Let me go ahead and post some information that may help individuals out here.

Brief Background of Lightning Network

For those that do not know, the Lightning Network is supposed to be a separate protocol (that word protocol is contingent upon who you ask), that was originally manifested circa 2015 as a potential remedy to the perceived ‘scalability dilemma’ for Bitcoin.

The Lightning Network is supposed to facilitate off-chain transactions in order to take some of the ‘load’ off of the ‘main chain’.

Thus, many in the crypto community have seen the implementation of the Lightning Network on Stellar’s protocol to be a largely positive thing.

The technical roadmap for the Stellar Lightning Network was published on Stellar’s website back in March:

https://www.stellar.org/blog/lightning-on-stellar-roadmap/#future_work

Here's my Shot at Helping With Understanding the Lightning Network

The LN is a state channel.

In a nutshell, state channels refer to what the Lightning Network seeks to implement on various chains.

It is explained (in its most primitive form), as the creation of an ‘off-chain’ transaction where two parties can interact with one another limitlessly without incurring any protocol-specific trading fees or having to wait until the transaction is confirmed.

When the two parties are done transacting with one another, they simply ‘publish’ the ‘state’ of the channel (i.e., the final balance) and then that final transaction balance is what is finalized on the blockchain.

Literal Translation of What is Happening in a State Channel:


The underpinning of most ‘state channels’ (particularly Lightning Network) are multi-signature wallets.

What is a multi-signature wallet?

So, you know how every transaction that you make on the Bitcoin protocol requires you to provide your private key as a ‘signature’ that proves that you’re the rightful owner of your bitcoins, correct? We no longer really see this in modern wallet interfaces, because it’s been dumbed down to let ‘non-tech’ people transact with one another — but this is literally how the protocol works.

Generally speaking, there is only one signature per public address on the protocol (we say public address and not wallet because wallets are not public keys but that’s a whole ‘nother story we’ll get to later one day).

So, a multi-signature wallet, on the other hand, is one where more than one private key is necessary to complete a transaction on the protocol.

This Medium article provides another thorough explanation of what these wallets are and how they work in relation to the Lightning Network protocol:

https://medium.com/cryptoverze/what-is-bitcoin-lightning-network-and-how-does-it-work-cd80ba9c0bda

How the 'State Channels' of the Lightning Network Work

It’s important to remember that you are technically not ‘off-chain’ in a literal sense — that would be impossible because blockchains are simply designed to account for the native asset in a tracked manner. Thus, there’s never a point in time when this is not happening.

So, when you enter into a ‘state channel’, the protocol perceives that as you moving your funds into another [multi-signature] wallet. It’s important to remember that the blockchain does not think about funds in terms of human-recognizable ownership. The only thing that matters in terms of ownership is who possesses the requisite private key(s) necessary to provide a signature for a transaction to be accepted and considered valid.

It is important to remember that moving one’s transactions ‘off-chain’ counts as a transaction on the protocol.

This is Where the Lightning Network protocol comes in:

Once in the ‘state channel’, the coins in that wallet are apportioned to the necessary wallets by the protocol (in this case, the Lightning Network).

To help explain this easier, let’s go with the classic Amy and Bob example:

Now let’s say Amy brought 5 bitcoins to the channel and Bob brought 3 bitcoins to the channel.

Let’s say Bob is selling some pizza and that pizza costs 1 Bitcoin (it’s the best pizza ever made in mankind).

Amy says, great Bob — this sounds like a deal.

Amy’s balance (in our heads) would be 4 $btc and Bob’s balance should reflect 4 $btc as well.

However, one must remember, the blockchain only sees this as one multi-signature channel — So, the semantic adjustment in balance for Amy and Bob has not been taken into account by the blockchain at this point.

In the blockchain’s eyes, this is still just a wallet that contains 8 bitcoins in it.

Below, is a more sophisticated diagram detailing the functionality of state channels:

Source: https://medium.com/statechannels/state-channel-applications-1f170e7d542e

Clearing Up a Misconception About State Channels; Pointing Out Some Limitations

Since there is no literal change in the balance, it is up to the users and the protocol itself (i.e., Lightning Network) to ensure that the balances are updated in the necessary manner via whatever ledger or balance of transfer that is being used in this case.

Since the state of the channel on the blockchain remains stagnant until a final status is ‘published’, and there are no miners on the secondary protocol (Lightning Network), it is up to the protocol to verify that the balances of the individuals within the protocol are legitimate.

For example, if for instance Amy tried to initiate another ‘transaction’ with Bob and claimed that she had her original 5 bitcoins at her disposal, rather than 4, it is up to the protocol or Bob / another 3rd party to ensure that the integrity of the channel’s state is maintained.

I'll go ahead and conclude it there, there's more information that will be included in the full write-up that I am going to publish in here in a few moments.

Here it is:

https://blog.zerononcense.com/2018/10/30/why-is-stellar-implementing-the-lightning-network

Just an FYI, because someone messaged me recently and stated that the Lightning Network and smart contracts have nothing to do with one another.