Over the last few weeks, Bitcoin’s (BTC) second-layer scaling protocol, called the Lightning Network (LN), has gained a lot of traction, steadily proving to become a viable solution to BTC’s infamous scalability problem and even potential competitor to American payments giant Visa.
Thanks to the community-driven Twitter experiment called “the Lightning Torch,” the LN has now been co-signed by Jack Dorsey, who says that integrating the protocol on Square’s popular Cash App is a question of “when, not if.” On top of raising awareness, the social media campaign has also shown what the LN technology is ready to offer in real conditions — but also revealed some of its shortcomings.
The history of the protocol could be traced back to January 2016, when Joseph Poon and Thaddeus Dryja published a white paper dubbed “The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments.” In it, they underpinned Bitcoin’s Achilles Heel — the scalability issue — and compared the cryptocurrency’s capacity to Visa to illustrate their point:
“The payment network Visa achieved 47,000 peak transactions per second (tps) on its network during the 2013 holidays, and currently averages hundreds of millions per day. Currently, Bitcoin supports less than 7 transactions per second with a 1 megabyte block limit.”
Achieving Visa-like volume on the Bitcoin network seemed barely possible, given that handling that kind of bandwidth and storage would require a great amount of computing power. However, Poon and Dryja argued, there is a way to make Bitcoin a feasible alternative to existing payment systems while keeping its signature decentralization and security — and that would be off-chain scaling.
Enter LN, a network of off-chain payment channels, which require almost no fees and allow for fast, seamless transactions that are made on a layer above the actual blockchain.
“With an off chain payment channel you can deposit, for instance, $100 once, and pay network fee for it, and then pay to your favorite shop as many times as you wish, without paying any transaction fees to the network, to the sum of $100,” explains Eyal Shani, a blockchain researcher at consulting group Aykesubir. He added:
“Instead of paying a transaction and sending it to the entire network, you send an encrypted and signed ‘promise’ that you owe that other party, say, $10 out of the $100. Finally, if the paid party needs the money for another purpose, they close the channel by sending the promise to the entire network. Theoretically, you can do millions of transactions for the price of twice the network fee.”
That way, users can conduct numerous transactions outside of the blockchain and then, when they’re done, record them as a single one, hence saving a lot of processing for the ledger. To describe how the channels work in greater detail, Shani makes an analogy with buckets of water, emphasizing one of its main shortcoming along the way:
“When you deposit money on it, you're filling the bucket and then when you spend it, it slowly loses that water. The bucket can also be full, as you can't have too much water in it. Because of this, for example, once you open a LN channel, you cannot receive money right away — your bucket is full, and first you have to spend some. However, based on the fact that you want to transfer (usually) money from A to D, via the channels of B and C along the way
it is a real problem to keep everyone’s channel with enough liquidity (i.e, balance) to make the transfer.”
Although the LN has been designed specifically for Bitcoin’s blockchain, Shani adds, the concept can be performed on other blockchains — for instance, there is the Raiden network created for Ethereum (ETH).
Moreover, as Cointelegraph reported in a more in-depth analysis of the LN, the network is also testing the so-called cross-chain atomic swaps, which are basically transfers of tokens between different blockchains. If properly implemented, this feature could allow to quickly — and with little to no fees — swap any given cryptocurrency to a different one, and hence challenge the use of cryptocurrency exchanges.
The Lightning Torch, also known as LN Trust Chain, is a community-driven experiment aimed at raising awareness about the protocol and testing its robustness.
It was launched on Jan. 19, when Twitter user and Bitcoin enthusiast Hodlonaut announced he or she was willing to pass on 100,000 Satoshis (the smallest unit of a Bitcoin) via the LN to the first person who seems reliable. That volunteer would have to add another 10,000 Satoshis and send the whole amount to another person willing to participate, and so on.
