Scaling Lightning: To El Zonte … and Beyond!
By: Roy Sheinfeld
Tags: Scalability, Lightning Network, Bitcoin, El Salvador, El Salvador Bitcoin

The first hidden consequence is that, by accepting any bitcoin on an open network, you accept all bitcoin on that open network. There are fundamental differences between types of currency, but units within a type are identical. For example, dollars and bitcoins are very different currencies, but all dollars are functionally identical to each other, and all bitcoins are functionally identical to each other.

By opting for bitcoin only, El Salvador has chosen a type of currency that is open, public, and decentralized, and by opting to implement it over an open network, they can’t distinguish one bitcoin from another. All sats are created equal, and open networks keep them that way. As a result, it doesn’t really matter if the official government wallet is custodial. As far as the network is concerned, the custodian’s node is the peer, and sats move up and down its payment channels as they would anywhere else. There is no difference between “custodial” and “non-custodial” sats from the network’s perspective; they’re all just functionally identical fractions of bitcoins.

With bitcoin on Lightning, El Salvador has committed itself to an irreversible process of choice on the free market between different offerings. They can choose less privacy, more trust, and higher risk for a lower cost with custodial solutions, or they can choose unbeatable privacy, minimal trust, and negligible risk for a slightly higher cost with non-custodial Lightning clients.

The second kind of candy in the El Salvador-bitcoin cake is the rest of the world. One study from about 25 years ago looked at how new rules and practices spread from one country to a few countries to all the countries in the world. The researchers found that, once a new idea is adopted by about one third of all countries, there’s a tipping point that induces a cascade effect.

El Salvador adopted bitcoin just a few weeks ago. Already, Paraguay, Panama, Brazil, Argentina, Tonga, and Mexico are eager to follow. There are 20 countries in Latin America alone, and a third of them — a regional tipping point — are already interested. There are about 195 countries in the world, give or take. A third of them would be 65. If 65 countries adopt bitcoin, its progress will likely be unstoppable.

Is it reasonable to expect 64 countries to follow El Salvador’s example? Absolutely. How much would I bet on it? I already bet everything on it — years ago.

El Salvador’s move put non-custodial, global candy inside a custodial, local cake, and the candles are already lit.

Scaling Lightning Globally: Neobanks and LSPs

So Lightning was always going to be the technology that made bitcoin into a global medium of exchange, and the process is happening right now. Awesome. But there is plenty of work left to do. El Salvador has just under 7 million people. The world as a whole has 7.8 billion. A quantitative increase of three orders of magnitude might require a qualitatively different approach.

El Salvador is scaling Lightning from El Zonte to the whole country primarily with neobanks. A neobank is an online-only bank. As with traditional banks, users give the bank their money, and the bank keeps it and handles it as an agent on the customers’ behalf. There are already Lightning neobanks in the wild, like Strike, BottlePay, and Lastbit.

While adopting bitcoin is always the right decision, and Lightning is always the right technology to do so, the neobank model is unlikely to scale everywhere as well as in El Salvador. The Salvadoran case is unique. How often will a visionary like Michael Peterson arise, receive a donation to seed adoption, and have demand for cash primed by a global crisis? How many countries are likely to have visionary leaders like Nayib Bukele, who feel inspired rather than threatened by bitcoin and who have a perfect test case on their doorsteps? How often is Jack Mallers going to be the guy they call rather than some stiff banker in a pin-striped suit for whom bitcoin is just a hedge, like T-Bills?

Will Lightning strike twice, three times, 195 times over? Absolutely. But we’re unlikely to find El Salvador’s perfect conjunction of rare conditions again. The norm is regulation in the form of money transmitter licenses, deposit insurance, KYC, as is already happening in El Salvador. Such regulatory hurdles are probably justified because people are entrusting their livelihoods to the neobanks. El Salvador is regulating and managing the process closely. The complexity of operating in nearly two hundred regulatory jurisdictions is the reason there is yet no global commercial bank for Lightning or fiat.

