Channel creation: To create a payment channel, two users deposit an agreed upon amount of Bitcoin into a channel. This initial transaction creates a ledger on the Lightning network to log the following transactions between the two users, away from Bitcoin’s chain.

Off-chain transactions: Once the channel is created, the two users can transact with each other, at low cost. Each transaction is recorded in the ledger, which doubles as a balance sheet to keep track of the movement of funds. As long as the channel remains open, they can send unlimited transactions to each other.

Channel closure: The channel can be closed at any time by either party. When this happens, all transactions are calculated and consolidated into a single transaction that is posted to and finalised on the Bitcoin chain. At this point, the correct balances are credited to each user's respective wallet on the Bitcoin network.