The process somewhat resembles the Olympic torch relay, hence the name “the Lightning Torch.” Eventually, the hashtag #LNTrustChain began circulating to ease communication among community members involved in the experiment, giving the movement an additional boost on social media.
“The experiment got traction pretty fast among my little twitter bubble. First 100 passes took less than a week.” Hodlonaut tells Cointelegraph over Twitter DMs. “I think busiest day may actually have been the first day, January 19, with more than 20 passes. The pace of passing has decreased with time, mainly because people are trying to make passes to specific people instead of just sending to one of the invoices sent to them on twitter.”
As of press time, the torch has been carried by more than 240 people in 52 different countries. The list of participants includes, among others, a 88-year-old grandmother of a crypto enthusiast, Twitter CEO Jack Dorsey, financial derivatives giant Fidelity Investments, LinkedIn co-founder and former PayPal Chief Operating Officer Reid Hoffman and Monero (XMR) Core developer Riccardo Spagni, who passed the torch while inflight.
“I was excited about LN, and wanted to have some fun/experiment with it.” Hodlonaut recalls. “I was curious to see how far something like that could go. Didn't expect it to last very long or get much attention… So the @jack thing was pretty mindblowing”
Initially, Hodlonaut says, his or her goal was to simply spread awareness about the LN and its potential use. He or she has been interested in the protocol since the testnet days, but it was in September 2018 when Hodlonaut finally set up their own node using RaspiBlitz’s instructions. Hodlonaut continued:
“Why I got interested is because the instant nature is so fascinating. To be able to send fractions of bitcoin instantly like this was mind blowing in the same way my first transactions on-chain after discovering Bitcoin in 2013.”
Even though the LN community has appeared overall trustful and cooperative, there have been a few bumps in the road. Early on, when the torch had amassed around 250,000 Satoshis, it was hijacked by an umbrageous user.
“I thought it was the end, but on his own initiative the guy who sent to the thief, resent to a new person out of his own pocket to keep the torch alive,” the movement’s founder says.
Then, around 2.5 million Satoshis, the torch fell into the hands of a reluctant person who declared he wasn't going to pass it on.
“He was hostile to the experiment, calling it a stupid circlejerk. But once again, the guy who sent it to him, resent to a new person out of his own pocket,” Hodlonaut says, summarizing at some point:
“Turns out, this community is pretty awesome.”
Now that the movement is rapidly growing, a more concrete milestone has been set up. “The goal is to get to the Lightning Network tx cap at 4.29 Msats,” Hodlonaut says. “The torch is then donated to @btcven [Bitcoin Venezuela] along with the funds from this fundraiser.”
Bitcoin Venezuela was chosen because of the local economic hardship, Hodlonaut explains. Indeed, Venezuela’s economy has reportedly fallen by 47 percent since the end of 2013, as the bolivar, the local sovereign currency, have been drastically inflating under the politics of Nicolas Maduro, the country’s president. As a result, the local people have largely turned to Bitcoin, which, due to its decentralized nature, appeared as a means to bypass the unstable fiat currency — last month, BTC trading volumes in Venezuela reached a new all-time high.
“They [Bitcoin Venezuela] have a long track record of spreading bitcoin adoption, feeding people and trying to put infrastructure like mesh networks in place,” the movement’s founder says.
Meanwhile, despite still being in its infant stage, the LN is picking up the pace. Although it is still unclear whether the protocol will ever be able to dethrone Visa, there are promising signs. Earlier this month, major U.S. retailer Kroger announced that its Smith's Food & Drug stores will not accept Visa cards starting April 3, citing the high fees that company imposes on large retailers. "Visa has been misusing its position and charging retailers excessive fees for a long time," Kroger's Chief Financial Officer Mike Schlotman said.
In response, Anthony Pompliano, founder of Morgan Creek Capital — an institutional investment house with $1.5 billion in assets under management — suggested that Kroger should deploy the Lightning Network in its stores. According to one of his tweets, the negotiations have already started.
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