This is post is taken from the Frequently Asked Questions.

Lightning is an additional layer on top of main chain bitcoin. It can be considered as a payment layer of bitcoin. It allows nearly instantaneous settlement. Main chain bitcoin refers to settlement on the capital B Bitcoin network. Currently fees are quite low but when demand increases, the fees to transact directly on the main chain rise and smaller transactions could be slow and/or costly. Final settlement means that the bitcoin has transferred to the receiver of the bitcoin and cannot be reversed. This usually takes 10 minutes to an hour depending on the size of the transaction. In the legacy financial system the credit card network charges merchants a fee to tell them the transaction is authorized. This fee is usually a fixed amount plus a percentage. Merchants either charge this directly to the credit card user or otherwise include it in the cost of the product. (This is why some stores give discounts for cash payments or restrict credit card payments to only amounts larger than $5 or $10.

In the time it takes to use Apple Pay, tap, or swipe your card, this notification to the merchant generally just takes a few seconds and allows you to buy the product you desire. To the end user, we get our product and the transaction seems settled. To the merchant, it will take a couple days for all the banks to interact with each other and for the money to actually settle into the account of the merchant. The delay is there due to each party along the way needing to run fraud checks and to take their cut of the money.

As they say, Bitcoin fixes this. Lightning bypasses the traditional delayed settlement and allows final settlement where the merchant can ensure that the actual bitcoin is in their account before giving out the purchased product. There can be no chargebacks or fraud.

Here’s how a Bitcoin transaction works:

Today’s fees (end of September 2024) are quite low and a single transaction with final settlement in the next block (typically around 10 minutes) would cost only 72 cents. This is regardless of the amount of the transaction. Buying a coffee for $4 would cost 72 cents and sending $3 billion would cost 72 cents. 72 cents isn’t much with a larger transaction. It is 18% of the cost of the coffee. For smaller or everyday purchases, even a low fee on-chain transaction is not ideal.

As fees increase, as shown here, it might cost single digit dollars to low hundreds of dollars to settle on the main bitcoin chain. Settling on-chain is the gold standard because you have the entire security backing the entire Bitcoin network.

However, buying a coffee on-chain would not be smart because 1) the merchant has to wait at least 10 minutes to ensure final settlement and 2) fees could be become more expensive than the cost of the coffee.

This is where Lightning comes into play. Even in high fee environments, final settlement for a $4 coffee would run less than 2 cents. Another benefit is near instantaneous final settlement. The benefit to you and the merchant is that neither is waiting for a transaction to finish. Lightning also has the backing of the entire security of the main Bitcoin network. Please reach out to me below if you want to discuss the technical reasons for this security despite its much lower cost.