Lightning network basics

Lightning is a payment-channel network layered on Bitcoin. What touches the chain: a channel open (a funding transaction locking coins into a 2-of-2 multisig) and a channel close (a settlement transaction distributing the final balance). Everything between is off-chain: the parties exchange signed commitment transactions — valid, broadcastable Bitcoin transactions that are simply not broadcast — updating the split with each payment; older states are revoked with penalty mechanics. Multi-hop payments route across channels so two parties need not share one directly.

Nuance: Lightning payments are real bitcoin (enforceable on-chain by broadcasting the latest state), not IOUs in the custodial sense — but the security model differs from on-chain: channel capacity limits, liquidity routing, the need to watch for stale-state broadcasts (or delegate to watchtowers), and on-chain fee conditions for enforcement all matter. Off-chain accounting uses millisatoshis, finer than the chain can settle (see sat-denomination).

Common misstatements:

• "Lightning transactions eventually all settle on-chain." — Only opens, closes, and disputes hit the chain; the intermediate payments never do, which is the entire scaling point.
• "Lightning is a separate token/coin." — Channel balances are bitcoin held under Bitcoin script; there is no Lightning asset.
• "Lightning is custodial." — The protocol is self-custodial; many popular wallets are custodial as a service choice, a distinction worth making explicit on stage.