needed.
Now that we’ve covered why Lightning exists, let’s dive into the foundation of how it works: payment channels.
What Is a Payment Channel?
A payment channel is the foundation of the Lightning Network. It is a private, direct connection between two parties who want to exchange Bitcoin frequently without recording every transaction instantly on the blockchain.
To open a payment channel:
- Two users lock a certain amount of Bitcoin into a shared multi-signature address on the Bitcoin blockchain.
- This initial “lock-up” requires an on-chain transaction. After that, they can transact between themselves instantly, without needing to touch the blockchain again until they choose to close the channel.
How Are Transactions Processed Off-Chain?
Inside the payment channel, each transaction doesn’t move real Bitcoin immediately. Instead, the two users exchange cryptographically signed messages that update their balance.
Because the signatures are secure and verifiable, if the channel needs to be closed, either part can submit the latest signed receipt to the Bitcoin blockchain to settle the final balance.
Think of opening a payment channel like starting a tab at a coffee shop.
Rather than paying for each coffee separately at the register, you agree to keep a running total with the barista.
Each time you order, the balance is updated. Then, once you’re ready to leave, you pay the final amount and close the tab—just as the Lightning Network only settles on-chain when the channel is closed.
In the Lightning Network, the tab is updated securely with each transaction, and only the final result is confirmed on the blockchain when the users decide to close the channel.
Because these updates happen privately and instantly between users without miners or confirmation delays, the Lightning Network remains lightweight, fast, and inexpensive.
Understanding off-chain updates is essential to grasp how the Lightning Network work enables speed and scalability.
Opening and Closing Channels: The Only On-Chain Steps
There are only two moments when the Bitcoin blockchain is directly involved:
- Opening the Channel: An on-chain transaction locks Bitcoin into a multi-signature address.
- Closing the Channel: When the users decide to close the channel, the final balance is broadcasted to the Bitcoin blockchain.
In between, users can transact thousands of times without burdening the main network.
How Payment Routing Works on the Lightning Network?
One of the key innovations that makes the Lightning Network scalable is its routing system. Rather than requiring a direct payment channel between every pair of users, Lightning enables payments to be routed through a network of connected nodes.
This allows for far greater flexibility and reach.
For example:
If Alice has a channel open with Bob, and Bob has a channel open with Carol, Alice can pay Carol by routing the payment through Bob, even if she doesn’t have a direct connection with Carol.
To facilitate this type of transaction, the Lightning Network uses Hash Time-Locked Contracts (HTLCs).
What Are Hash Time-Locked Contracts (HTLCs)?
HTLCs are a type of smart contract that ensures secure and conditional payments across multiple hops (participants).
Here’s how they work:
- Hash lock: A payment can only be claimed if the recipient provides a specific secret (hash preimage).
- Time lock: If the payment isn’t claimed within a certain time window, it is refunded to the sender.
This structure ensures that either the entire multi-hop payment succeeds, or all funds are returned—no partial transfers or risk of loss.
HTLCs allow for trustless payments across untrusted intermediaries, making the Lightning Network both secure and decentralized.
With this mechanism, Lightning creates a massive, decentralized web of payment possibilities, allowing for instant, atomic payments to virtually any other user on the network and showcasing how the Lightning Network work in a real-world setting
But what if someone wants to send or receive a Lightning payment and doesn’t have a Lightning wallet or an open channel?
That’s where Submarine Swaps come in.
Submarine Swaps — Bridging On-Chain and Lightning Network
Not every user wants to manage a Lightning wallet or open a payment channel.
That’s why a powerful feature called Submarine Swaps is gaining traction — and Klever Wallet is actively developing this functionality to make Lightning more accessible to everyone.
Submarine Swaps allow users to pay Lightning invoices or receive Lightning payments using only on-chain Bitcoin.
Even if you’re not connected to the Lightning Network yourself, you can interact with it securely and seamlessly.
These swaps use the same cryptographic building blocks as Lightning — like HTLCs — to enable trustless, atomic transactions between Bitcoin’s base layer and the Lightning Network.
How Submarine Swaps Work
- You lock BTC in a smart contract on-chain.
- The Lightning payment is executed.
- If successful, the on-chain BTC is released. If not, it’s refunded.
This opens the door for anyone to benefit from Lightning’s speed and low fees — no technical setup or channel management required.
As a non-custodial wallet, Klever Wallet is building Submarine Swaps directly into the user experience, allowing seamless movement between on-chain Bitcoin and Lightning with just a few taps.
Key Components of the Lightning Network
Several critical technologies enable the Lightning Network:
- Multi-signature wallets: Ensure that both parties must agree on final balances.
- Smart contracts: Govern the rules of payments and protect users.
- Hash Time-Locked Contracts (HTLCs): Guarantee atomic, multi-hop payments.
- Routing nodes: Connect users across the network and facilitate indirect payments.
- Watchtowers: These third-party services monitor the blockchain and act on behalf of users in the event of attempted fraud, enhancing security especially when users are offline.
- Taproot Integration: Bitcoin’s Taproot upgrade improves Lightning’s privacy, efficiency, and enables more complex transaction logic by enhancing how signatures and scripts are handled.
