the evolution in Lightning of Bitcoin

Liquidity should not be seen as a negative factor in the Lightning payment network, but as a necessary component to drive the evolution of the Bitcoin ecosystem, says Roy Sheinfeld, co-founder and CEO of startup Breez Technology. For him, what has so far been seen as a problem is actually the key element in learning to master the system, where Lightning Service Providers (PSL) are the key to what could be the next step in the evolution of the ecosystem.

In an article posted on his Medium blog, Sheinfeld lays out some ideas that can fuel the Lightning network and sustainably grow it. From their perspective, moving forward will need to stop considering incoming (ability to receive money) or outgoing (ability to send money) liquidity as a problem, to start turning it into an opportunity and treating it like an investment.

So far, one of the main problems with the Lightning Network is managing liquidity. This is because it requires money to be on both sides of a channel in order to exchange bitcoins.

However, the solution would be for those with sufficient funds to send or receive payments, operate a routing node and make it available to the network so that the Lightning economy gains fluidity. In return, will get a return as an incentive, according to Sheinfeld.

“Like borrowing money or buying stocks, investors commit capital over a period of time and expect a return that increases over time. From the PSL point of view, the cost of providing liquidity will increase with the number of users and the time that capital is committed to that end. This is why returns also have to increase per user and over time. That is the formula ”.

Roy Sheinfeld, in the article “How I learned to stop worrying and love liquidity.”

3 models to monetize liquidity on the Lightning network

For PSLs to earn a return on their investment will be necessary for them to scale to a professional level. “A serious operation involves an investment in hardware, software and, potentially, personnel to maintain uptime, performance and efficient allocation of liquidity,” Sheinfeld explains. Therefore, in his article he presents three models that would allow monetizing liquidity.

1.-Subscription payment channels

Liquidity btc cryptocurrency value

Liquidity btc cryptocurrency value

The Lightning network would gain momentum if liquidity is converted into energy capable of producing changes in the ecosystem. Source: Engin Akyurt /

Under the subscription model, users pay their PSL a monthly fee in exchange for liquidity enough to receive or send bitcoins. The Sphinx messaging service operates under this model, which charges users 0.5% per month to make micro payments through the Lightning network. As with bandwidth, a higher capacity to process payments will mean a higher quota, but it can also mean lower fees, Sheinfeld says.

Implementing this subscription model still presents challenges in the sense that the ability to process payments in a channel depends on the liquidity available at each end. This would put users at risk of paying for their own liquidity or their own money instead of paying for a service provided by a PSL, as the CEO of Breez warns.

2.-Lease the capacity to send or receive satoshis

Those who have bitcoin to spare in their payment channels will be able to rent it to those who do not have liquidity. A) Yes one or more channels may be made available to those who need it for a fixed period at a predetermined price using smart contracts. This is the model behind the Lightning Pool, a non-custodial exchange protocol that uses an auction mechanism to adjust the rental price of bitcoin to the demand for liquidity. Those who need it most will submit the highest bids, guaranteeing their suppliers the highest available profitability, says the Breez CEO.

As Sheinfeld sees it, the leasing model also fails to react effectively to current usage patterns. This is because implementing it runs the risk of increasing capacity without simultaneously allocating liquidity between the two balances of a channel in an optimal way.

3.-Routing fees

With routing fees, PSLs charge a flat fee plus a percentage for each transaction that they forward. This model is possibly the most faithful to the purpose of Lightning as a payment network. However, Sheinfeld cautions that while it is an intuitively attractive solution, routing fees are too low these days to incentivize PSLs, at least until Lightning goes mainstream.

LN cryptocurrency liquidity

LN cryptocurrency liquidity

Roy Sheinfeld spoke at the 2019 Lightning Conference on how the second layer network can overcome challenges to evolve. Source: The Lightning Conference / Youtube

Ultimately, Sheffield is convinced that the next step in the evolution of the Lightning network is to master liquidity, that today is a scarce resource. At the same time, this resource is necessary to ignite the engine of the economy that must flow smoothly in the second-layer bitcoin payment network.

“Cash flow is literally the goal of Lightning and, like everyone else, PSLs need a little more money to come in than what leaves or stands still. Therefore, part of the equation is to compensate LSPs for supplying a scarce resource. The other part is preventing that money from becoming stationary. We do it by closing inactive channels ”.

Roy Sheinfeld, in the article “How I learned to stop worrying and love liquidity.”

The Lightning network is in full development since it emerged in 2016 as an alternative to solve the scalability of Bitcoin. Therefore, today there are many proposals to improve the user experience.

As reported by CriptoNoticias recently, one of these proposals is the creation of a network of “springboard” nodes that is being promoted by ACINQ, the company behind the development of the Phoenix and Eclair wallets. The initiative would simplify the payments that users process on a day-to-day basis.

These do not need the user’s wallet to synchronize with all the nodes of the network before routing a transaction, since it will be enough to locate those nodes that are close to each other, or the remote nodes that function as “springboards”. With them, a third party may calculate the most suitable route to process payments.