The Lightning Network Glass is Half Full Post

About three weeks ago I wrote a post titled 'The Lighting Network is go Great that it Has all Kinds of Problems' that spawned a lot of discussion.  The purpose of that post was to express my belief that even though the 'Lightning Network' is a very cool piece of technology, it is not some magic silver bullet that can solve all of bitcoin's scaling problems.

That is still true, of course, but the article had a very negative tone.  This negative tone then got recycled into the negative feedback loop on /r/btc and may have been unfair at a certain level. I spent so much time focusing on the negatives, that maybe I lost sight of the positives.  This post is going to focus on the positives and propose some new ideas that might take us a step further.  Most (but not all) of the criticisms I leveled in that post are still true today, but I have learned some new information which make things seem not quite so bleak.

Last week I was interviewed on the 'Let's Talk Bitcoin' podcast about the Lightning Network.  During that interview I tried to stay positive the entire time.  I was joined in the interview by noted bitcoin evangelist Andreas Antonopoulos. Andreas has a very optimistic tone and also takes a 'big picture' approach to things.

As Andreas has been known to say on more than one occasion, even if bitcoin itself fails, it doesn't really matter in the big picture; because you cannot 'uninvent' crypto-currency.  Whatever short term political or technical struggles bitcoin may be having today, pale in comparison to where the cryptocurrency revolution is ultimately going to lead.  Like a number of other people, I am not only emotionally and intellectually invested in bitcoin, I am also financially invested as well.  Since I have a personal financial investment, much of my views are colored by that fact.  I want bitcoin to succeed, not litecoin, not dogecoin, or any other cryptocurrency.  I placed my bet on this one cryptocurrency and I really want it to succeed long term.

I saw the quote in the title image above, purportedly by Teddy Roosevelt, on the Bitcoin-core slack channel last night, and I took it as a wake-up call. Instead of focusing on all of the negatives, how about seeing what I can do to find some solutions.  That is the purpose of this post today, and I hope you will follow along.  There is a path forward, which can achieve the goals of nearly everyone invested in the bitcoin ecosystem.  The path is not without risks.  It is not guaranteed.  But at least there is a way, and that should be a clear and common goal we can all work towards.

So, first, let's list what those common goals are, and figure out if there is a way to get there.

Bitcoin goals:

• Bitcoin should remain decentralized and unassailable by any government.  This is the single, key, most important feature of bitcoin.  If we lose this, then most everything else doesn't really matter.
• Bitcoin should be freely accessible as a store of value to every single person on the planet
• Bitcoin should act as a safe store of value and, on average, increase in value over time.
• Bitcoin should be able to scale to accommodate both more users, as well as more payment transactions; as this happens it will contribute to its other desirable properties.
• Bitcoin should enable not only person to person transactions, but machine to machine transactions as well, and support micro-transactions of infinitesimal value nearly for free.

These are points which most all bitcoin supporters can agree, the question is how do we achieve it.

The simple answer is through layers.  Right now, today, when people think of 'bitcoin' (at a technical level) they think exclusively of it as the bitcoin network and blockchain.  That is what the bitcoin network is today, but that is not what it is likely going to become over time.

The future of bitcoin will be a network which is composed of layers on top of layers on top of layers; like Russian nesting dolls.  This is how virtually all networks are built.  Each layer is designed typically to do one thing, very well, and nothing more.  If you try to design a single network layer 'capable of doing everything for everyone' you usually end up with an over-engineered mess which ends up never fully achieving those goals.  

The important thing to remember is that each time you add a layer on top of this network, you are not creating something separate from bitcoin, you are extending the definition of bitcoin.  All of the layers combined are still part of the overall bitcoin ecosystem.

In the future, the core bitcoin network and blockchain as we see it today, will just be the bottomost layer of a series of Russian nesting dolls.  While there are limitations within the bitcoin network, previously discussed, each layer built on top of it can mitigate or eliminate those limitations. 

That is what we are going to do with bitcoin over the next several years, and on into the future.  However, if we become impatient, and try to make radical changes to the core bitcoin protocol, to make it a 'one size fits all' network layer, we run the legitimate and real risk of killing the golden goose before she has laid most of her eggs; and, I don't think any of us wants that to happen.

The core bitcoin network will not let us scale to billions of users, directly, ever.  Not without destroying it's most important property of being censorship resistant and immune to control by nation states. However, we can scale to billions of users through additional layers built on top of it.

The bitcoin network alone won't do it.  The Lightning Network alone won't do it.  Sidechains alone won't do it.  However, combining all of these systems together, in an evolving and well planned way, can achieve these goals.

