Some people have fallen into the habit of referring to Lightning transactions as “IOUs”:
Calling Lightning transactions “IOUs” devalues them as nothing more than cheap talk, something less than “real” bitcoin transactions. More than anything, that metaphor reveals a misunderstanding of what Lightning is and how it works.
Yes, Lightning is a second layer on top of the bitcoin mainnet, but that doesn’t diminish Lightning transactions or the bitcoin they move in any way. On the contrary, it makes them cheaper and faster. Delicious frosting is a second layer on a cake, but it doesn’t make the cake any less cakey. If anything, it makes the cake cakier than before.
Lightning isn’t like bitcoin; it is bitcoin, your bitcoin
Lightning transactions are bitcoin transactions. Bitcoin goes in, and bitcoin comes out. The proof-of-work scheme and the ledger distributed across almost 10,000 nodes (and counting) protects bitcoin on Lightning just as it does on the mainnet.
The fact that Lightning uses payment channels, to which the two parties at either end commit funds and have access, seems to confuse some people. The two parties at either end of a payment channel have (cryptographically ensured) access to it. Before either party can send funds over the channel and, by extension, the network, they have to commit funds to the channel.
Some people seem to see an IOU at work here. They might see bitcoin on Lightning like casino chips, which are tokens for money — as if users traded in their “real” bitcoin for “token” Lightning credit, like IOUs to be cashed in for “real money” at the end of the night.
But unlike a casino, you never relinquish custody of your money on Lightning. Not your keys, not your bitcoin. We’ve all heard that mantra a thousand times. But it’s true. And the converse is also true: as long as you hold the keys, you hold the bitcoin. Therefore, any non-custodial wallet — whether on-chain or off-chain — gives the user more control over her money than any custodial wallet on-chain or off-chain.
In other words, any funds you receive over Lightning or deposit into your Lightning wallet are yours and only yours. No one else has a claim to them.
An IOU is different. It implies a counterparty claim. If a friend lent you $100, he may have a claim on it — at least in the sense that you probably shouldn’t let him see you on Instagram treating yourself to front-row seats until you’ve paid back the debt. With an IOU, custody of the funds doesn’t translate into the freedom to use them.
Compare: whoever holds the keys to bitcoin committed to a Lightning payment channel can park it, withdraw it, or transfer it to anyone else on the network. Custody of the keys translates into the unencumbered freedom to use those funds. There are no counterparty claims involved.
The difference between bitcoin and Lightning is that bitcoin publishes each transaction to the chain, whereas Lightning checks channels status against the chain. On-chain transactions require more data to be transmitted and more computation, which is why Lightning is able to radically increase transaction capacity while lowering costs.
In effect, the bitcoin mainnet is like the network of GPS satellites in orbit, actively computing their own locations. Lightning is like the network of GPS-enabled devices on Earth, passively receiving confirmation from the more expensive and cumbersome satellites. But Lightning will be even more transformative than GPS.
Think about it: Lightning (finally) makes bitcoin a medium of exchange. It overcomes one of the last remaining obstacles to mass adoption. Lightning gives bitcoin the ability to scale up to universal use — a Lightning-based economy.
Of course, the public ledger will remain the backbone of the Lightning economy, preserving its security, integrity, and peer-to-peer structure. A Lightning economy isn’t a bitcoin economy with compromises, it’s a exactly how to realize a true, independent, peer-to-peer economy with bitcoin.
It’s our Lightning economy. This is how we protect it.
With bitcoin, the world gained a store of value independent of banks and “authorities.” With Lightning, the world is gaining a way to transfer that value independent of banks, mints, and credit cards. It will be cheaper than ever to use money, and for the first time ever, the money is truly ours.
But freedom isn’t free. Its price is responsibility. If a peer-to-peer system is to shed the paternalism of banks and governments, we — the peers — have to maintain its integrity ourselves.
The way to maintain bitcoin’s integrity is to run a full node and validate transactions — all transactions. The way to maintain Lightning’s integrity is to monitor your wallet’s channel state, which a good wallet does automatically. If an out-of-date state appears on the chain (i.e. if someone tries to cheat you), you publish the more recent state, punishing the cheater.
Breez, for example, includes a background watcher. This process informs users of cheating attempts even when the app is closed. As long as users turn their devices on once every 1080 blocks (~once a week), letting their light node update itself, they’re protected. And even if you’re offline for more than a week, the ability to outsource that duty to watchtowers is only weeks away.
The result is faster, cheaper transactions, full custody for users over their funds, full security, and automated maintenance. It’s Lightning. It’s bitcoin. It’s nothing like an IOU.