Pre-funded liquidity refers to the amount of Bitcoin (BTC) that must be locked in a Lightning channel before payments can be sent or received through it. Liquidity is what makes a channel viable for efficient off-chain transactions.

To open a channel, a Lightning operator records a Bitcoin transaction on the native Bitcoin blockchain (Layer 1), committing funds to the Lightning Network (Layer 2). Once the channel is open and funded, those funds become available for sending, receiving, or routing payments either directly between connected nodes or indirectly through routed paths across the network.

The size and success of transactions depend on the liquidity available across the channels involved. If there isn't enough liquidity in the required direction, a payment won't go through, even if a route technically exists. This makes liquidity management a critical part of operating effectively on the Lightning Network.

Without pre-funded liquidity, a node cannot participate actively in the network.