The Scalability Challenge of Bitcoin Layer-1
With a 1 MB block size limit (expanded to roughly 2 MB with SegWit) and 10-minute block times, Bitcoin Layer-1 can process only 7 transactions per second. Attempting to record every cup of coffee on the global public ledger would cause the blockchain state to grow unsustainably. The Lightning Network solves this by moving high-frequency transactions off-chain.
The Payment Channel Mechanism:
Two parties lock BTC into a 2-of-2 multisig address on Bitcoin L1. They can then sign unlimited balance updates back and forth instantly without broadcasting anything to the network until they decide to close the channel.
Multi-Hop Routing with HTLCs
You do not need an open channel with every merchant. Hashed Timelock Contracts (HTLCs) route payments across a network of connected channels. If Alice wants to pay Carol, the payment routes through Bob cryptographically: either the payment succeeds and Carol receives the satoshis, or the timelock expires and Alice gets her funds back automatically.
Key Layer-2 Operational Considerations
- Watchtower nodes monitor the blockchain to prevent an offline channel partner from broadcasting an outdated channel state.
- Channel liquidity management requires maintaining balanced inbound and outbound capacities for reliable routing.