Lightning Network: Protocol Maturity and Adoption
In this report, we'll delve into the changes that have taken place from 2018 to the present that have enabled companies to build their businesses on top of Bitcoin's open instant payments protocol.
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Introduction
In the year 2019, the social media titan known as Facebook and now renamed Meta Platforms introduced the world to Libra.
Conceived by David Marcus, former chairman of PayPal, Libra had a clear ambition: to establish a cryptocurrency with stable value, backed by a selection of traditional currencies and other assets.
This initiative attracted the interest and participation of major players in the payments market, such as Mastercard, Visa, Mercado Pago and Paypal.
However, shortly after its release, the Libra proposal faced powerful opposition and close scrutiny by regulators. The project was eventually officially shut down and sold in January 2022, three years after it was announced.
Overwhelming pressure from regulators was a factor that those involved attributed to the failure. David Gerard, author of the book “Libra Shrugged” says that “Facebook misjudged the complexity of the regulations that govern the global financial system”.
In 2021, David Marcus decided to step away from the project.
Later, in April 2023, he introduced LightSpark, a company offering a bridge to the Lightning Network in the form of a service (LaaS), making it easier for other companies to jump onboard the second layer solution for fast Bitcoin payments.
Onstage at the Bitcoin Conference 2023, David reflected:
At the end of the project, we made so many concessions to appease regulators and central bankers around the world that the end result would not have been the open network we dreamed of delivering. In reality, the correct answer for the world is the Lightning Network and Bitcoin, not what we were building.
Interestingly, Marcus admitted that back in 2018, before Libra was launched, he had a meeting with Elizabeth Stark, the CEO of Lightning Labs. At the time, both evaluated whether the Lightning Network would be the right platform for Libra.
They decided that it was too early for such a step, guiding the project down the path that led to its downfall.
Protocol Maturity
The Lightning Network's logic is simple: making payments outside the Blockchain, allowing the transfer of monetary value to occur beyond the speed of Bitcoin's block production. This notion is known as an off-chain protocol.
Formally, an off-chain protocol is a system in which some participants update the data present in a blockchain without actually changing it until absolutely necessary.
The notion of an off-chain protocol dates back to roughly the same time as Bitcoin. In one of the first editions of Bitcoin Core, released by Satoshi Nakamoto in 2009, there was a piece of code that allowed modifying a transaction field called
nSequence.The intent was that someone could publish a transaction and, before it was mined, publish an updated transaction, incrementing the
nSequence field to indicate to miners that this was an updated version of the original transaction.While intriguing, this update method is not secure as there is no guarantee that the miner will enter the most recent transaction. In fact, one of the participants can even bribe the miner to include the oldest transaction instead of the newest one.
Fast forward to 2016, when the Lightning Network whitepaper was published by Joseph Poon and Thaddeus Dryja.
It proposes an off-chain protocol based on an update mechanism, known as HTLC (Contract locked by time and hash), which encourages honest cooperation between participants. Briefly, if fraud occurs, the HTLC entitles the aggrieved party to claim all money contained in the payment channel.
BOLTs and Implementations
With the publication of the whitepaper, the development of the BOLTs (Basis of Lightning Technology) began, a sequence of 11 technical documents intended to formally specify the protocol so that organizations can implement the node software for the end users of the network.
As of 2017, the first software began to be made publicly available, but still in an alpha version. The first to be released was Lightning Labs' LND in January 2017, which at the time only supported four of the published BOLTs.
In 2018, when David Marcus met with Elizabeth Stark, the LND versions were still identified as betas. If you're not familiar with these terms, alpha and beta versions of software typically indicate that the product is still in development and that glitches and bugs are to be expected.
As of this writing, LND has already reached version 0.16. It is the most popular implementation, dominating over 90% of the network, as reported in the study made available on Stacker News in November 2022.
Currently the Ecosystem has 4 Main Lightning Node Implementations:
1. LND, by Lightning Labs;
2. CLN, by Blockstream;
3. Eclair, by ASINQ;
4. LDK, by Spiral;
Despite the wide presence of LND, the other implementations are not far behind in terms of development maturity, receiving constant contributions in their GitHub repositories.
ECLAIR
whose last version was published in June 2023, completed support for Dual-Funded Channels (opening channels with background contribution on both parties), inserted a prototype of Splicing (ability to change the ability to change the value locked in a channel without the need to close and open it again).
And followed with the implementation of Offers (new lightning invoice model that covers more use cases). All these updates to the protocol are aimed at improving the user experience.
