Lightning is Bitcoin’s cypherpunk secret passageway
The buzzlessness might have been the second layer on Bitcoin’s signal
Bitcoin transactions can be fairly private if people want to do a bit of work. All it takes is shifting to the Lightning network and making some friends.
The Lightning Network, as you probably know, is the favorite scaling solution for Bitcoin. It’s a way of transacting on Bitcoin in less than a second (rather than the 10 minutes it takes for a transaction on-chain), if conditions are right. It’s a bit of a mess, it’s highly technical and, this is what I want you to come away with today, it’s not like anything else out there in the crypto world.
In fact, as I set out to report out what’s going on with Lightning right now, I was struck by a beautiful realization that made my cypherpunk heart sing a trill of joy.
We may never really know how successful Lightning actually is.
O Frabjous day. Callooh. Callay.
Public metrics
It has appeared, for a very long time, that Lightning was a bumbling laggard among the grand hopes of crypto scalability. In volume and hype, it has trailed the universe of stablecoins and decentralized finance and cross-chain bridging networks.
Even its successes have been deflating. Right now, Lightning is at an all-time high in terms of its public network capacity, at about 5700 BTC (~$500 million) that’s been dedicated to its payment channels by users.
So that’s like 0.03% of the whole Bitcoin network.
DefiLlama actually tracks it with other decentralized finance protocols in terms of total value locked, and ranks it 69th. Even the Threshold Network, which makes a decentralized alternative to wrapped bitcoin (WBTC), has more funds committed to it, at around $550 million worth.
But here’s where we start to get to why it might help to hold Lightning to a different standard, because it is a very different animal than all the hot categories of decentralized financial technology. In the first place: Lightning is not a blockchain. At all. In any way.
We can only see as much of Lightning as Lightning lets us see.
Lightning is more like a series of connected wallets off-chain (multi-party wallets, but let’s not get too deep here). You can make transactions with other people inside Coinbase or Binance, right? And those transactions don’t show up on the Bitcoin blockchain, but they are still real exchanges of value.
Lightning is like that. Lightning transactions are real transactions. But they exist elsewhere. When a channel closes, they can all just go away. From the perspective of the Bitcoin network, Bitcoin on Lightning is still sitting in the last wallet that it hit before going onto Lightning.
Unlike on exchanges, though, where transactions occur in one big database, Lightning is a truly decentralized mechanism. In fact, it’s not even right to call it a mechanism. It’s many mechanisms. If Coinbase is AT&T, Lightning is more like the mail. Sure, everyone writing mail uses paper, but that doesn’t mean their respective mail systems ever pass letters back and forth.
Lightning works via payment channels. Two different people agree to transact and they each devote a little bit of BTC to the channel. If two people want to transact without a payment channel directly between them, they just need to find a chain of hops that connect the two of them.
So, each person or company who sets up camp on the Lightning network is a node. Each time they agree to transact in an ongoing way with someone else, that becomes a channel.
So nodes and channels are two other ways of looking at the health of the Lightning network. The amount of Bitcoin on the network is crucial to how much it can be used.
But that’s not the whole story.
You need a lot of nodes and a lot of channels for Lightning to reach everywhere it should. Look at this map of public nodes. It’s pretty easy to see that a lot of the planet isn’t really accessible with Lightning yet.
So with that context about nodes and channels in mind, there’s more bad news (maybe).
It doesn’t seem like people are joining the public lightning network. Ever since the FTX disaster, the number of public nodes has been stuck at around 15,000.
Channels are trending down somewhat, though that has flattened out lately.
Seems bad, right? But did you notice? I kept writing “public” in front of all the statistics in this section.
Blockchains are nations, but Lightning is an archipelago
We honestly have no idea how much of Lightning that we can’t see.
One thing I didn’t understand about Lightning for a while is that it is not a public network. It’s not even, in fact, one network. Lightning is a way for parties to interact, but everyone using Lightning isn’t necessarily connected to each other.
Said another way: Everyone on Ethereum or Dogecoin or Bitcoin, for that matter, is connected on a low level just by dint of having assets on the same blockchain. They are connected in much the same way that everyone in France or Russia is connected, in that they live under the same national identity and government.
If we are on the same blockchain, I can push some value to you any time I want. You are, transactionally speaking, all just around the corner from me. If we own some cryptocurrency, then we have some skin in whatever game is getting played on a given blockchain.
