The first meaning is correct. The candle is lit. I lit the fire. The second meaning is to be drunk from alcohol. It is casual slang. For example, "I was so lit last night" means that I was drunk last night.

"lit" is the past tense of "light", which as you have said means to ignite sth. The other expression "the party is lit" is a recent pop culture phrase/buzzwords to say something is cool, lots of fun, etc. It's very colloquial and not used in formal writings.