LDK
has a bold development plan for the coming years. In addition to focusing on supporting Dual-Funded Channels, Splicing, and Offerings, they are moving forward in specifying new aspects of the Lightning Network protocol.
Such as Taproot Channels and support for asynchronous payments, all changes aimed at better end-user service.
CLN
With a focus on democratizing the entry of new users into the Lightning Network, Blockstream, responsible for CLN, dedicates development time to its newest product: Greenlight. With its code recently released to the public, the software promotes self-custody, challenging the current predilection for custodial solutions.
LND
Lightning Labs, creator of the famous LND, has focused its efforts on its Bitcoin asset issuance protocol, Taproot Assets. In addition, the company has shown a growing interest in the intersection of the artificial intelligence market with Lightning payments.
With the aim of democratizing access to AI for humans and AI agents, the company announced that it is developing tools through its L402 and LangChainBitcoin protocols.
In the last week of June, New York hosted the Lightning Protocol Summit, an annual event that brings together developers of the aforementioned implementations.
This meeting aims to align the teams regarding the different views on the future of the network and discuss which areas should receive more attention in implementations.
Rusty Russell, responsible for the CLN, highlighted on his Twitter that his main focuses at the meeting were robustness and privacy. Russell has been dedicated to streamlining specification documents to increase interoperability between different implementations - a crucial aspect of network robustness.
Protocol and Tools Improvements
We talked earlier about some protocol improvements still in the specification process (Asynchronous Payments, Splicing, Offers). In this section, we'll focus on the innovations that were actually introduced between 2018 and 2023, enabling enterprises and end users to embrace the Lightning Network.
Entry Liquidity
One of the main obstacles of the Lightning Network in its initial phase was the scarcity of incoming liquidity. In order to have a clear view of the problem, it is important to first understand how the network operates in its essence:
The Lightning Network works like a vast network of payment channels, with each node establishing payment channels with other nodes. Payments can be routed through these channels, eliminating the need for a direct link between the sender and the recipient of the payment.
The only condition is that there is a route of payment channels interconnecting participants with sufficient liquidity.
Imagine a payment channel as an hourglass. The liquidity of the channel would be like the sand in that hourglass. To open a payment channel, it is necessary to carry out a transaction on the blockchain and one of the channel participants adds liquidity (represented by bitcoins) to the channel.
Payment can only be made if liquidity is available on the appropriate side of the channel. Thus, when the channel opens, all liquidity will be concentrated on the side that initiated the transaction.
This dynamic implies that a user who has initiated the opening of a payment channel will not be able to receive payments through this channel, since all liquidity will be concentrated on his side. The payment flow will be unidirectional, only allowing him to make payments to other participants.
Lack of incoming liquidity was one of the main challenges faced by companies looking to adopt the Lightning Network in their business in the early stages.
At that time, the only solution available was to turn to online forums and other communication channels to try to find counterparties willing to open up payment channels.
Imagine a store that needed to receive payments over the network, it would have to make a considerable effort to find partners who were willing to establish payment channels with it.
Faced with this demand, the market quickly sought innovative solutions to solve the problem of incoming liquidity. For example, Lightning Labs developed Pool, a tool that connects buyers and sellers of liquidity through a blind auction held on the blockchain.
Amboss launched Magma, a liquidity marketplace integrated into the node exploration platform, offering valuable insight into the robustness of the nodes that are providing liquidity.
On the other hand, CLN took a different approach, introducing Liquidity Ads, allowing nodes themselves to advertise liquidity offers directly on the Lightning Network, without the need for external tools.
Another important improvement in the protocol is the introduction of Dual-Funded Channels, which play a key role in solving the inflow liquidity problem. This enhancement allows both channel partners to contribute funds in the opening transaction, ensuring that the channel starts with available liquidity on both sides.
It is as if the sand in the hourglass was already distributed between the two sides from the beginning, providing a greater capacity to receive payments for the user who initiated the opening of the channel.
Multiparty Payments
Another initial limitation of the network was that every payment could only be sent in full. This means that the largest payment that could be made on the network was limited by the size of the largest payment channel present on it.
That is, it was impossible to make a payment of one Bitcoin if there were not one or more channels of 1 Bitcoin of capacity connecting the payer and the recipient of the payment.
The solution developed to solve this problem was the multipart payment, Multipart Payments. This type of payment can be divided into several parts and can be sent through multiple paths through the network.