Lightning is not like that. Lightning users don’t have to announce themselves to strangers. They can use it privately. We can set up little Lightning cliques and tell the rest of the network: You can’t sit with us!
Summer camp
Let’s imagine that we wanted to set up a weeklong libertarian camp out in the forests of Oregon, and we wanted to transact in a fully stateless way out in those mean woods.
Everyone who came there to offer goods or services could have a Lightning node that they dump a few hundred dollars of BTC into. They could all connect with a larger router node who had a larger amount in there, maybe tens of thousands of dollars worth, right?
Then everyone could show up and transact the whole week entirely in Bitcoin, entirely off-chain. There could be thousands and thousands of transactions, sats bouncing around between everyone all week long. Then at the end of the week they would all close their payment channels, the network would disappear, and all that would be seen on the Bitcoin network would be how much BTC went back into their wallet addresses.
Some would be up a lot. Some would be down. It would all balance out.
All of those thousands of other transactions would have been effectively ephemeral. There’s no permanent record of them on chain. It would be like a little Burning Man of money in the woods and, like that big wood statue of a man, it would be gone once it was over.
To get this right would be tricky, but it’s possible. And even if folks didn’t do it perfectly, it would be harder for blockchain surveillance to come away with a super clear picture of what happened.
Lightning is like a system of tunnels. Every channel is a tunnel to another person. Some people will have channels to lots of people, so you can pass through their spot to find a path to the person you want to reach, if there’s no direct path between the two of you.
But all the tunnels in the world are not connected, right?
Some networks of tunnels are completely separate from all the other tunnels out there.
And that’s why I say that blockchains are nations, but Lightning is an archipelago.
Every node on Lightning is an island, and it’s up to the person running it to decide whether or not they want to let canoes from any particular island land on their shores.
Am I mixing metaphors here? Yes. I love metaphors.
Secret passages
We assume that most people who create nodes on Lightning announce them, but there’s no way to know for sure.
When you look at metrics about Lightning, it’s important to keep in mind that dashboard creators can only see nodes that wave neon digital flags over the electromagnetic waves of the internet’s vast waters.
And, look, I don’t want to pretend like privacy with Lightning is perfect. It’s not. The only perfect privacy is hiding in a cave.
A lot can be inferred about Lightning out there. Privacy leakage is possible and even likely. Hiding is tricky, but at least there’s a way to put on black and travel by night rather than strutting main dripping with Gucci.
The degree of privacy is not really my point here. My point is to help you picture how the Lightning network is unique. We bring our assumptions to how a thing that we know as a crypto thing works. I was doing that. So I expect you were too! But I hope by now you can see that Lightning is not like other crypto things.
It’s its own thing.
Keep watching
So much in this space is driven by hype and half the time if a project doesn’t get somewhere in the first three months, it gets abandoned.
Lightning has never been abandoned, though.
Coingate says that users have been more and more inclined to transact with it via Lightning.
Tether, the world’s largest stablecoin company, says it can run USDT over Lightning, with the RGB Protocol.
Tether also invested in a startup called Speed that does payments with Lightning, somehow.
An African startup, Chipper, says that it has managed to massively increase its footprint with Lightning.
Lightspark has this great way of making sending money work just like email. I’ve always loved this mechanism.
SoFi has announced it will use the email money system. Maybe we see it in the U.S. soon as regulations clear up?
The point of all this is just that the usefulness of Lightning seems to be catching on in a non-buzzy way.
Today I did some searching to see if there was a quick and easy way for me to get set up running a node. Short answer, there’s not. Running a node still looks like a technical process. I might try to get one going. I’m not sure I’m up to it, though.
But even understanding that is signal.
It suggests that the most important metric to watch is probably the network capacity. Normal people will largely work through centralized operators that provide access to their nodes. So as long as the capacity of the network is rising, that means more people and companies are getting in.
Update the midcurve
You know how there’s always a “but actually” dude who wants to remind everyone that Bitcoin is not really private?
Tell that guy about private channels on Lightning. The biggest cryptocurrency network on Earth is not completely without a way to befuddle Chainalysis, Elliptic and the NSA.
The point of today’s dispatch is this beautiful truth: We can only see as much of Lightning as Lightning lets us see. For a sufficiently determined set of users, Lightning can hide some set of payments, at least to an extent, between parties who share reasons to hide.
Does that mean some bad actors could make use of it? 🫡
That’s always the scary trade when we give each other a way to close the shades.
That’s a little scary, of course, but it’s also nice to know that the panopticon is not quite complete.