Even before entering the testing phase, hundreds of global developers have begun investing time and resources into Bitcoin’s latest technology – the Lightning Network – to help establish a more scalable version of the largest and longest-standing cryptocurrency.
This effort is significant, with the number of Lightning Network nodes now exceeding 1,000. Although these nodes are largely operating at a loss, the motivation is to make the Bitcoin network more accessible and affordable. However, as the network enters a self-guided phase, some are beginning to question when economies of scale will arrive.
As seen in the Bitcoin community, with the rise of cryptocurrency mining, home mining via personal computers was quickly surpassed by industrial operations, with lucrative profits attracting corporate interest. Experts acknowledge that companies can indeed profit by providing convenient cryptocurrency payment solutions.
BitGo engineer Jameson Lopp stated:
If an entity intends to invest heavily in payment channels and run nodes for profit, this is likely to create a profit model similar to mining.
Lopp’s viewpoint is that all networks, no matter how grassroots they start, will ultimately yield to those who can provide more reliable services at more affordable prices. In the case of the Lightning Network, almost anyone with technical skills and a small amount of cryptocurrency can run a Lightning channel, but the services offered in the future may vary.
For example, users of the network may not always be able to rely on the availability of others to whom they send money, meaning intermediaries may emerge that provide better liquidity and payment paths.
A Twitter user remarked: “The Lightning Network will effectively concentrate Bitcoin’s ‘channels’ and ‘centers’ on one side. These centers will essentially operate like banks.”
Frances Coppola, a contributor to Forbes and CoinDesk, pointed out on Twitter:
In the eyes of many critics, financial institutions may offer so many of the largest payment channels that they will essentially merge into ‘centers’. Lightning nodes resemble well-capitalized banks, and the network effectively becomes a proxy banking operation.
In addition to volunteers, companies like Blockstream, ACINQ, and Lightning Labs are involved, having done much of the heavy lifting related to open-source Lightning Network software, and critics believe these companies may be more inclined to play these roles.
These companies currently provide services for free, although they often receive funding from venture capital – Lightning Labs recently secured $2.5 million in venture support, while Blockstream has raised $80 million – leading to the belief that they will eventually need to find a way to generate profits.
This business opportunity has raised concerns among some cryptocurrency enthusiasts. After all, Silicon Valley startups from Facebook to Twitter have long perfected the model of captivating users with free services, only to later adopt practices that may not be in users’ best interests.
However, there are several reasons why, for now, there is nothing to worry about.
Collaborative Implementation
Firstly, the low barrier to entry is becoming a significant distinction between the Bitcoin blockchain and the Lightning Network.
In this regard, MIT researcher, co-author of the original Lightning Network white paper, and former Lightning Network CTO Thaddeus Dryja believes that the Lightning Network will avoid comprehensive corporate centralization because its design does not require expensive or specialized hardware.
According to Dryja, users will be able to freely abandon institutional participants that attempt to exert too much influence over individuals.
For instance, everyone uses Amazon, and Amazon says we also arrange payments between users,” Dryja said. “If that node starts doing things people don’t like, then the cost of shutting it down is very cheap. They never held your money.
Based on these ideas, Lightning Network application developer Elaine Ou believes that the low threshold for providing default software means that if a company adopts poor practices, alternatives may quickly emerge.
She stated: “There are already two other implementations of the Lightning Network in use, so I’m not too worried about the Lightning Network becoming centralized. The specifications are open and are updated through an open process.”
This is not to say that the Lightning Network is absolutely equitable. The system still favors players with technical and financial resources because Lightning Network channels require funding to facilitate transactions. Participants with ample capital can provide more liquidity to network nodes.
Dryja told CoinDesk that institutional participants may join this growing network, stating:
Larger nodes are more efficient. I think for at least the initial years, exchanges will be the main participants, which isn’t great. It would be fantastic if people could use their Raspberry Pi (super small computer) at home as nodes.
