Lightning Network Development Is Now Centralized and for Profit after Lightning Labs Raises $10 Million and Launches First Commercial Service

February 7, 2020 / by Zachary Mashiach

Bitcoin (BTC) technology and infrastructure development has taken a centralized turn after the announcement that Lightning Labs, which is a primary developer for Lightning Network technology, raised $10 million in a Series A funding round. 

It was led by Craft Ventures, with several firms and venture capitalists from the traditional financial sector pitching in.

Logically, if investors are putting $10 million into Lightning Labs, they are not doing it out of goodwill. Rather, they expect their investment to be repaid multiple times over through the success of Lightning Labs.

Indeed, simultaneous with the Series A fundraising announcement, Lightning Labs announced the launch of its first for-profit commercial service called Lightning Loop.

Essentially, one of the main inefficiencies of the Lightning Network is channel liquidity. In order for a merchant to receive payments, they must lock up a certain amount of Bitcoin (BTC) into a Lightning channel. If the merchant receives lots of Lightning payments, the liquidity dries up on the customer’s end of the Lightning channel, making it so the merchant can no longer receive payments without closing the channel and opening up a new channel with fresh liquidity.

Likewise, if a Lightning user sends enough payments, their channel liquidity will dry up, and they will have to close the channel and open a new one with fresh liquidity.

Lightning Loop solves this by automatically rebalancing channel liquidity via sending payments to Lightning Labs. Users can ‘loop out’ by sending a Lightning payment to Lightning Labs and receiving a Bitcoin (BTC) transaction in return, which can replenish inbound channel liquidity for a merchant or be used to deposit Bitcoin (BTC) on an exchange via the Lightning Network. Users can ‘loop in’ by sending a Bitcoin (BTC) transaction to Lightning Labs and receiving a Lightning payment in return, which replenishes outbound channel liquidity for Lightning users, or can be used to withdraw Bitcoin (BTC) from an exchange into the Lightning Network.

The major caveat is that Lightning Labs charges around 0.05% for each Lightning Loop transaction, with the fee varying based on the size of the transaction and some other factors.

Zooming out, instead of fixing this critical inefficiency in the Lightning Network in a decentralized, open-source, and non-profit way, Lightning Labs has chosen to capitalize on this inefficiency, by charging money for the service that fixes it.

Considering there are now traditional financial firms with investment stakes in Lightning Labs, and the managing director at Craft Ventures is now on the Lightning Labs board, it seems any future improvements for the Lightning Network are likely to be for-profit services. Also, if Lightning Loop becomes highly popular, it is possible investors will push for Lightning Labs to raise fees.

Ultimately, the Lightning Network is heading down the slippery slope of centralization, and unfortunately, Bitcoin (BTC) is coming along for the ride. Bitcoin (BTC) cannot be used for retail transactions due to its 10 minute confirmation times, volatile fee structure, and lack of scalability. The Lightning Network solves this by facilitating instant transactions for practically no fees, at least originally.

Now, however, the technology and services required to make Lightning Network truly available for retail adoption will be paid services. If Lightning Labs is completely successful, and its Lightning Network technology becomes widely adopted, most Bitcoin (BTC) transactions will end up paying fees to Lightning Labs.

Effectively, this would make Bitcoin (BTC) centralized, with fees paid to a for-profit company and essential technological development conducted by a for-profit company.

The time is now for the Bitcoin (BTC) developers and community to act. As detailed in a previous Crypto.IQ article, the Bitcoin (BTC) developers should integrate Lightning Network technology into Bitcoin’s (BTC) code. If they do this,  Lightning development would be conducted in a decentralized, open-source, and non-profit way, and would take the thunder away from for-profit companies like Lightning Labs that will not develop the technology the Bitcoin (BTC) network needs to succeed without being paid a fee for each transaction.