Headway With Bitcoin’s Lightning Network Shows Promise

In a series A round of funding, Lightning Labs has raised $10 million from a number of sources including Craft Ventures, Slow Ventures, and Ribbit Capital. This investment shows more faith in Bitcoin’s future and its ability to scale. 

Brian Murray, the managing director of Craft Ventures has also now joined Lightning Labs’ board of directors. Murray said that “If bitcoin is going to reach its potential as a viable global currency, it’s going to need to scale beyond the base layer. Similar to how Visa relieves banks from handling all fiat currency traffic, Lightning relieves the base bitcoin chain from handing all transactions, thus bringing more speed and fee efficiency to the network.”

For those who don’t know, the Lightning Network is an off-chain scalability solution to help Bitcoin get to a point where it can handle the massive volume of the world’s transactions that occur daily. Lightning Labs is one of the many companies involved in the development of further solutions on Bitcoin’s off-chain second layer. Currently, Bitcoin can handle between three and seven transactions per second. This is tiny in comparison to Visa or Mastercard’s near 2,000 transactions per second. 

The Lightning Network shows promise in drastically scaling up Bitcoin’s ability to handle massive amounts of transaction volume by handling small transactions off-chain in payment channels that will later be settled on the blockchain. The Lightning Network isn’t without criticism and some fear that it may centralize Bitcoin with these off-chain payment hubs, but If the Lightning Network were to be successfully deployed, Bitcoin would be able to handle even more transactions than current payment systems like Visa (V) and Mastercard (MA), and it would help push Bitcoin forward as a realistic day to day currency rather than a store of value asset, as many have been calling it recently. 

Lightning Labs is one of the dozens of other startups working on the Lightning Network and building products around it. In 2018 Lightning Labs received $2.5 million from investors including Twitter (TWTR) CEO Jack Dorsey, Square (SQ) executive Jacqueline Reses, former PayPal (PYPL) COO David Sacks, and Litecoin (LTC) creator Charlie Lee. 

Since the funding in 2018, Lightning Labs went on to create a product called “Loop” which aimed to assist merchants in creating and managing their own payment channels for a fee. 

Lightning Labs CEO Elizabeth Stark said that “Loop ‘in’ helps people put funds into their existing channel … kind of like a prepaid debit card for a lightning account and that “Loop ‘out’ is currently the most popular product because it allows people to continue receiving funds on lightning.” 

As one of the leading companies in the space, Lightning Labs looks to push Bitcoin into the future as a real currency and make it a more viable option for merchants to use with ease. This new round of funding will help their efforts tremendously and could help to scale Bitcoin going forward.

While the Lightning Network does show promise in drastically scaling up the volume of transactions that Bitcoin can handle, the off-chain payment network can still suffer from congestion. To solve this, Massachusetts Institute of Technology researchers have developed tech that can help avoid this congestion.

The researchers have named the technology the “Spider” crypto routing scheme. The new method may present a more efficient procedure for off-chain payment channels.

Spider allows users to charge accounts with predetermined amounts of Bitcoin. Payments can be made across these accounts outside of the blockchain and would only use the blockchain to establish and close the accounts. By only making contact with the blockchain to establish and close accounts, transactions using the second layer Lightning Network and MIT’s spider routing scheme can be completed in milliseconds.

Where this Spider system differs from other routing schemes is that it uses a system that splits each full transaction into smaller “packets,” which could be transmitted across different channels at different rates.

MIT researcher Vibhaalakshmi Sivaraman said that “shortest-path routing can cause imbalances between accounts that deplete key payment channels and paralyze the system […] Routing money in a way that the funds of both users in each joint account are balanced allows us to reuse the same initial funds to support as many transactions as possible.”

According to MIT researchers, payment channel networks can be slowed by ineffective routing schemes, and can often deplete users’ accounts forcing them to replenish their accounts funds. This, in turn, slows down the off-chain network that was designed to solve on-chain speed issues.

Using this new spider routing scheme results in a solution to Bitcoin’s scalability issues. Currently, Bitcoin transactions on the blockchain can take around 11 minutes to be confirmed. The Second layer Lightning Network along with spider changes this entirely and is said to be able to process around four times as many transactions than other Lightning Network routing solutions.

This new development only furthers the prospects of second layer off-chain solutions that may help scale Bitcoin to a level akin to Visa or Mastercard.

While Bitcoin’s price is still only half of its all-time-high, some metrics give a different story than what the price does.

• Number of bitcoin ATMs worldwide: Bitcoin currently has over 6,000 ATMs worldwide. While this is miniscule compared to the amount of cash ATM’s there are, It’s interesting to look at how the number of Bitcoin ATMs has grown. The increase of Bitcoin ATMs make the asset more accessible and if this trend of growth continues the usage of Bitcoin will likely grow too.

• Developer activity: While Bitcoin’s developer activity is not quite the size of projects like Ethereum or Cardano (ADA), it still has seen ever-increasing development with data from 2015 till now. Projects like the Lightning Network have been quite active.

• Daily active addresses: As with nearly all cryptocurrencies, the number of daily active addresses suffered greatly following the 2018 crash. While daily active addresses have not reached its top of over one million since 2018, it has still maintained consistent growth. There are currently about 780,000 active addresses up from its 2015 levels of 250,000.

• Bitcoin (BTC) YTD: 35.95%
• Bitcoin Cash (BCH) YTD: 115.42%
• Ripple (XRP) YTD: 46.06%
• Ethereum (ETH) YTD: 63.51%
• S&P 500 YTD: 3.54%

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