Q 14.0: You say that the Lightning Network is using real bitcoin transactions…How can it be a real bitcoin transaction if it’s not recorded on the blockchain?

Short A:

To understand this, we first need to understand what a bitcoin transaction really is…

The fact is; That there are no “coins” in Bitcoin…

There are only signed messages and updates to the blockchain.

So let’s say that Alice is sending 1 bitcoin to Bob…

We call this a peer-to-peer transaction due to the fact that the ownership of value is transferred directly from Alice to Bob.

But Bob does not actually receive a “digital coin” from Alice.

The thing that in reality is happening; is that all the nodes in the network will update their local copy of the public ledger.

The public ledger is updated so that; the “coin” that was before registered in an address controlled by Alice, is now instead registered in an address controlled by Bob.

Long A:

The bitcoin transaction that Alice is sending to Bob, is in reality just a signed message that Alice is broadcasting to everybody.

The message is not only received by Bob, but it is broadcasted to all the nodes in the network.

At the time of writing there are more than 5400 so called “full nodes” in the bitcoin network.

The following steps illustrates the process that takes place when Alice is sending a bitcoin transaction to Bob:

1. When Alice is broadcasting her signed message (= bitcoin transaction), it will be picked up by some of the full nodes in the network.

2. These nodes will independently validate the message (transaction) in accordance with the consensus rules. If the nodes find the message to be valid; they will broadcast the message again so that it can be picked up by other nodes on the network.

3. Some other nodes on the network will pick up the message, and this process continues until all 5400 nodes have independently validated and re-broadcasted the message (transaction)

4. At some point a miner will succeed in constructing a valid block that includes the message (transaction) from Alice. To make this happen the miner must bear the cost of an enormous amount of electricity.

5. The miner will now broadcast this newly found block. The new block will be picked up by some of the full nodes. The nodes will independently validate the block and all its content.

By doing this they are also validating the message (transaction) from Alice for a second time.

If the nodes find the block to be valid (in accordance with the consensus rules) they will broadcast the block again so that other nodes also can receive the block.

6. Other nodes will pick up the block, validate and broadcast.

This process continues until all the nodes in the network have independently validated the block and thereby also validated the message (transaction) from Alice for a second time.

The steps above illustrate that a normal bitcoin transaction actually involves everyone on the network.

The message is independently validated two times by 5400 nodes (= 10 800 validations)

Despite this, we are still calling it a “peer-to-peer transaction” because the actual ownership of value is transferred directly from Alice to Bob*

(*But everyone still needs to help by updating their local copy of the ledger)

Conclusion:

A bitcoin transaction is just a signed message.

So let’s say that Alice wants to send 1 bitcoin to Bob within a Lightning Channel:

Alice is storing some of her money in a “2 of 2” multi-signature address.

Alice and Bob will both sign a message that transfers the ownership of 1 bitcoin from Alice to Bob.

This message is a valid bitcoin transaction, but it is not broadcasted to the bitcoin network.

Instead Alice and Bob both store the transaction (message) locally.

From Bob’s point of view, this “double-signed message” has a monetary value of 1 bitcoin.

The monetary value of 1 bitcoin comes from the fact that Bob can spend this money on-chain at any time; by simply broadcasting the message to the bitcoin network.

Bitcoin transaction = Signed message = Lightning transaction

The purpose of any monetary transaction is to change the ownership of value.

In the bitcoin network we change the ownership of value by the use of signed messages.

A Lightning transaction is a double-signed message.

This double-signed message is therefore a real bitcoin transaction.