When you read how this will be accomplished at a technical level, it will sound overwhelming.  There is no way around it.  The bitcoin network is complex, and really requires a decent background in computer science to understand it.  When you bring sidechains, smart contracts, and other advanced cryptographic and networking topologies into the mix, it just raises the bar.  This shouldn't be perceived as either a problem or as a negative.  Large complex software projects are written and deployed all of the time, all over the world.  In the fields of artificial intelligence and neural networks, we are accomplishing amazing things; from self-driving cars to computers which can practically create art.

The fact that the software we will need to develop to accomplish these things is complex is not a problem, it's just a challenge that will be met.  Most software which does something really cool is the product of many engineers working on it for a long period of time.  In the end, regardless of the complexity, once they deliver their product it can change the world.

Let us begin by noting what the bitcoin network does well, and what it does not do quite so well.

• The bitcoin network does an excellent job of providing a decentralized, censorship resistant way to both store and transfer value around the world without the need for an intermediary.  That is a truly brilliant invention.
• The bitcoin network does not work very well for low-value payments, especially those which need instant confirmation.
• The bitcoin network does not scale well to a large number of on-chain active users.

The bitcoin network maintains an immutable database called 'the blockchain' which records every single transaction which has ever occurred, in all of history.  Maintaining this database is not free, it has real world fixed costs, and attempts to scale it present risk to the network's most critical property, that of being decentralized and censorship resistant.  Over the years there have been a number of 'spam' attacks on the network, where attackers have flooded the network with junk transactions in an attempt to disrupt the system.  Every single one of those spam transactions is recorded in the blockchain, for all of time eternal.  Every single bet ever made on Satoshi Dice is recorded on the blockchain for all to see.

Intuitively, to almost anyone, that doesn't make sense.  Why is every single micro-transaction (value as low as a millionth of a penny), recorded for time eternal on the blockchain?  If the blockchain was free, maybe it wouldn't matter.  But the blockchain is not free.  It is a network resource that is ever growing over time, and the larger it grows, the harder it is to keep it fully decentralized.

Fortunately, there is a solution to this problem in the form of 'The Lightning Network'.  The 'Lighting Nework' is capable of offloading all low-value transactions from a blockchain (any blockchain with the sufficient cryptographic features).  Not only can it off-load them, it can also enable new features that the core bitcoin blockchain could never achieve.  It can provide instant fraud-proof confirmations.  It can support micro-transactions of infinitesimal value nearly for free.

The Lighting Network is not, nor should it be thought of, as something separate from the bitcoin network.  It is simply a layer on top of it, which extends and enhances the capability of the entire bitcoin ecosystem.

As pointed out in previous postings, the Lightning Network, is not a silver bullet.  It does not solve all problems.  It is only capable of easily off-loading the bulk of day-to-day low value payment transactions; which are the majority of all transactions on any payment network, but definitely not all.  High value transactions and transactions required to open and close payment channels are still gated by the core bitcoin blocksize limit.

So, what can we do? 

Well, there is an answer, and it comes in form of another piece of the puzzle which is something called a 'side-chain'.  So, what is a 'side-chain'?  A 'side-chain' is another blockchain which has its value pegged to the main bitcoin blockchain.

Sidechains are almost identical to existing 'alt-coins' with one key difference.  The value represented on the sidechains is derived directly from the parent bitcoin blockchain; using a technique known as 'two-way-pegging'.

By now, most people familiar with bitcoin are also familiar with the concept of an 'alt-coin'.  Since bitcoin is simply a piece of software, anyone can just make a copy of it and launch their own alternate token.  Of course, this new token will have no real-world value, nor will it initially have any security built in.  There are already, today, hundreds of alt-coins, which run on independent networks and have their own value relative to each other.

A sidechain is different than an alt-coin in that the value of the token is derived directly from the value of the parent chain it is pegged to.  It also derives its security by using a technique called 'merge mining' and leverages against the security of the existing parent network.

In this way, 'sidechains' form yet another layer on top of bitcoin.  The tokens exchanged on a sidechain have their value locked to the value of bitcoin; therefore users can trade these tokens the same as bitcoins, because they effectively are bitcoins.

So, the next question is, how many sidechains can there be?  And, the answer is, as many as we need.  We can just keep creating more sidechains as demand arises.

Now, for the final piece of the puzzle, if we want to move all of the low-value payment transactions off to the Lightning Network, there is something extremely important to be aware of.

