This is an opinion editorial by Kishan Kato, the founder of Trustless Services KK, a Japanese company that primarily focuses on Lightning Network research and development.
This is the third article based on the contents of the “Understanding Lightning” report produced by the Diamond Hands community, the largest Lightning Network community in Japan. The report aims to provide an overview of Lightning’s technology and ecosystem for a non-technical audience. The first article can be found here, the second can be found here.
Previous articles in this series have covered how the Lightning Network excels in its payments use case and what it currently enables. While retail payments and international remittances are extremely powerful use cases for Lightning in their own right, much more is possible.
In this article, we’ll explore some of the advanced use cases that Lightning may enable in the near future, with a specific focus on enabling various application use cases.
Enabling Peer-to-Peer Finance
One of the defining characteristics of the Lightning Network is its peer-to-peer architecture, compared to other payment technologies. While it’s important to acknowledge that not everyone will realistically run their own Lightning node, setting up and operating it for personal use is already relatively simple and straightforward, and we’ve established best practices for businesses operating Lightning nodes. so that they can become more widely installed. In the coming years. Ultimately, these factors will enable the delivery of simple and complex financial services on a peer-to-peer basis on the Lightning Network.
Whereas the limitations of Bitcoin Script hinder on-chain enforcement of contracts using global consensus rules, Lightning Channel state is managed locally among related peers, allowing various custom state management protocols to be traced. . Solutions like DLC aim to achieve confidentiality and on-chain settlement of contracts that rely on anonymous oracles, and similar contracts can be recreated over Lightning channels, at least peer-to-peer. Channels between peers sharing trades as little as possible.
The tradeoff space that can be explored is if the relationship between those peers is such that on-chain enforceability can be compromised, for example if antitrust is high and it is sufficient to be able to prove fraud. Such channels can handle concepts such as credit, settlement on other blockchains or databases, and much more.
Credit-based channels already exist in limited capacity, commonly known as hosted channels, and are already being used to provide community banking services such as the fiat-denominated Lightning Channel. (A delicate topic for another day). In theory, exchange accounts could even be represented as a hosted channel! Such constructions give us the flexibility to explore financial use cases and user experiences todayParticularly where the service rendered requires custody and trust anyway.
In addition to the possibilities that can be brought by custom state management on individual channels, it limits systemic exposure to peer-to-peer finance networks. If a credit-based channel provider is insolvent, its users along with credit-based channels may be affected, but the network’s other channels will not (assuming they do not trust this provider behind the scenes). Regular Lightning channels, in particular, are completely immune, as they are completely collateralized and without permission.
Lastly, we are also seeing projects experimenting with token issuance plans that enable transfers on Lightning. In my opinion, the advantages of this approach over others are unclear, as most tokens are based on the provision of services by a centralized party, and may therefore be better served by a centralized database or hub-and-spoke model. Nevertheless, there appears to be interest in developing the token on Lightning, which could result in some useful innovations.
More decentralized payments on the web
As a payment technology, it is important to consider what problems the Lightning Network is well positioned to solve. Looking at recent events, one answer is becoming clearer and clearer: Lightning enables payments that resist censorship and deplatforming.
Indeed, Jack Dorsey’s project focuses on the creation of the Web5 concept, a decentralized application platform announced by TBD, which aims to separate users and developers from the clutches of major technology platforms and payment processors by separating the concerns of identity, data storage, authentication, and apps. is to free. Distribution.
While Web5 itself does not require the use of Lightning or Bitcoin, it is clear that a Web where users selectively run servers to provide data to applications has a strong synergy with Lightning (even though most use their own devices). Servers/nodes choose not to run!). In fact, although by no means representative of the general public, Lightning enthusiasts run thousands of nodes, thanks to the efforts of projects such as Umbrella, Raspiblitz, and many other node managers.
In fact, since Lightning Payments is technically an atomic tradeoff between pre-committed information (preimage) and bitcoin, it is particularly well suited for payment information, whether it is paid content, data retrieval or key content. . There already exist lapses (Lightning-powered apps) that address some of these use cases.
Of course, even if the effort to decentralize web application environments, including Web 5, may never take off – most users and developers may eventually prefer the walled gardens provided by Big Tech, even That even with their downsides – politically neutral, censorship-resistant and the value of easily verifiable money cannot be underestimated, as the trend of money politicization continues. Even traditional, fully-custodial apps can benefit from interoperability with other apps that integrate Lightning deposits and withdrawals, as covered in previous articles in this series.
summary
The Lightning Network has vast potential beyond just being a scalability solution for payments on bitcoin. Since anyone can participate in the network without permission, a diverse ecosystem of peer-to-peer financial service providers can exist that operate on vanilla and custom Lightning channels. Furthermore, if the market really sees value in an application platform as opposed to being taken over by Big Tech and major payment processors, the Lightning Network has features that make it suitable for regular and conditional payments in such a context.
The road to mass adoption is long and not guaranteed, with countless obstacles to overcome. Nevertheless, as the network continues to grow and developer interest grows, the Lightning Network is poised to become an interesting proving ground for peer-to-peer applications and finance.
This is a guest post by Kishin Kato. The opinions expressed are solely their own and do not necessarily represent those of BTC, Inc. Or reflect on Bitcoin Magazine.