My First Time Using Lightning
My First Time Using Lightning
Whilst Bitcoins decentralized attributes and hard monetary policy are second to none, the most common critique has always been its inability to scale due to high congestion within the network.
This being a result of Bitcoin's simple design with small block sizes in efforts to remain decentralized, often causing slow transactions and high fees.
For this reason, I was extremely proud upon hearing that Purse would be integrating Lightning to alleviate these problems.
Learning how to use this layer 2 solution was fairly simple, given my previous Bitcoin exposure, however Lightning has some confusing elements for a first time user.
Here are some of the answers to questions I had along the way.
If you would like specific help with how to use Lightning on Purse, click here.
1. What is Lightning?
Lightning is a Layer 2 solution to Bitcoin, allowing transactions to be made off chain in a decentralized, peer to peer manner. Transactions are done through payment channels opened for multiple parties.
This means that there is a unique invoice (address to send funds to) for every transaction. As transactions between parties are batched, they only occur fees only when onloading and offloading on chain.
To put into perspective, whilst Bitcoin fees can be as low as a couple cents, on chain fees during bull runs can go over $100. Regardless of bull or bear, the price of Lightning transactions remain free or a couple of cents.
The more significant fee associated with Lightning is the "channel open fee" and the fee is based on the nodes you route through. Thus, it is only worth it to transfer over to Lightning if you are planning to use a decent amount of funds.
Comparable solutions on other protocols include Polygon or optimism for Ethereum, where a new solution is made on the backbone of an existing one. This allows for the users to access the same functionalities whilst taking stress off layer 1, making it more cost and time efficient.
2. Is there a difference between Lightning and Bitcoin addresses?
This was the initial confusing element. Yes there is a difference. And no you cannot send BTC to a Lightning address straight away unless your wallet/exchange supports Lightning natively, such as Kraken. If your wallet or exchange doesn't support Lightning, you would need to move funds to one that does in order to use the layer 2 solution.
Here are some examples of wallets that support Lightning:
Only after this can you make a Lightning transaction.
Here is an example of a BTC address: (Segwit)
Here is an example of a Lightning Invoice:
As you can see, the Lightning invoice is a lot longer than the bitcoin address and thus pretty distinguishable.
3. A Lightning Invoice? What is it?
Let's break down what a Lightning invoice actually is as it's very different from a regular BTC address.
For example, a Bitcoin address is the home for all of your Bitcoin receivables. If anyone needed to send you BTC, you would provide each individual with the same address.
However, your Lightning wallet does not have one distinct address where you can receive BTC from different people.
Instead, the receiver of BTC has to create an invoice, stating the amount of BTC to be received. The sender then has to scan or paste in that invoice and put in the required amount.
Sometimes you do not even need to put the amount you are sending, as apps such as Muun wallet do it automatically upon scanning or pasting in the invoice.
Lightning Invoice (Blue wallet):
Key features of the invoice:
- The cryptocurrency network this invoice is valid for - in this example lnbc indicates bitcoin network.
- 1u in this example is the amount encoded. This means 1 micro Bitcoin or 0.000001 bitcoin or 100 sats.
Other examples: This is an invoice for 50,000 sats (500 micro BTC)
4. How to setup a Lightning Wallet
Setting up a Lightning wallet is quick and easy. Here is an examples of a Blue Wallet setup.
Download wallet app
Create a BTC wallet
Write down back up phrase
Create a Lightning wallet
Write down back up key
Given that your BTC and Lightning wallets are separate, you have a different backup phrase for each.
This will allow you to restore your funds if you lose your device.
5. I have sent my funds to a Lightning wallet. How do I complete a Lightning payment now?
Your Lightning wallet has two wallets within, a bitcoin wallet and a Lightning wallet.
Now, since your wallet (eg Blue wallet) supports Lightning natively, you can move BTC to your lightning wallet within the app via "refill". If you do not know how to do this, please click this link.
Once this is done, you can check if you have received the Bitcoin in your Lightning wallet.
TADA! You finally have some Bitcoin locked and loaded for Lightning transactions.
Now, to complete a payment:
Select your Lightning wallet
Click the QR scanner icon and scan the Lightning invoice or paste the code provided.
By completing this payment, you have technically opened up a payment channel between you and the receiving party!
Example invoice for depositing 500 Satoshis onto Purse:
6. I have successfully sent my BTC via Lightning, how do I check that it has been received?
As a Lightning payment occurs off-chain and is private between sender and receiver, you cannot track its progress via a block explorer.
However, you can check the transaction via a pop up in your wallet.
EG: Blue wallet
Click on your Lightning wallet, it shows recent transactions
Click on the latest one
Shows check mark that the transaction has completed denominated in sats
7. How do I cash out from Lightning
There are two ways you can go about this:
Send your Bitcoin to an exchange which accepts Lightning natively
Send your off-chain BTC back on chain via an external party or a function within your app.
These are both great applications which allow for auto swaps between LN and on chain BTC, making the process very smooth.
Other external solutions include Zigzag and Fixedfloat.
I hope this answers some of those headscratchers for those who haven't used Lightning before and can now use the L2 solution with confidence!
Despite the Lightning network still being in its infancy, it is worth using if you wish to save on time and fees.
If you would like an in depth tutorial on how to get set up and start spending your sats, please click here
Updated on: 27/07/2022