The Lightning Network uses a series of connected bi-directional payment channels to facilitate the flow of money using hash-time-locked smart contracts.  Here is the amazing thing.  The Lightning Network is completely agnostic about which blockchain it connects to!  Not only does it work with the bitcoin network, it can work with any cryptocurrency network which provides the requisite smart contract features.  Meaning, not only can the Lightning Network operate against the bitcoin network, it can also operate against any instance of a side-chain as well.

And, here is the final piece of the puzzle, since the Lightning Network simply facilitates updating signatures between smart contracts, it can freely inter-operate across multiple side-chains simultaneously!

Here is an article written by Bryan Bishop on this topic.

So, the solution to the scaling problem is similar to the solution we apply in other networking systems.  Rather than trying to make the bottom layer ever bigger, and bigger, and bigger, instead we just keep spooling up additional sidechain instances as needed to meet demand for ever more users, and move all petty low value transactions to the fully inter-operable Lightning Network.

Does this sound complicated?  Well, it is.  However, when this, or a similar system is fully implemented, it will be entirely invisible to the end user.  Just as today, the average person can browse a website with absolutely no understanding of the underlying networking layers that make it possible, likewise people will operate on a multi-layered bitcoin network without needing to know anything about any of the underlying technical details.  They will simply open up their bitcoin wallet, and whether they are using the Lightning Network via some sidechain, or not, it will all be completely invisible to them.

The point of this discussion, is merely to suggest that we can solve the global scaling problem for bitcoin, and we should probably do so, not by putting the core bitcoin network at risk by trying to grow it so large it loses it's most important property.  Rather, we grow it by extending the bitcoin ecosystem by adding additional layers on top of it.  This is how most things are scaled in computer networks today.  You don't scale things by building ever larger and larger computers, rather you throw more and more computers at the problem.  Once you can create one side chain, you can create dozens, or hundreds.  Once you have one Lightning Network capable of talking to one single blockchain, it can just as easily talk to hundreds.  Inter-operablity through multiple network layers is how scaling can, will, and should be accomplished.  Not by trying to grow the layer-0 network to do something it was not designed to do in the first place and, running the risk, of destroying it's key value in the process.

Revisiting my Critique of the Lightning Network

In conclusion, I would like to revisit my critique of the Lightning Network with a 'glass is half full' perspective.  Frankly, my critique largely boiled down to two points (1) The Lightning Network does not yet exist, and probably won't exist in a form capable of off-loading a substantial percentage of bitcoin transactions for a very long time and (2) The Lightning Network is not capable of offloading nearly all bitcoin transactions and has challenges with larger amounts of value.  Both points are still valid, but let's concentrate now on what it can do once it is ready.

In my previous post, and in the LTB podcast, I repeatedly state that the Lightning Network works great for offloading low-value transactions from the bitcoin network.  Which raises the question, just how many low value transactions actually happen today?  I just ran some statistics against the blockchain and here are the results:

This chart breaks down the percentage distribution of transactions on the bitcoin network, by value, for the calendar years 2014-2015.

What you should be able to see is that roughly 30% of all transactions on the bitcoin network are for 0.01 bitcoins or less; which is less than $5 USD worth of value.  Around 60% of all bitcoin transactions are less than 0.1 bitcoins (around $40 USD worth of value), and 70% are worth less than 0.25 btc; or about $100.

While I still believe that the Lightning Network has issues with trying to off-load high value transactions, I think it is likely to work very well for transactions within the $100 range or so.  That means that once there is a fully functioning Lightning Network, it is probably capable of off-loading approximately 70% of all payment transactions; freeing up that space for more users to store value, send high-value payments, or to open and close payment channels.

There is no question that this would be significant net benefit towards the goal of scaling bitcoin.

So, what would this accomplish?

• It would allow the existing bitcoin network to support probably 4 times as many people as it does today.
• It would provide instant confirmations in the form of the LN for all low-value payments.
• It would enable new kinds of payments, not currently possible (true micro-transactions)

Once SegWit is deployed, and wallets are upgraded to support it, we will achieve a 1.7mb effective blocksize limit which will, in turn, support more users.  If there is a 2MB hard fork bump down the road after that, then it will support even more.

This is a clear path, without invoking the need for any sidechains, to scale bitcoin by about an order of magnitude (10x more people) over the next couple of years.

That said, it does not get us to the point that it can support 100x more people, or a 1,000x more people.  For that to happen, we will need to implement additional layers for those people to enter the ecosystem.  Whether this is my idea of spawning additional sidechains for those people to hold value, using the Lightning Network as an intermediary to bridge between them, or something else, remains to be seen.  The point is, that if we give engineers time to solve these problems, there should be no limits to scaling bitcoin, without the need to substantially increase the core blocksize limit to extreme and, some would say, dangerous, levels.

