Lightning Network adoption ushers in a new era of cryptocurrency functionality
On May 10 Segregated Witness (Segwit) was activated on Litecoin, allowing Lightning Network (Lightning) transactions from various software clients to settle on the cryptocurrency network.
The creator of Litecoin, Charlie Lee, started advocating for SegWit activation on Litecoin and Bitcoin at the start of the year. Lee described the two competing networks as two highways: “Today, Bitcoin is packed full of cars and Litecoin is empty. Even with Bitcoin packed, the cars are not coming to use the Litecoin highway today because it’s not connected and it’s inconvenient (centralized exchanges and slow on-chain transfers) to go across.”
“[Lightning] will build bridges over the highways. But a side benefit is that these bridges will connect both highways together.” - Charlie Lee, Litecoin Creator
One major benefit of Lightning is a feature called Cross-Chain Transactions (XCTx), otherwise known as atomic cross-chain transactions or atomic swaps, where users can trade differing cryptocurrencies instantaneously and without risk. XCTx allows a user to pay a merchant in Bitcoin (BTC), for example, even if they only own Litecoin (LTC), as long as they are both using the Lightning Network.
“Efficient decentralized exchanges are now possible,” Lee explains, “You can now pay LTC and exchange them instantly through a Lightning exchange node and send BTC to the merchant. That’s basically decentralized ShapeShift.”
With little documentation covering XCTx currently available, BraveNewCoin spoke to Lightning developers to learn more about this feature. Lightning Labs co-founder, and co-author of the original Lightning Network whitepaper, Joseph Poon told us that “Cross-chain swaps are one of the most important & useful aspects of the Lightning Network.”
Poon’s website briefly explains that XCTx “can occur off-chain instantly,” making it possible to make transactions across blockchains without trusting a third party custodian. While qualifying that the tech has a way to go before users have a seamless interface, Poon believes that XCTx will be “very viable when wallets add Lightning Network capabilities.”
Implementations such as his own Lightning client, Lightning Network Daemon (LND), will allow wallets to make these types of payments “seamless in the long-term.” They could also result in very cheap transactions, he added.
“Cross-chain payments are nearly instantaneous, and the fees will likely be very low. The fees involved with channels are up to the market to decide.” - Joseph Poon, Lightning Labs Co-founder
His counterpart at the Paris-based Lightning startup ACINQ, CEO Pierre-Marie Padiou, agrees, calling XCTx a “truly amazing feature.” The developer sees two specific use cases for this new type of transaction, one would be trustless trading.
The CEO is more excited about a second use case, cross-chain payments. Paiou echoed Lee’s and Poon’s sentiment about Lightning enabling users to transparently pay a merchant who is asking for bitcoins with litecoins, but states that “nothing prevents hopping across several chains either.”
“It makes it possible to interconnect blockchains with different security/centralization tradeoffs,” Padiou states, hinting that you’ll be able to use the benefits on any participating cryptocurrency. “Any blockchain that supports Hash Time-Locked Contracts can be plugged into Lightning,” he explained, “even private blockchains for that matter!”
Perhaps you only trust the value of your litecoins but want leverage the stealthiness of Zcash (ZEC) for a particular transaction? According to Padiou, it will be possible to send LTC, through the anonymous ZEC, and the other party can receive them as LTC. “Of course, the heterogeneity in security, liquidity, etc. between blockchains will translate to risk management for gateway nodes,” he adds. “This will come at a price.”
The process may be a relatively expensive transaction, racking up fees on each leg of the journey. “Of course there will be fees, it shouldn't be a surprise either,” Padiou states. “You need to incentivize people to forward your payments, and in the case of cross-chain transactions, to reward the risk of handling a potentially ‘less-secure’ or ‘less-liquid’ altcoin. It doesn't mean that these fees will be high though; they will be much lower than for on-chain transactions.”
Padiou also described how users would experience the XCTx process, stating that “there is no reason why a cross-chain payment shouldn't be totally transparent.” The technology allows for value to jump from chain to chain in any order, making a normal, one-currency Lightning transaction just the same in appearance and speed from the user’s perspective as a payment that jumps between coins.
