Understanding the Lightning Network, Part 1: Building a Bidirectional Bitcoin Payment Channel

The Lightning Network is probably the most highly anticipated technological innovation to be deployed on top of Bitcoin. The payment layer, first proposed by Joseph Poon and Tadge Dryja about a year ago, promises to support a virtually unlimited number of off-chain transactions among users, at nearly no cost – while leveraging the security offered by Bitcoin.

At least three companies – Poon and Dryja’s LightningBlockstream and Blockchain – are currently working on implementations of the technology. But few outside this small technological frontline fully grasp how the “future of micropayments” is set to boost Bitcoin’s capabilities.

In this three-part series, Bitcoin Magazine lays out the basic building blocks of the Lightning Network, and shows how they fit together to realize this upcoming protocol layer.

This first part of the series establishes the necessary building blocks, and shows how these can be combined to create “smart contracts,” which can be applied to realize the first requirement of the Lightning Network: a bidirectional payment channel.

(Note: Anyone with a solid understanding of Bitcoin can skip the building blocks.)

Building Block #1: Unconfirmed Transactions

At its heart, the Bitcoin protocol consists of transactions, that are typically linked to previous transactions, and potentially to future transactions. Each transaction contains inputs, which refer

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