Bitcoin’s popularity is sky-rocketing day by day but unfortunately, the cost to transact is increasing. Due to the design of Bitcoin, the speed of transactions is limited, meaning only a certain amount of transactions make it into a block. When there’s a high number of transactions, the queue becomes longer and the processing time increases. Scaling up the existing blockchain structure of Bitcoin can be a herculean task, so creating a second layer on top of the blockchain seems to be the way forward.
The Lightning Network, first proposed in 2015, was built to address the scalability issue of Bitcoin. It’s a second layer technology applied to Bitcoin. Micropayment channels are used by the network to conduct transactions more efficiently and it takes the transactions off-chain. The side chain is built separately but it interacts with Bitcoin. To increase efficiency, the off-chain transactions get settled as a batch on the main chain. The network uses smart contracts and multi-signature scripts. You can compare the system with the purchase of an item with your credit card. When you pay with a credit card, the amount does not get settled instantly but the seller and you give confirmation of the transaction through a predetermined process. The original settlement of funds takes place later on. The Lightning Network not only decongest the Bitcoin network but also helps to conduct transactions much faster and cheaper.
Challenges of the Lightning Network
Lightning Labs, a blockchain startup, launched the beta version of The Lightning Network in 2018. It was funded by many prominent companies and investors. Twitter CEO Jack Dorsey personally invested in the project. The Lightning Network was gaining popularity before the advancement of DeFi or decentralized finance on Ethereum. The idea of lending and borrowing without a middleman or third party made the crypto community excited and DeFi started to grow exponentially. It was impossible to imagine DeFi without Bitcoin, the number one asset class of cryptocurrency. So, Bitcoin had to arrive on Ethereum blockchain as a wrapped token. Presently WBTC, an Ethereum wrapped Bitcoin token, is enjoying the top asset slot of DeFi and almost $1.67B value is locked in Bitcoin. The scope of the Lightning Network suddenly looked weak. Yes, the Lightning Network always had some security issues. As per this Forbes report published in July 2020, around 95% of some 2,000 existing lightning nodes were vulnerable to attack. But no better trustless second layer alternative was available for Bitcoin. Another issue of the Lightning Network was an inefficient allocation of inbound resources. Some OTC services for resource allocation were there but those didn’t create the impact. Bitcoin really needs the Lightning Network for payment scalability. The Lightning Protocol evolved fast. Every software issue can have a fix and the Lightning Network is not an exception.
Launch of Lightning Pool
Lightning Labs recently announced the release of the alpha version of Lightning Pool in their blog post dated November 2, 2020. Lightning Pool is a non-custodial, peer-to-peer marketplace for Lightning node operators to buy and sell liquidity. Lightning Pool makes the job of instantly accepting Bitcoin easy through Lightning payments, and offers the possibility of earning a yield on your bitcoin. Overall, it makes the Lightning Network operation smooth while offering an option to make money. If you want to use the pool through the command line, check the Github link. The team is planning to release a UI soon.
Image Source - Two natural sides of the marketplace
“This release marks an important development in the evolution of Lightning financial products, making Lightning liquidity a tradeable asset and enabling users to earn a return on their capital all while keeping custody of their funds.
With Pool, Lightning businesses and node operators can streamline their channel management and focus on building and serving their customers instead of worrying about liquidity. When node operators can more efficiently deploy their capital, it improves the network as a whole, making it more reliable and resilient for everyone.” – Team blog
Be ready for the pool party
Increasing OTC demand for inbound liquidity was a good signal about the requirement of a better platform to onboard new users. Lightning Pool can open up a new horizon leasing out liquidity and deploying capital on Lightning. The pool focuses on improving liquidity and the UIs can be made by any reputed wallet or third party. The new nodes will be able to place their capital for bidding and they can also bid to fulfil their inbound needs. The pool’s auction feature will provide transparent pricing signals and the nodes will get a clear picture of the liquidity demand. The pool doesn’t use wrapped Bitcoin like WBTC on Ethereum. It uses real Bitcoin blockchain as a layer of settlement and security. These are the early days of the pool. Getting the yield curve will take some more time.
Blockchain is a field where innovations happen fast. Lightning Pool can accelerate Bitcoin mass adoption to a new level. For the first time, liquidity on the Lightning Network can be traded as an asset. An attractive yield will bring more liquidity to the network. If we remember, the network always suffered the problem of liquidity and it was a barrier to its growth. With more capital allocation, merchant adoption will grow. Some security issues must be addressed although. The Lightning Network Finance can make its way this time. The whole working pattern is non-custodial in nature just like DeFi. People are calling it ‘LiFi’ already. LiFi can unleash a new era by taking Bitcoin to every part of the globe and allowing people to earn yield from their assets by providing non-custodial liquidity. Welcome to the world of #stakingsats!
Note: This post was first published here for Cryptowriter in association with voice.com.