This is a beginner-friendly article meant to be used by anyone curious about how to pay with Lightning, which is synonym for paying in bitcoin without the high fees. Just install an app on your phone and ask that annoying friend who keeps going on about Bitcoin to send you a few dollars in sats.
Intro: Getting Started
What is Lightning?
Instant bitcoin payments with almost no fees.
What is the catch?
Both sender and receiver have to be online at the same time
It works for relatively small amounts (a few hundreds of dollars).
For instance, according to an October 2023 report by River Financial, the average transaction amount on Lightning is around 44700 sats ($11.84 as of August 2023).
Because amounts are small, it is usually more convenient to count in satoshis rather than in bitcoin.
There are 100,000,000 sats in 1 BTC.
At the time of writing (December 2023): $5 ≃ 11451 sats
If I pay with Lightning, am I still paying in bitcoin?
Yes, the currency is still BTC. There is no difference between a bitcoin on Lightning and a bitcoin on-chain.
Lightning is a layer on top of the Bitcoin network. It works by setting-up semi-permanent channels between Lightning nodes. Bitcoins are securely locked inside those channels. The channels make it possible to find a route between any two nodes. Payments safely ripple through those routes, without having to involve any block. Hence the speed and the low fees.
As a regular user, you don't have to worry about channels: phone apps will manage them for you.
On-chain payments: The classic way of paying in bitcoin (called "on-chain") involves a fee. This fee is usually under $1. However there is no guarantee that it stays cheap. For instance it proved to be very volatile in 2023: in May it shot up to $20 for several days and then again in December when it went even higher. When fees are high, it is not worth paying on-chain for small amounts.
Lightning payments: the other way to pay in bitcoin is with a Lightning wallet, which involves a very small fee (usually around 0.1% of the invoice amount) and settles in a few seconds. By the way, it really settles. In other words the payment is final: no risk of chargeback for the vendor (unlike a Visa payment for instance).
If the amount is small enough, the fee will even be zero! It always amazes me that you can send a cash-final international instant payment for zero fee over the most secure and open network in the world.
How do I use Lightning?
Simply install a bitcoin app on your phone and top it up with a small amount of sats to get it running. Ask that annoying friend who keeps going on about Bitcoin to send you a few dollars in sats. You can pay back your friend in cash or with a 🍹.
To top up your wallet with sats:
create an invoice with a specific amount (1000 sats for instance. This is about $0.44 as of December 2023)
have your friend scan the QR code
Where do I find a wallet?
This article lists some of the wallets I have tried. They're all phone apps.
I thought of grouping them in two categories:
easy (custodial or non-custodial)
advanced (non custodial and requires your own node)
Ok you lost me already, what does "custodial" mean?
Custodial: someone else handles the sats for you. The app on your phone connects to a Lightning node that belongs to the company that built the app. This company controls your sats so you're going to have to trust them. The advantage? Super easy to set-up: just install, top-up and it's ready to send and receive payments. The risk? if the company disappears, you might lose your sats.
Non custodial (or 'self-custodial'): you control your sats yourself. This can be done in different ways. The hard way consists in running your own Lightning node on a server at home. Then the bitcoin app on your phone is configured to connect to your node.
Unless you are an enthusiast, this may not be your option.
Fortunately, there is also an easy way: some phone wallets now make it possible to have some form of self-custody without having to maintain your own node. They effectively run a mini-Lightning node right on your phone.
Whether a wallet is custodial or non-custodial is less critical with Lightning than with on-chain Bitcoin. Lightning is meant to be used for small everyday payments (a beer, a cinema ticket, a bowl of ramen, a jar of organic honey, an online book). You carry $50 in Lightning on your phone just like you would carry a banknote in your physical wallet: there is less need for the cold storage hardware and operational know-how required to protect bitcoin savings.
⚠️ Friendly reminder ⚠️
your bitcoin life savings should be in cold storage (on a hardware wallet for instance).
not on an exchange (because in the long term, exchanges fail).
not on a hot wallet on your phone or computer (because in the long term, phones and computers get hacked).
Easy wallets
"Don't bother me with the technical details, I just want to pay and be paid quickly"
The following apps work out of the box; no prior knowledge of anything is required.
Phoenix
Phoenix runs a mini Lightning node directly on your phone. As such, it's a non-custodial wallet that still manages to be user-friendly.
Self custodial: You have complete control over your funds.
Creates a 12-word seed upon install for backup. If you lose your phone and the seed, then you lose your money.
Does not require a phone number.
Clean UX with handy features such as a built-in currency converter and a detailed, editable transaction history. You can also choose to display the fiat value of transactions as of their respective dates (that's very handy).
Automatic channel management: This wallet automatically manages the Lightning channels. While you can see the channels the app creates, you don't have control over the peers you connect to. These peers are nodes managed by ACINQ, the company behind the wallet.