That is, if there is no path with 1 Bitcoin on the network, the payment can still be sent because the protocol divides it into smaller payments and sends it through the paths where there is the necessary liquidity, all without requiring any interaction on the part of the user.
LNURL, LNAddresses and Offers
Another pain that has already been solved was the need for interaction to receive a payment. As it was initially designed, every time a user wanted to receive a payment they had to actively generate an invoice for that payment.
This derails many use cases for Bitcoin. A classic example is the streamer. A streamer will never use Lightning as a payment method to receive their tips if all the payment someone wants to make they need to stop what they are doing and generate an invoice for the viewer.
To be the internet's native payment protocol, Lighting Network needs to be able to compete with traditional payment methods.
The designed solution is the standard known today as LNURL, lightning nodes can communicate over the internet and request new invoices from each other without the need for interaction between the receiver and the payer.
The streamer, for example, can place the static QR Code on their screen and viewers can scan the QR Code to make payment. In the background, the user's wallet will communicate with the streamer's wallet, asking it to generate a new invoice for this payment.
The LNURL developers even took the protocol one step further and made it possible to use similar addresses with an email address (something like bitiplyx@getalby.com, for example) to facilitate lightning payments, the LNAddress. Today multiple wallets already allow users to pay each other using these addresses.
The downside of this solution is that it requires lightning nodes to be connected to internet servers. For lay users, it is impractical to do this using a wallet that allows the user to keep their own keys, which ends up encouraging even more the use of custodial services.
Fortunately, a solution that does not depend on the use of external servers is being developed. It is known as Offers, or BOLT 12. The functionalities are basically the same, but all communication between nodes is performed natively in the Lighting Network.
Watchtowers
Every second layer solution for Bitcoin will have tradeoffs. This is inherent in Bitcoin's design. One of the Lighting Network's tradeoffs is the need to constantly keep an eye on the Bitcoin blockchain. Searching for potential breaches of contract by malicious channel partners.
This is because in order to apply the punishment transaction that penalizes a fraudster, it is necessary to know firsthand that the attempted fraud is taking place.
This meant that in early Bitcoin channel owners could not keep their nodes offline for extended periods of time, as they risked missing the transmission and confirmation of a fraudulent transaction on the Bitcoin Blockchain.
This problem was solved with the introduction of watchtowers. Watchtowers do the surveillance for you. There are altruistic services and paid services to carry out node surveillance.
Usually companies with a lot of capital in the network run their own wattstowers to avoid using an external service to guarantee the security of their operation.
Entrepreneurial Ecosystem
Another sign that highlights the maturation of the network and its adoption is the evolution of the entrepreneurial ecosystem.
In particular, the evolution of companies that offer Lightning as a Service (LaaS), as they provide the necessary infrastructure for other companies and developers to connect their products to the Lightning Network.
There isn't a world where every company and organization that wants to connect to the Lightning Network spends development hours building their own infrastructure. Just as companies do not usually create
In parallel with the increase in the number of users, the volume of payments on the Lightning Network also grew rapidly. This growth, which represents an increase of more than 400% and a doubling in the number of payments over the last year, was driven in part by the adoption of Bitcoin as legal tender in El Salvador.
The use of the Lightning Network has diversified over time. Currently, three main payment types account for the majority of payment volume on the network.
Approximately 50% of the volume is made up of transactions directly between individuals, 20% are purchases of goods or services, and the remainder is dominated by deposits and withdrawals from trading services.
Interestingly, micropayments, or micro rewards, make up more than half of the total number of transactions. These micropayments are usually rewards given to users for using a specific service, such as playing a game.
More recently another use case for micropayments has come to the fore with the popularization of NOSTR, a decentralized social media protocol. Users of this network can easily send and receive lightning payments from the apps themselves.
The feature that appeared in February 2023 has already allowed more than 1.2 million payments to be made on the network, an impressive number when we compare the number of daily active users of NOSTR (approximately 6000 on average) with the number of active users of Twitter (237 million on average).
Markers and Metrics
Before we go any further, it's important to clarify one crucial point: in the world of data collection, the Lightning Network is quite distinct from Bitcoin's base layer.
Unlike what happens with the Bitcoin blockchain, where information is evenly distributed, in the Lightning Network each node has a unique view of the network. This means that data can vary from one explorer to another.
Furthermore, even when there is interaction with the Bitcoin base layer – such as during opening and closing of channels – this relationship is not necessarily transparent.
