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The Future Economics Of Lightning Network

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Satoshi&Co Daily Crypto Newsletter

May 29 · Issue #185 · View online
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Check out past issues of the newsletter along with more interesting crypto content as well as our recently-launched podcast series with leading crypto industry participants at our newly-launched website www.satoshiand.co

(Listen to our latest podcast here. It is with Sandeep Nailwal of Matic Network, which is a layer 2 protocol working on ETH’s Plasma. Matic Network recently finished a successful launch on Binance Launchpad and is also the first Indian crypto startup to receive funding from Coinbase Ventures).
Bitcoin’s Lightning network has grown impressively over the past one year, with total nodes and channels having risen exponentially after the launch. The Layer two solution helps Bitcoin scale exponentially, makes instant payments possible and adds privacy to Bitcoin transactions. Lightning Network comprises a network of nodes that can send Bitcoin between themselves after opening a payment channel. Using routing algorithms, a node can send Bitcoin to any other node without having to establish a channel between them directly. Establishing a channel between two lightning nodes involves transactioning on the main blockchain and incurs miner fees. Owing to the nascency of the protocol, the node network is fairly centralized with just a few nodes accounting for a majority of the network’s channels and throughput capacity. The example that follows illustrates how the lightning network works in simple terms.
Source: 1ml.com
Source: 1ml.com
The basic idea is to create a “channel” between 2 participants (let’s say Alice and Bob) and place some funds in, for example 1 BTC each. This requires a transaction on the Bitcoin blockchain, that locks the funds in a two-signature multisig address. Here is the situation of the open channel:
Alice <= 1 BTC == 1 BTC => Bob # opening of a new channel
Alice and Bob can now make as many transactions as they want “off-chain”, they just need to exchange an updated “balance-sheet”: that is a transaction signed by the other party (so it’s missing one of the signatures) that is not propagated to the bitcoin mainnet (yet), and that pays the updated funds to the participants.
Because the transactions are stored “off-chain”, Alice and Bob do not need to wait for a confirmation from the main blockchain (instant transaction) and also do not need to pay a fee to the mainnet miners (low fees).
So, some nodes perform the crucial role of routing transactions through multiple hops in order to allow any sender to transfer Bitcoin to any buyer. As running a lightning node incurs a cost (however, not as high as running a Bitcoin node), nodes that route transactions usually charge a fee for performing routing services. The cost of running a node is approx. around $4-5/per month (mostly electricity expenses) and the revenue from fees is only a miniscule fraction of that currently. Anecdotal evidence shows that the average revenue is around 200 sats which is worth less than a dollar. The economics of running a lightning node is unviable in its current state. This is expected to change as LN becomes more widely adopted.
The reddit thread below has some interesting discussions around the economics of lightning network.
Meanwhile in Crypto Wonderland....
“Salesforce Announces Its First Blockchain Product”
Last year, Salesforce  chairman Marc Benioff mentioned, perhaps for the first time, his interest in the blockchain. It was not known at the time if he was seriously interested, or if Salesforce would indeed offer a way to use the blockchain on the Salesforce platform. Today, a little over a year later, the company announced its first blockchain product, and it’s one aimed squarely at developers. Salesforce’s MO with new tech is always to start slowly and branch out after it gets a feel for customer requirements. Today’s announcement follows a similar path. The company is announcing a low code blockchain development tool on the Lightning platform.
“STP Raises $7 Million”
Standard Token Protocol (STP), a firm hoping to bring transparency to the tokenization process, announced Wednesday it has raised a total of $7 million through the sales of its STP tokens. The fund was raised through two rounds from investors including Neo Global Capital, BlockVC, AlphaBit. STP develops an open-source standard for projects looking to tokenize their assets. The company highlights compliance, claiming that the protocol will ensure tokens fully comply with region-specific regulations and KYC requirements. Meanwhile, the firm’s STP tokens could be used to pay for issuance fees and compliance investigation or to be used for staking and governance on STP’s platform.
“Blockchain Is Slow and Costly”
A trial project using blockchain to transfer and settle securities and cash proved more costly and less speedy than the traditional way, Germany’s central bank president said. The experiment, launched by the Bundesbank together with Deutsche Boerse in 2016, concluded late last year that the prototype “in principle fulfilled all basic regulatory features for financial transactions.” Yet while advocates of distributed ledger technology say it has the potential to be cheaper and faster than current settlement mechanisms, Jens Weidmann said the Bundesbank project did not bear those out.
“German Watchdog Warns Public About a Crypto Exchange”
The Federal Financial Supervisory Authority (BaFin), Germany’s financial regulator, has issued a public warning about cryptocurrency exchange CoinBene on May 28. The watchdog says that CoinBene has been recruiting freelance crypto traders who get paid on commission. BaFin states that since crypto assets are financial instruments, trading them requires authorization under Germany’s Banking Act, or Kreditwesengesetz (KWG). BaFin states that CoinBene is not listed in Germany’s commercial register and has not obtained proper licensure for trading crypto assets as required by the KWG.
Tweet of the Day
nic carter
When you’re a vassal of greater east Shanghai (formerly known as New Jersey) in the Wechat co-prosperity Sphere and your subway privileges are revoked for thoughtcrime, console yourself with the thought: my payment processor does millions of TPS https://t.co/quTamjigZD
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