The lightning network seems to be the answer to all Bitcoin and blockchain related ills: the ideal alternative to the clogged, clumped, over-crowded payment processing ecosystem we’re currently saddled with, with its slow speed, high transaction fees and all-around, ever pervading inefficiency. Surely, with Bitcoin being the natural evolution of currency (and by extension, humanity itself), improved levels of usability should freely follow in its wake — however, as is often the case within the launch of new technologies, the final infrastructure does tend to lag several steps (or miles) behind. With Visa able to process 24,000 transactions per second, Bitcoin Cash 61 and Bitcoin a mere 7 transactions per second, its inadequacy is glaringly obvious to all members of the crypto community.
The lightning network grew into prominence during the more nascent architectural days of 2017, before its official, full-blooded incarnation in March 2018. Since then, particularly in recent months, it has travelled swiftly from strength to strength. One of the key players — and early adopters — within the lightning network space is Bitfury. Bitfury is “one of the largest full-service blockchain technology companies in the world”, providing both software and hardware solutions for businesses, governments, organizations and individuals to securely transfer assets across the blockchain network. Interestingly, Bitfury have been the first to fully implement a lightning-network based coffee-purchasing system. Their lightning network engineering team, known as LightningPeach, partnered with payments startup Paytomat in order to launch the lightning network via their platform — an all-around successful integration, garnering further faith in the Lightning Network, and pushing Paytomat up the rankings of revolutionary retribution platforms.
Lightning Labs, the infamous proponents of the Lightning Network, have achieved a significant amount over the past year: regardless of Bitcoin’s dips, its ability to travel sideways, upside down and fling itself askance in every other direction, the lightning network itself has gone from strength to strength, unfazed by market volatility. November saw the network top 4,000 nodes and before burgeoning to uphold over $2 million value of bitcoin, its capacity continuing to rise after the spiral of BTC, experiencing an increase of almost 300%. Yes, it’s still possible to remain profitable during a stark, bleak crypto midwinter. For instance, the number of crypto ATMs around the world kept growing steadily, with 209 machines opening around the world in December.
Canadian BTC mining company Hut 8 claimed a record high $13.5 million for Q3 2018, and Japanese IT giant GMO reported that its crypto businesses, including mining equipment production and its crypto exchange, gained 2.6 billion yen ($22.8 million) during the same period (although some fraudulent dabbling may have been involved).
Open Node, a well-seasoned, dynamic member of the lightning network conglomerate, has begun to painstakingly facilitate the launch of the ideal bitcoin payment processing system, negotiating its widespread acceptance with as many merchants as possible, including Starbucks and Tesla, according to Tim Draper’s excited tweet last month. OpenNode charge a transaction fee of 1%: as far as revenue generation goes, it’s hardly outlandish, particularly when stacked beside a successful, all-encompassing payment network.
Top Lightning Network Users of Q4, 2018:
- Bitrefill: A website specialized in providing top-ups for cell phone lines and various gift cards.
- Blockstream: A blockchain company dedicated to the development of applications on bitcoin, especially sidechains. Its best-known innovation is Liquid
- HodlMonkey: a company dedicated to selling clothes with crypto-related designs
- TorGuard VPN: Company specializing in cybersecurity and VPN service provisioning
- Living Room of Satoshi: Australian company focused on providing options for the payment of various invoices with cryptocurrencies.
So... how does it work?
The lightning network's mechanism utilizes the relatively young Distributed Proof of Stake (DPoS) protocol, which allows separation of the voting power and block production, with no risks of a hard fork. The BTC Lightning Network, a second layer payment protocol that operates on top of the BTC blockchain, aims to solve the problems with scalability through the use of additional, separate payment channels — a secure and fast way to carry out transactions between a number of users without the necessity of recording them on the blockchain — until the moment the channel is closed. (You certainly can’t avoid it altogether, of course.) These off-chain payment channels facilitate instantaneous micropayments, and a greater, augmented performance for public blockchains. (We’ll expand onto private blockchains shortly.)
According to Jack Zhang, “Pow and PoS are easily centralized, while DPoS represents true decentralization. Moreover, DPoS has the benefit of high efficiency, with little resource consumption”. If we’re to engage in a PoW, PoS and DPoS debate, first we need to establish the facts.
DDoS vs. PoW vs. PoS
Distributed proof of stake, alongside Proof of Work and Proof of Stake. The latter two are older, more wearied and time-worn hats, squabbled over copiously during the evolution of Bitcoin and Bitcoin Cash. All three fall beneath the umbrella of consensus mechanisms, which the blockchain/cryptocurrency sphere relies upon — the oxygen of the industry, so to speak. Cryptocurrency, of course, uses distributed ledgers or blockchains to record information, as opposed to a centralised authority, such as a government or a central bank. In the welcome absence of this entity, it is necessary to rely upon an alternative: the consensus mechanisms, all of which borrow certain components freely from one another. All consensus mechanisms work to achieve one, unanimous goal: make it difficult to attack this network, and profitable to protect it. Achievable — yes. Simple? No.