Plugging into the existing fiat financial system also puts Lightning at the mercy of the powers that be. A restrictive bill or a fiat shock could end the party quickly, even in El Salvador. We got lucky with Bukele. Will we have the same luck with his successor? What about three presidents from now?

The scalability of neobanks is limited, but that doesn’t mean Lightning is.

The alternative to neobanks is LSPs, which are simply network nodes that provide connectivity, liquidity, background channel management, and other helpful services to Lightning users, many of whom are onboarding directly from fiat. Perhaps the biggest difference between the LSP and neobank models is that LSPs allow the network to grow organically, to be “the result of human action, but not the execution of any human design.” The LSP model circumvents the staggering complexity of planning and organising a Lightning economy, letting the free market shape it from the ground up instead.

Unlike neobanks, LSPs don’t take custody of their users’ funds; they only have to provide users with inbound liquidity to enable payments. To bootstrap a network of LSPs, operators need rapid access to liquidity. The easier they can obtain it, the less capital need to get started, and the faster they can scale. But who allocates that liquidity and at what price?

With liquidity marketplaces like Lightning Pool, allocation can happen automatically and optimally. Lightning Pool is a trustless, true-to-bitcoin technology that reallocates the spare liquidity some users have to other users who need it using a spot auction. Lightning Pool allows bitcoin to find its most productive location on the network and compensate its owner(s). Liquidity marketplaces transform liquidity from a barrier to entry into a business opportunity. They allow bitcoin to flow around the network according to vectors of pressure measured by price. Such marketplaces literally render liquidity liquid.

The decentralized LSP model also scales better because it’s more resilient and harder to curtail. It’s decentralized. Nobody takes possession of anyone else’s property, so there is not much to regulate. Central authorities can regulate the curvature of cucumbers in stores, but they can’t regulate the cucumbers in your garden. That’s the difference.

And the same decentralized structure that makes a network of users connected by LSPs hard to regulate also makes it hard to constrict. Even if you wanted to shut Lightning down, it’s not clear what there is to target. You’d basically have to shut down the internet. If space ninjas landed tomorrow and wiped out all servers and developers of a non-custodial LSP, like Breez, our users would lose … hmm … a highly informative blog? The network would naturally, automatically adapt. The LSP model will work in Cuba and Switzerland, Canada and Nigeria, whoever happens to be in office.

Never heard of space ninjas? Exactly my point. (Image: Augustin Rafael Reyes)

LSPs are more private, secure, and they live up to the borderlessness, openness, censorship resistance, and freedom that bitcoin was designed to achieve. Again, neobanks aren’t wrong, and they will coexist alongside LSPs. If regulation is evolutionary selection pressure on different models of scaling Lightning and UX is reproductive fitness, the non-custodial LSP model is simply fitter and more sustainable.

Want to watch the revolution? Look around you.

The chain wasn’t ever going to replace fiat. It’s too slow and too expensive. That’s no secret. Fiat has, however, just been diagnosed with a terminal illness: Lightning. El Salvador has adopted bitcoin because of Lightning. People are buying coffee and vegetables with bitcoin because of Lightning. The IMF, the World Bank, national mints, and commercial fiat banks are all starting to sweat bullets because of Lightning.

Since Bitcoin is an open, free, public protocol that exists everywhere and nowhere, like Lightning, it’s now unstoppable. If any one person were doing this, it would be a story of a villain pursuing world domination. But since we’re all doing it together, it’s a global, grassroots revolution.

While nothing can stop this change, choosing the right model from the beginning can accelerate it. A network of peers, each in custody of their own funds, connected by a free market of LSPs is virtually immune to censorship. It’s a hydra with 7 billion heads. Lowering the barriers to entry while raising the incentives to enter, preserving bitcoin’s technological integrity at every step, and not diluting Lightning’s principles for any fleeting prize is the way to make the first global, democratic currency in the solar system. Cue John Williams.