Two parties lock funds in a contract, then exchange signed balance updates directly. Only the opening and final settlement touch the chain, so the transactions in between are instant and effectively free.
Payment channel networks extend this by routing payments across connected channels, which is how fast, cheap Bitcoin payments work in practice.
The limitations are structural: capital is locked in each channel, you can only transact with parties you can route to, and you must either watch the chain or pay someone to watch, so a counterparty cannot settle an old balance in their favour.
Related: layer-2, finality, blockspace, block-time