Everyone’s favourite — the sanctified system powering Bitcoin and Bitcoin Cash. Miners endeavour to solve a cryptographic puzzle, consisting of the mathematical function (hash). The first mining pool forming a hash with specific properties are remunerated with a few Bitcoins, at estimated 10 minute installments. This acts as proof: they have completed the work required to verify all transactions in a block as valid — the product of their labours is then added to the blockchain.
Cons: not energy efficient and lacking in environmental friendliness and adequate sustainability. With PoW, organizations that can afford faster and more powerful processing power usually have a better chance of getting the reward than the others — leading to a more unfair distribution of wealth, which Bitcoin itself was designed to tackle.
Ethereum’s considering making a well-timed move over to this one. Why? Because it doesn’t need computers in order to perform repetitive computations, thus presenting itself as a more environmentally friendly, sustainable alternative. PoS replaces miners with validators, in a certain situation wherein they will lock up some of their coins as stake — or a deposit. A group of validators takes turns proposing and voting on the next block; the weight of each validator’s vote depends on the size of its stake. When the validators discover a block which they think can be added to the blockchain, they will validate it by placing a bet on it. The validators will receive a reward in proportion to their bets — we hope. Anyone who holds the blockchain’s base cryptocurrency can become a validator by sending a specific type of transaction to lock up their fund within firm lacerations of security.
Also, rewards for the creation of a new block are different: with Proof-of-Work, the miner may potentially own none of the digital currency he/she is mining. In PoS, forgers are always those who own the coins minted — thus drastically reducing the risk of fraud.
Delegated Proof-of-Stake (DPoS) is a more efficient form of PoS. DPoS uses a reputation system and real-time voting to achieve consensus. Community members vote for “super representatives” to secure their network — these super representatives (very aptly named) will be rewarded by validating transactions for the next block. Better? Yes. As the DPoS vote is consistently on-going, if a super representative does not comply with regulations or perform well, people in the community can remove their votes, essentially firing the bad representative — they are rendered useless. The super representative must obey all rules and keep the network uptime as high as possible, or face the guillotine: a swift, violent rebuttal from its community members.
And the best part? It’s a democratic system. Instead of relying on processing power from a centralized authority, bad actors will lose their position and power within the network, at the network members’ behest. These members will maintain the decentralized architecture of the network, as well as benefiting from its speed and agility.
The Power of Micropayments
As we’re all aware, the power of micropayments is undisputed. Efficiency is the most mandatory component of a financial ecosystem — and mciryopayments can serve as the missing flame, with the lightning network serving as much needed paraffin. “CryptoGraffitti”, the illusory, as yet unidentified crypto and fintech based artist, following the successful auctioning of a micro-painting depicting a black swan, released a statement extolling the many virtues of a future where “micropayments are omnipresent. Artists paid by the view…writers by the poem…musicians by the listen.” An almost intoxicatingly attractive proposal for any independent content creator — and an achievable goal as well.
In recent news…
Roger Ver strikes again with what is arguably a barrage of insensitivity, ruthlessly preaching the virtues of Bitcoin Cash, far worthier of the prowess of the lightning network in comparison to its lowly sibling — Bitcoin. Open Node, a prolific lightning network company, has soundly rejected 2.5 million dollars from Roger Ver, to build a protocol on Bitcoin Cash. According to Open Node: “our vision of a better, more open financial system is only possible with Bitcoin.” Cue the sighs of relief from the old religion, crucifix-bearing, holy-water swigging portion of our crypto society, otherwise known as the “HODLers” or “Maximalists”. Bitcoin continues to reign supreme in our hearts and minds.
A return of the Bitcoin/Bitcoin Cash wars of the past several months? Or another instalment in the battle of investor upon investor? Roger Ver appears reluctant to take on Tim Draper, the principal investor in Open Node, although he remains sceptical of his reluctance to combine BCH with the lightning network. According to Ver: “the Lightning Network would work far, far, far, far better on a system that doesn’t have a limit to the size of the blocks, (like Bitcoin Cash) than it will on BTC.” Point taken — the four “very”s really added some much needed oomph.
More slightly negative updates: another ambiguous contributor to the Lightning Network codebase, under the username ZmnSCPxj, has pointed out a stark limitation of this promising network. Its ability to make multi-asset conversions is apparently limited by its current technical design: as the value of trade assets changes dramatically during specified trade windows, cross-asset exchange nodes on the Lightning Network will be exploited to create risk-free American Call Options. According to ZmnSCPxj: “significant liquidity will be tied up in such American Call Options, and they [the channels] find that they will lose funds — especially at times of volatility.” More on this in our next installment, in which we’ll also be addressing the relationship between the lightning network and XRP.