“A bitcoin-to-bitcoin payment could go through a litecoin channel without the user noticing,” the CEO conveyed, assuming that Bitcoin implements Segwit. “The wallet setup is a tricky part, because it takes time to create channels.”
“The payment experience will be pretty similar to that of current on-chain wallets: just scan a QR-code and hit 'send'.” - Pierre-Marie Padiou, ACINQ CEO
There could be dozens or even hundreds of cryptocurrencies using Lightning. Each network simply needs to implement Segwit on their blockchain. In every case so far, Lightning was then easily and quickly applied.
While not every cryptocurrency is compatible with Segwit, the upgrade is not restricted to Proof-of-Work blockchains. Including Litecoin, at least seven cryptocurrencies are running the upgrade, and most have tested out Lightning transactions on their main network successfully.
Groestlecoin, claims to be the first to activate Segwit, as early as January 24 this year, while Syscoin was the first to claim a lightning network transaction on April 26, after activating Segwit via a required upgrade over Microsoft’s Azure cloud on March 31st. Digibyte implemented Segwit at the end of April, and made their first Segwit-style transaction on May 1.
Viacoin announced Segwit activation last week, and on May 7 Vertcoin announced that they activated Segwit. Vertcoin facilitated their first lightning transaction within hours. NAV Coin was the latest to lock in Segwit, and the developers claim to have a dual-blockchain Proof-of-Stake algorithm, demonstrating that a wide variety of protocols can implement the upgrade.
Padiou tried out his eclair Lightning client on Litecoin’s testnet before Litecoin activated Segwit, and happily claimed that “it worked out of the box, all we had to do is change a few configuration parameters.” 16 days later, within two hours of Segwit activation, Blockstream developer Christian Decker sent the very first Lightning payment to settle on Litecoin’s main network.
Given a large enough network of cryptocurrencies all using Lightning and XCTx with each other, it stands to reason that together they could act as a dominant competitor to bitcoin itself, offering far more functionality than Bitcoin can before it adopts Segwit. It would certainly offer faster transaction speeds than bitcoin has, and there would be no need to re-deploy all of the participating wallets.
Padiou was careful not to predict if this network would become an economic threat to bitcoin. “Some key aspects are extremely difficult to anticipate beforehands,” he cautioned, “even when you have a good understanding of the underlying technology.”
Poon said It's unlikely for many cryptocurrencies to act as a replacement for a common currency, “as that results in an illiquid order book.”
“Most likely, there will be only a small handful of coins which are used as a common cross. Speculatively, I expect Bitcoin, Ethereum, and one or two more to be used.” - Poon
Poon told BraveNewCoin that the primary limitation going forward is that “development of the software to a point where it is robust,” with “improvements in interaction.” Padiou added that there is still much to do on the development front as well. “Before making Lightning work between multiple blockchains, we should make it work on one blockchain. That is our immediate goal.”
There are currently seven prominent development teams working on separate Lightning Network software client projects, which are all at various stages.
The second largest manufacturer of mining equipment worldwide, Bitfury, was among the first to release their own specification and code for a Lightning client, called Flare.
Lightning Network Daemon, from Poon and Tadge Dryja’s Lightning Labs was the first lightning network team to issue a complete, working client.
Eclair, from Padiou and his team, was the first to add a Graphical User Interface, allowing less development-savvy users to download and run a Lightning for the first time.
Blockstream’s c-lightning is the software that Decker made the historic first Litecoin transaction with, although it’s not ready for release as yet.
Amiko Pay is a user-friendly Lightning client, although its security features are still under construction.
Built for the Ethereum blockchain, Thunder is a Lightning client developed by the development team at Blockchain.
Lit is the latest addition to the group, a lightweight client from MIT’s Media Lab. The software is designed for developers that want to avoid downloading a blockchain and running a node, and therefore has its own built in wallet.
There are also several projects being developed by startups in the space. Yours and Bitcache have developed their own mini-versions of the Lightning which they need to run their platforms on.