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Bitcoin Lightning Network Overview

Overview

The Bitcoin Lightning Network is a second-layer protocol that enables fast, low-cost, and scalable bitcoin payments by conducting transactions off-chain through payment channels. These channels enable participants to transact instantly, without waiting for on-chain block confirmations. The Lightning Network also supports microtransactions, making small payments more feasible. Final balances settle on-chain only when a channel closes, reducing load on the Bitcoin base layer.

At a high level, the Lightning Network functions by:

  1. Channel Funding: Two parties collaboratively create a 2-of-2 multi-signature output on the Bitcoin blockchain known as a funding transaction. Either one or both parties can contribute funds to the channel (single- or dual-funded). The total amount locked in this output becomes the channel capacity.
  2. Initial Balance Allocation: The initial commitment transactions reflect how much of the total channel balance each party owns. These are off-chain transactions, not broadcasted, but fully signed and ready in case of disputes.
  3. Off-Chain Transactions: Parties can update the state of the channel by exchanging newly signed commitment transactions that reflect the updated balance split. These updates are trustless. Each new commitment invalidates the prior state using revocation keys.
  4. Commitment Transactions: Each party holds a fully signed commitment transaction that spends from the funding output. These transactions enforce the current balance state and include mechanisms for punishment if an outdated state broadcasts.
  5. Channel Closure: A channel can close either cooperatively, in which both parties agree and settle on-chain efficiently, or unilaterally, in which one party broadcasts their latest commitment transaction to claim their funds. Either way, the final balances settle on the Bitcoin blockchain.

Simplified with BitGo

Typically, using a Lightning wallet requires running a dedicated Lightning node for each wallet, along with its persistent storage to maintain state. This includes managing liquidity, maintaining channel states, monitoring for fraud attempts, and ensuring high availability — all of which are complex and resource intensive.

With BitGo Lightning wallets, you don't need to manage most of the infrastructure yourself. BitGo manages:

  • The underlying Lightning node software.
  • Channel lifecycle, liquidity, and state management.
  • Monitoring and security enforcement, like revocation logic.

BitGo has Lightning-specific REST endpoints for operations such as creating invoices, sending payments, and listing payments and invoices. Meanwhile, other common BitGo wallet operations — such as listing transfers or generating on-chain deposit addresses (that you can use to fund the Lightning wallet) — use the same asset-agnostic endpoints available across the BitGo platform.

Wallet Types

BitGo currently offers two types of Lightning wallets:

  • Custody wallet - A single-signature hot wallet managed by BitGo.
  • Self-custody wallet - A single-signature hot wallet where you manage the key and operate the signer Lightning node within your own infrastructure.

Unlike other wallet types at BitGo, Lightning wallets use a single-signature model. To enhance security at the application layer, BitGo introduces an additional key that you control, called the User Authentication Key. This key is used to sign request payloads for security-sensitive API operations, such as sending payments or updating wallet settings. BitGo verifies these signatures to ensure the authenticity of requests.

Guides

View the end-to-end integration guides for each wallet type:

Custody Wallets

  1. Set Up Custody Lightning Wallets
  2. Create Lightning Invoices
  3. Pay Lightning Invoices

Self-Custody Wallets

  1. Set Up Self-Custody Lightning Infrasture
  2. Set Self-Custody Lightning Wallets
  3. Create Lightning Invoices
  4. Pay Lightning Invoices

See Also