This is why Lightning Labs CEO Elizabeth Stark told CoinDesk that her team is working to keep the technology aligned with any company, adding:
The Lightning Network specifications are open, and anyone can build a compatible implementation.
Lightning Network developer Jack Mallers created the free ZAP Lightning wallet, which will soon release mobile and desktop client applications. These user interfaces will make it easier for the average person to use the Lightning Network without relying on corporate channels.
Lower Barriers to Entry
It is entirely possible that inherent costs could make the Lightning Network too expensive, preventing general users from frequently opening and closing channels. But so far, that has not been the case.
Unlike Bitcoin mining, which requires consuming a lot of expensive electricity, opening a Lightning Network channel typically only costs a few cents. The operating cost of a channel handling over 100,000 transactions remains below $20.
Mallers stated: “Competition on the network is fierce, and the barrier to entry is low.” He noted that he has invited 19 volunteer developers to help him build ZAP.
He added:
Just like how people install Bitcoin wallets on their phones today, eventually you could have a Lightning node on your iPhone or desktop that connects to other full nodes on the network, completely independent of your machine, tapping it to access information.
In fact, the upcoming ZAP is just one of several Lightning projects that allow users to run a Lightning node without using more complex Bitcoin or Litecoin nodes. Amazon may one day provide the most efficient nodes, but anyone with a laptop or mobile device can leverage its traffic.
The Lightning Network is here, but can Bitcoin avoid being controlled by centralized enterprises?
Thanks to so-called lit or light clients, these independent Lightning nodes can communicate with other nodes to understand what is happening across the broader Bitcoin network. About 500 people have already participated in chat groups for ZAP on platforms like Slack.
Of course, there are compromises. Those using lightweight clients will not have all the blockchain data at hand.
Regardless, this beginner-friendly option makes the Lightning Network vastly different from cryptocurrency mining. For companies like Lightning Labs and Blockstream, they have an economic incentive to avoid becoming traditional intermediary suppliers.
Reputation at Stake
For those who think another Facebook might emerge from these enterprises, that is actually quite unlikely.
For instance, Lightning Labs is able to benefit from collaboration with developers like Mallers and Ou. For blockchain startups dedicated to this open-source technology, their professional reputation depends on how much they maintain the decentralization of the Bitcoin network.
Corporate interests often consolidate power and access, but the Bitcoin community has proven they will push back against these efforts, as evidenced by groups forking the Bitcoin network to create Bitcoin Gold, aimed at curbing industrial-scale miners. Of course, the Lightning Network is much younger than Bitcoin, and such splits could have broader implications for the Lightning Network community.
If entrepreneurs are to continue leading the development of the Lightning Network, they must avoid colluding with any party that holds exclusive advantages.
Stark told CoinDesk:
We currently do not operate any Lightning nodes because that is not part of our plan. We create the infrastructure for others to run nodes, which is ultimately for the benefit of the entire network.
BitGo CTO Ben Davenport, an investor in Lightning Labs, agreed with Stark’s viewpoint, stating, “They won’t profit directly through this protocol. However, there are always many opportunities for smart teams to develop some business models.
Dryja told Coindesk that it is still too early to say how this young technology will affect overall decentralization.
However, Mallers is optimistic because the operators of Lightning Network channels will never hold users’ funds. Moreover, anyone with technical skills can choose their payment methods. Thus, crypto punks can easily avoid using enterprise-level channels.
Mallers stated, “You can completely avoid relying on any third party. You can even configure and choose the payment path you want to use. If needed, you can route around specific participants in the network.”
Blockstream developer Rusty Russell believes that, in the long run, the swings of the Lightning Network community will promote greater decentralization, with the barriers to entry being a key reason.
He said, “Accepting Lightning Network payments is easier than accepting on-chain (Bitcoin) payments. So we’re seeing more and more people controlling their own payment infrastructure.”
He also stated:
I think as we make the entire Lightning Network stack more usable, Lightning Network payments will grow, which is an excellent trend for the health of the ecosystem.