The wallet creates channels as needed and charges an on-chain fee when it does. So expect to have to pay the regular Bitcoin on-chain fee the first time you receive sats.
Blink (previously Bitcoin Beach Wallet)
Custodial.
Very easy to install.
Requires your phone number.
Lightning wallet only; no on-chain.
Allows you to maintain a small balance in US dollars internally. If you're worried about bitcoin price volatility, you can park your bitcoin in US dollars. You can switch between sats and USD within the wallet. Note that this is not a stablecoin, so you can't take it out of the wallet.
Breez
Self custodial.
Very easy to install.
Doesn't require a phone number or email.
Can be backed up in iCloud (on an iPhone).
Allows you to listen to podcasts and tip them, either as a one-off tip or with a number of sats per minute. Note: I wish you could do this on Youtube!
Charges a set-up fee when you top-up for the first time (1% with a minimum of 25000 sats as of December 2023).
Lightning wallet only. You can top-up directly via Lightning or via a Bitcoin on-chain.
One minor annoyance: prompts you to sync with the network regularly.
Wallet of Satoshi
Custodial.
Zero friction: you can start receiving sats immediately after installation. This is one of the most popular Lightning wallets.
Doesn't require a phone number or email to work.
Asks for an email address for backup purposes only.
Lightning wallet only; no on-chain.
And that's it. If you are just beginning with Lightning you can stop reading.
For advanced users
"I run my own Lightning node and I want to manage channels myself"
Then the following wallet works pretty well for that.
Zeus
Self Custodial.
Allows you to configure a connection to your own Lightning node.
Connectivity to your node can be done over Tor but this is very slow and unreliable. It works much better when using Zeus together with Tailscale.
The Zeus wallet shows you two balances:
the total on-chain bitcoin balance on your node,
the total amount of bitcoin locked in Lightning channels initiated from your node.
Zeus also shows you the individual channels configured on your node.
⚠️ By default, Zeus gives you access to the total amount of funds locked in the wallet of the Lightning node. The total amount of funds locked in channels might be significant. Therefore, it might not be an ideal wallet for casual coffee shop payments if you only want to carry small amounts with you on your phone.
How decentralised is Lightning? Is it more or less secure than Bitcoin?
Decentralisation: Lightning nodes of different sizes exist; you can visualise them here or look at the nodes lists at 1ML or Amboss. Lightning nodes may be managed by private companies, universities or private individuals. As in the case of Bitcoin, Lightning nodes may be fully visible (through their IP address) or hidden (behind the Tor network).
At the time of writing, there are roughly 15000 Lightning nodes of various capacities and channel numbers. Centralisation occurs in the sense that users tend to flock to the better connected nodes to improve routing success.
As a way of comparison, the Bitcoin network counts somewhere between 17593 visible nodes and 47116 total nodes -at the time of writing- according to bitnodes.io.
The Bitcoin network is peer-to-peer: there is no reason to connect to any specific node.
The Lightning network has a hubs-and-spokes architecture: well-connected nodes attract more users, which has some centralising effect. Yet Lightning users are never locked-in to any particular node. They are free to switch wallets or switch nodes.
Security: when you "top-up" a Lightning wallet, your funds are allocated to a channel. A channel is set-up between two Lightning nodes. It is made up of a pair of multisig Bitcoin transactions that are held by the nodes and are not broadcast. These transactions are used as "vouchers" that can be redeemed in case any one of the nodes goes offline.
If you run your Lightning node yourself, you have full control of those "voucher" transactions. In this case the security of your funds is equivalent to that of a hot wallet (as opposed to a cold storage wallet). You are responsible for keeping your machine safe from hacks.
If you use a custodial wallet such as those listed in this article, the "voucher" transactions are controlled by the organisation behind the wallet. In that case there is an element of trust involved where you have to trust this organisation with your pocket money.
In both situations, whether you run your own node or trust a custodial wallet, funds locked in Lightning channels are never as safe as funds stored on a Bitcoin cold storage wallet. Since Lightning is used for smaller transactions, this is an acceptable risk.
Fraud: as with Bitcoin on-chain payments, Lightning payments are final. Therefore there is no risk of chargeback for the vendor. An e-commerce vendor using Lightning has therefore no reason to harass their customer with the usual retarded credit card fraud check questions (such as home address, postcode, 3-digit hologram-code-at-the-back-of-the-card, "3D Secure" OTP SMS challenge, etc...).
Conclusion
Just give it a try.
You might find that the ability to send micro-payments to the other side of the planet for near-zero fee is surprisingly exciting.
All content on this blog is for education purposes only and should not be taken as professional financial advice or recommendation to buy or sell any financial instrument. No guarantee is given regarding the accuracy of information on this blog.
Also I am not endorsing any company or product mentioned in this article and I am not paid by any company behind any of the products or websites mentioned.
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