What is the Bitcoin Lightning Network and why can it help Bitcoin create new use-cases?

1. 1The Lightning NetworkRoland Stadler, May 2019, licensed under CC BY-SA
The Lightning Network
A gentle introduction

2. 2The Lightning Network
Shift Cryptosecurity
Founded in 2015 in Switzerland as a spinoff of the
ETH Zürich, we’re now a fast growing, international team
of over 20 specialists.
Our unique hardware wallet, BitBox, equips individuals
to easily store, protect, and transact cryptocurrencies.
BitBox is sold and enjoyed by customers
in over 100 countries.
Roland Stadler
Product lead, IT engineer, Full node evangelist
roland.stadler@shiftcrypto.ch

3. 3The Lightning Network
Instant Payments
Scalability
Low Cost
Cross Blockchains
Off-Chain
Payment Channels
Arbiter
Channel Networks
Lightning Network?Instant Payments
Scalability
Low Cost
Cross Blockchains
Off-Chain
Channel Networks
Payment Channels
Arbiter

4. 4The Lightning Network
Does Bitcoin need improvement?
Yes and no.

5. 5The Lightning Network
Global consensus
No trusted party
Permissionless access
But these characteristics come with a price.
Bitcoin is a phenomenal success.

6. 6The Lightning Network
Global consensus
Consensus
means everybody agrees about certain facts.
Local consensus
is “communication”, no special technology needed.
Global consensus
in Bitcoin is used to solve the “double spend” problem
and create digital scarcity.

7. 7The Lightning Network
No trusted party
Global consensus is easy when trusting a central party.
Only a decentralized system can avoid centralized
governance that could be malicious or become a target.
The right incentives are necessary for:
● Economic participants: full verification of the global
ledger and transactions for their own sake.
● Miners: it’s more profitable to play by the rules.
● Developers: no formal governance or leadership.

8. 8The Lightning Network
Permissionless access
Consensus without a single trusted party is not very hard
with known participants.
Bitcoin is built on the ethos of cypherpunks, distrustful of
authorities, privacy-conscious and committed to the idea
of open-source software.
In that regard only an open system can be regarded as
good money, enabling permissionless innovation.

9. 9The Lightning Network
Bitcoin’s sacrifices
To achieve these goals, Bitcoin needs to sacrifice
● Speed: to keep the network in sync, consensus is
achieved in intervals
● Throughput: blocksize needs to be limited, the amount
of transactions per block is finite
● Lightness: full validation replays every transaction ever
conducted (demand for storage, computing power)
Result: a super-secure system that does not really scale.

10. 10The Lightning Network
A blockchain cannot grow indefinitely:
● Initial block download
● Block propagation
● Block validation time
Linear scaling does not work:
● Bitcoin: ~400’000 tx per day, blocks < 2 MB
● VISA: ~150 million tx per day
● Bitcoin “VISA”: 370 MB blocks, 50GB+ per day
Only 7 transactions per second?

11. 11The Lightning Network
The Lightning Network
Building on Bitcoin

12. 12The Lightning Network
Bitcoin as the “base layer”
After ten years of battle-testing, Bitcoin development has
matured and the system evolves conservatively.
New functionality must not disrupt the existing network
that represents over 100 billion USD.
Innovation does not need to create a new, initially weak
blockchain network: it can just reuse the Bitcoin security
and build on top!
The Lightning Network is such an additional layer.

13. 13The Lightning Network
Evolution in layers
Complex systems like the Internet can be modelled in
layers, each abstracting the complexities below.
Layers can become more stable over time, new features
are added on top, without disrupting them. Nobody tries
to stream YouTube directly on the bare network cable.

14. 14The Lightning Network
Off-chain transactions
Is it really necessary to settle every coffee purchase
globally and keep its record forever?
The Lightning Networks takes load off the blockchain
with two innovations:
● Payment channels: two peers exchange signed Bitcoin
transactions without broadcasting. But they could!
● Mesh network: route payments through multiple
channels to reach people without direct connection.