So, my advice to the community is to show some patience.  Let's not do anything too risky or dangerous to the goose that lays the golden eggs.  There are technical solutions that will help us achieve all of our shared goals though, admittedly, those technical solutions will take time and patience to build.  

Finally, let me add some additional commentary to the points I raised in my previous post about the Lightning Network.

• The Lightning Network does not yet exist. This is still true, and still a concern. The reality is that the Lightning Network won't exist in a form capable of off-loading a substantial percentage of bitcoin transactions for quite a while. That is why the community is trying to raise the blocksize limit today, in the form of both SegWit and a 2mb HF later, to give us some breathing room until it can become available to provide a real scaling effect and off-load petty payment transactions from the core network.
• The Lighting Network scales transactions NOT users : This wasn't entirely accurate. Since the Lightning Network requires on-chain transactions to work, the number of users who can have payment channels open is still gated by the core bitcoin blocksize. However, if you off-load 70% of all of the low value payment transactions from the bitcoin network, this does make room for substantially more users than we have today before we meet that limit. More to the point, using sidechains to peg value and the Lightning Network to iner-operate between those sidechains is one example of how we can on-ramp more users once the bitcoin-network reaches capacity. The reality is that we would love to have a whole lot more users of the bitcoin-network. It would naturally lead to both an increase in price and overall utility. These kinds of things are a 'good problem to have'. If we have so many people coming into the bitcoin ecosystem that we need to grow, that would definitely be a good state to be in. Whether it is my idea of using sidechains, or some other layer we insert safely into the network stack, I'm confident that software engineers will be able to solve this problem. Especially now that I know the Lightning Network can freely inter-operate between multiple blockchains simultaneously.
• If the Lightning Network existed, people wouldn�t trust it right away. This statement is still true as well. However, I am only proposing that the Lightning Network be used to offload low value payment transactions; under say $100. I think most bitcoin users would be willing to commit a small amount of value to even an early beta launch of the Lightning Network. Maybe only $5 worth of value at first, but as time goes on and people see that the system functions and operates well, I'm sure they can gain confidence enough to keep a $100 channel open for an extended period of time.
• If the Lightning Network existed, no wallets or payment providers would support it for a while. This is true as well. This is why, even if some version of the LN launches in say six months, there will be a much longer time until it is fully integrated into the ecosystem. However, just because it's going to take a while to accomplish this, given the promise of the technology, it doesn't mean we shouldn't try.
• The Lightning Network has problems with exchanging significant amounts of value. I still believe this is true, but I don't think it matters that much. I think the goal should be to move low-value payments off of the bitcoin blockchain, and we should expect high value transactions to still occur on chain.

• The Lightning Network payment channels cannot help but lead to a certain degree of centralization. I still believe this is true for the high-value use case, but it is less of a concern for the low value model. Since I wrote this, I have learned that the engineers working on the Lightning Network are trying to encourage a mesh-network model, one where every single user maintains not a single payment channel, but instead four or more. The more connections each user maintains with every other user, the more likely the Lightning Network can remain decentralized and truly peer to peer. So long as these channels are only locking up a relatively small amount of value each, this should not present the centralization risk I previously discussed.

• Unbalanced Channels and Locking up Massive Amounts of Bitcoin in them makes LN economically challenging. Again, this is only a problem if your goal with the Lightning Network is to offload all payment transactions, including high-value transactions. However, if the goal is to facilitate the transfer of small value, and each participant maintains multiple open channels, this should not be a major concern.
• Locking up funds in channels means they are subject to market volatility. Same as before. This is certainly a concern if you open channels with a large amount of money; however for a small amount, say $100, most people can more easily stomach a certain amount of volatility for an extended period of time.
• Users of the Lightning Network effectively have a 'hot-wallet'. Same as before. This is a legitimate concern if you have all of your money tied up in Lightning Network payment channels. However, for a relatively lower amount of value, most will likely consider it an acceptable risk, just at they do today with their existing cell-phone hot-wallets with 'walking around money'.

The bulk of my objections in my previous article arose from my belief that trying to offload nearly all payment transactions from the bitcoin network via Lightning were impractical or presented too much risk. I still believe that today, but I don't think it is a concern for the low-value use case which, as shown above, accounts for nearly 70% of all transactions on the bitcoin network today.

If we find ourselves in the envious position of having completely filled up the bitcoin network bandwidth with high-value transactions and more users, even after SegWit and a 2MB HF, we can add additional layers to the bitcoin ecosystem to safely and securely accommodate these new users.

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