Lightning Network Capacity
Capacity refers to the total amount of bitcoin held in public channels on the network. While this metric is widely popular in the media, it's crucial to point out that it doesn't provide a complete picture.
This is because the capacity only measures bitcoins in public channels, completely ignoring the amount in private channels.
A notable example is Phoenix, one of the most popular non-custodial wallets, where all user channels are private. Therefore, no bitcoins from Phoenix users are counted in this metric.
An interesting aspect to consider is that an increase in capacity can signal adoption, but it can also indicate that measures intended to make the network more efficient, such as multi-party payments, are not being adopted by users.
Therefore, instead of just celebrating the 'number go up', it is recommended to analyze this data with caution, correlating it with other information. In this way, we obtain a more accurate and detailed picture of what is really happening.
What can be interpreted from the graph is that the demand for Bitcoins in public channels has increased. So it's undeniable that the Lightning Network is expanding.
When we compare this data to the increase in the number of users with access to the network, we can safely say that, in this case, there is a correlation between greater capacity and adoption. After all, both showed concomitant growth.
Capacity per Channel
On the other hand, the capacity per channel represents the average of Bitcoins held by each public payment channel in the network. The graph indicates a constant increase in this average from 2022 onwards, approaching 10M satoshis (0.1 BTC or about 3 thousand dollars) per payment channel.
This metric is very relevant to measure adoption. The increase in the average value retained per channel can be interpreted as the entry of companies into the ecosystem, due to greater purchasing power.
Eccentricity
Eccentricity is a metric that expresses the distance in the network, represented by the maximum number of 'hops' required to connect to another node. You may have heard the 'six degrees of separation' theory, which suggests that we are at most six people away from anyone else in the world.
Currently, in the Lightning Network, a node is at most 9 hops away from any other node. This means that, for a payment to reach its recipient, it will make a maximum of 9 hops between payment channels.
An uncontrolled growth of the network could result in an increase in this number, a phenomenon observed between the end of 2021 and the beginning of 2022. However, as the network matures, it is expected that it will become better connected, leading to a decrease this number over time.
Cutting Channels
A cut channel, also known as a bridge, is a channel that connects different network components between two payment channels. If that channel is removed, the two components are no longer able to forward payments to each other.
Just as airplanes have duplicate components to ensure redundancy, the Lightning Network also needs redundancy to ensure that routes are always available to network nodes. Therefore, the smaller the number of cutting channels, the greater the robustness of the network.
Currently, the proportion of cut flutes is around 44%, which serves to further exemplify the 'runaway growth' that we observe in the eccentricity graph.
Conclusion
The Lightning Network has experienced impressive growth in recent years, marked not only by the significant increase in its adoption, but also by the consolidation of its protocol.
The rapid evolution of this technology has been driven by its efficiency and speed, making Bitcoin transactions faster and cheaper, thus enabling greater inclusiveness and utility.
Within protocol implementations, improvements in interoperability between different implementations represent an important achievement for the community.
With greater alignment and collaboration, the environment becomes more conducive to innovation and continuous improvement, promoting network maturity and stability.
The entrepreneurial ecosystem around the Lightning Network is also expanding.
The emergence of companies offering Lightning as a Service (LaaS) has been a game changer, making the necessary infrastructure more accessible and encouraging other companies and developers to connect their products to the network.
The significant amount of investment allocated to these companies illustrates investor confidence in the upward trend of Lightning Network adoption.
From an end-user perspective, adoption of the Lightning Network has been exceptional. The number of users with access to payments through this network has seen a significant jump, despite the fact that this does not necessarily reflect a proportional increase in the number of active users.
The diversification of payment types is also a positive indication of wider adoption of the technology.
Even with the rapid pace of development and adoption, the Lightning Network is still a book in the making, and we need metrics and key indicators to guide us through the next few chapters.
Analyzing this data allows us to assess not only the current success of the network, but also to identify opportunities for future improvements and innovations.
Through careful assessment of the network's capacity, eccentricity and cut channels, we have a window into the beating heart of the Lightning Network, and this view is crucial to understanding where we are and where we are going.
Finally, it's clear that the Lightning Network is no longer the uncertain new thing it was a few years ago. It has matured in many ways - in terms of protocol, adoption and entrepreneurial ecosystem - while its metrics point to a promising future.
As with any emerging technology, there are still challenges and uncertainties, but the Lightning Network has clearly demonstrated its resilience and adaptability. This network is cementing itself as an essential part of Bitcoin's future.
The article was published on the website (https://www.antiresearch.com.br/)