15. 15The Lightning Network
Tech stuff: Payment Channels
Alice Bob
Alice and Bob
create a channel. A: 10 B: 0
Funding tx
A: 7 B: 3
Settlement tx
A: 8 B: 2
New balance
2
4
A: 4 B: 6
New balance
3
A: 7 B: 3
New balance
A: 7 B: 3
Transactions are
not broadcasted,
but each could
settle any time.
Important
Mechanism to
prevent settlement
of old balances.

16. 16The Lightning Network
Lightning Network mainnet in January 2018
Tech stuff: Network routing

17. 17The Lightning Network
Lightning Network mainnet in January 2018Lightning Network mainnet in May 2019
Tech stuff: Network routing

18. 18The Lightning Network
Usually, local consensus is enough
There is no need to settle smaller payments globally and
preserve them forever. Consensus is established locally
in a payment channel and can be updated for free as long
as both participants agree.
Just the possibility to settle the final channel balance at
any given time is enough to establish trust.
In that way, the Bitcoin network acts as arbiter when
disputes occur by “falling back on-chain”.

19. 19The Lightning Network
Yay, Lightning!
The Lightning Network is not only a scaling solution
for Bitcoin, it also enables new use cases.
● Payments are instant and final
● Network scales to millions of transactions / sec.
● No more manual errors due to invoices
● Micropayments for minimal fees
● More private due to local consensus

20. 20The Lightning Network
Meh, Lightning...
But it is no silver bullet. It adds complexity and
has its own restraints.
● Lightning funds are in hot wallets
● Recipients of payments need to be online
● Wallets need to actively manage channels
● Routing is a non-trivial challenge

21. 21The Lightning Network
Implementations
The Lightning Network is a protocol,
not a specific implementation and
not owned by anyone.
● Implementations:
c-lightning, LND, eclair
● Wallets: too many to list
● Payment Processors:
BTCPay, Strike, OpenNode, ...

22. 22The Lightning Network
Real-world examples (1)
At the Energy Kitchen in Berne, coffees and
sandwiches can be ordered and paid for directly in
the shop window.

23. 23The Lightning Network
Real-world examples (2)
Bitrefill sells gift cards and phone refills online.
Most customers are from emerging markets,
without any other access to these products.
Immediate delivery of digital goods with instant
payments.

24. 24The Lightning Network
Real-world examples (3)
Online tipping in social media with minimal
amounts is only possible with a micropayments
solution.
This works either by publishing a simple link, or
through plugins for Twitter, Reddit, Telegram…
https://tippin.me/@Stadicus3000

25. 25The Lightning Network
Real-world examples (4)
Everybody can set up their own fundraiser or start
a crowdsourcing campaign, with global reach.

26. 26The Lightning Network
Real-world examples (5)
Vending machines with a data connection can
accept payments with minimal hardware, no
payment processor required.
“Instant” payments are necessary
when handing out physical
goods or fiat money (ATM).

27. 27The Lightning Network
Real-world examples (6)
Payments processors beware: everybody can
simply host their own. For free.

28. 28The Lightning Network
TL;DR
● Permissionless blockchains don’t scale. At all.
● Layers allow to build complex systems over time.
● The Lightning Network leverages the Bitcoin network
as arbiter for settling disputes.
● Fast and lightweight off-chain transactions scale very
well, exceeding all existing on-chain solutions.
● Lightning has its own set of challenges and trade-offs,
it is complementary to on-chain transactions.
● The power of permissionless innovation is hard to beat.

29. 29The Lightning Network
AMA
ask me anything

30. 30The Lightning Network
Further reading
● Lightning Network introduction and whitepaper: https://lightning.network
● Introductory and advanced video lectures: https://lightningresidency.com
● Comprehensive list of resources: https://www.lopp.net/lightning-information.html
● Build your own Bitcoin / Lightning full node: https://stadicus.github.io/RaspiBolt/
Image attribution
All icons made by Freepik from www.flaticon.com
Internet protocol illustration from https://en.wikipedia.org/wiki/Internet_protocol_suite (CC BY-SA 3.0)
Mobile wallet picture from https://zap.jackmallers.com
Real world example (1): photos by Digitale Welt
Real world example (4): Sintra Bitcoin ATM by Lamassu
License
This presentation is licensed under CC BY-SA: Attribution-ShareAlike 4.0 International