In addition to the components that make off-chain payments possible, there are also essential processes that allow funds to move smoothly between the Lightning Network and Bitcoin’s main blockchain.
Next, we’ll look at how Swap-In and Swap-Out work — two key mechanisms that bridge these two layers.
Swap-In & Swap-Out Transactions
To bridge Bitcoin between the Lightning Network and the regular Bitcoin blockchain, users rely on two essential processes known as swap-in and swap-out.
- Swap-In refers to the process of moving Bitcoin from the main blockchain (on-chain) into the Lightning Network.
When users fund a Lightning wallet or open a new payment channel, they perform a swap-in by locking their BTC into a multi-signature address.
This initiates the ability to make fast, off-chain transactions. - Swap-Out allows users to exit the Lightning Network and move their Bitcoin back to the main blockchain.
This is particularly useful when sending BTC to someone who only accepts on-chain payments, or when a user wants to consolidate their balance back into cold storage or a regular Bitcoin address.
These swaps can be automated by certain Lightning-enabled apps or performed manually through services like Loop by Lightning Labs.
They are critical for maintaining liquidity and ensuring that funds can move freely between both environments depending on the user’s needs.
Users can also utilize liquidity tools like Pool (a marketplace for leasing liquidity) and Faraday (a tool for analyzing channel health and performance), both developed by Lightning Labs.
Klever Wallet is already production-ready for Lightning and preparing for imminent release.
Soon, users will be able to swap from any coin or token directly into Lightning to spend it instantly—with the full Lightning experience, including Lightning Swaps, expected to go live within weeks.
In essence, swap-in and swap-out functionality enhances interoperability, enabling users to move value seamlessly between Bitcoin’s base layer and the Lightning Network for maximum flexibility.
Benefits of the Lightning Network
The Lightning Network brings several major advantages. These benefits explain why the Lightning Network work is considered a game changer for Bitcoin’s usability.
- Instant Transactions: Payments settle within milliseconds.
- Low Fees: Transaction costs are minimal, making micropayments practical.
- Enhanced Privacy: Only the opening and closing of channels are visible on-chain, and recent upgrades like Taproot improve this further.
- Massive Scalability: Capable of handling millions of transactions per second.
- Economic Incentives: Participants can lease out channel liquidity to earn routing fees, introducing a yield opportunity in the Lightning ecosystem.
These benefits make Bitcoin a realistic option for daily payments and digital services.
Real-Life Examples and Use Cases of Lightning Network
The Lightning Network is already being used around the world in practical, real-world scenarios:
- Retail and Commerce: Thousands of merchants globally accept Bitcoin over Lightning for everyday purchases. Platforms like Strike and OpenNode allow businesses to accept Lightning payments easily.
- Online Content and Streaming: Services such as Podcasting 2.0 and apps like Fountain enable streaming micropayments to podcasters in real time.
- Gaming and Rewards: Companies like Zebedee and Moonlabs integrate Lightning payments into gaming, allowing players to use Bitcoin for gaming as well.
- Social Tipping: Tools like tippin.me and wallets like Wallet of Satoshi let users tip content creators instantly on social media platforms like Twitter.
- Everyday Use: In El Salvador, Bitcoin (and Lightning) is accepted nationwide, with major chains like Starbucks and McDonald’s supporting Lightning payments.
- Remittances: Apps like Strike allow people to send money internationally in seconds using Lightning, drastically reducing fees compared to traditional remittance services.
- Switzerland: Cities like Lugano promote Bitcoin and Lightning payments across various merchants, aiming for broader crypto adoption through initiatives like “Plan B.”
- Brazil: Businesses and services increasingly accept Lightning payments, especially within the tech, e-commerce, and fintech sectors. Notably, in Rolante, Rio Grande do Sul, Bitcoin has been embraced at the community level, with many local businesses and tourism services using the Lightning Network as their main payment system.
- Philippines: Tourist destinations like Boracay are increasingly embracing Lightning for seamless payments from international visitors.
- Zug, Switzerland: Also known as Crypto Valley, where supermarkets like Spar accept Bitcoin over Lightning.
- El Zonte, El Salvador: The birthplace of “Bitcoin Beach,” where locals and visitors use Bitcoin Lightning daily for food, services, and transportation.
These examples show that the Lightning Network is more than just an experimental technology—it is becoming an essential infrastructure for faster, cheaper, and more accessible Bitcoin payments.
Klever + Lightning: Speed, Freedom, and Simplicity
The Lightning Network transforms Bitcoin into a fast, efficient, and practical payment system suitable for daily use. By opening payment channels, conducting off-chain transactions, and leveraging smart routing, users can send Bitcoin instantly and affordably.
With Lightning support in Klever Wallet now production-ready, users are on the brink of a major upgrade in usability.
Soon, you’ll be able to swap any coin or token directly into Lightning and use it instantly—whether you’re tipping creators, sending fast payments, or paying for your groceries. It’s more than just access; it’s a full Lightning experience in your pocket.
Download the Klever Wallet today and be ready for the Lightning release—because the future of fast, decentralized payments is Klever and the Lightning Network work is just getting started.
