11.17.2022. Good (C)hains. Good (C)hanges. The Chains Lives On. Crypto-Exchanges. The New Role As Decentralized Payment Processors. Doing A Free Public Good Service For All. Super Fast. Low Cost. Almost Negligible. Highly Scalable.
A New Disruptive Technology Example & Case Study. Using The USDC Stablecoin On The Solana Blockchain. Be Nice All Decentralized Exchanges Will Offer USDC Solana. ~50,000 No-Fee Transactions per second. A Future Alternative To Visa / MasterCard Centralized Payment Providers. ~25,000 Fee Transactions per second. Do you take USDC Solana?
Once Bitten, Twice As Brave!
Bitcoin Blockchain > The Lightning (Payment) Network > P2P Lightning Pay App.
The Bitcoin "Lightning Network" and Its Associated "Lightning Wallets" Are Two Big Misleading Terms!! They really hamper badly our understanding of what this New Peer-to-Peer (P2P) Payment Technology is.
The Lightning Network is actually a Lightning (Payment) Network. It's a Payment Network like Visa and MasterCard. It's Lightning because doing transactions on it are quick fast and also inexpensive almost no transaction fees at all. Visa charges a 3% transaction fee for every swipe. Like dollars are transacted on Visa / Mastercard, Bitcoins are transacted on the Lightning Payment Network. To put in all together, it's the Bitcoin Lightning Payment Network.
Why do we need a Lightning Payment Network? Well, the Bitcoin Blockchain can only process 7 transactions per sec. That's very small and limiting transactions per sec. Think of the Bitcoin Blockchain as Layer 1. The Lightning Payment Network is built on top of the Bitcoin Blockchain and so it's called Layer 2. By providing for off-chain transactions, the Lightning Payment Network has the potential to process close to 1 million transactions per sec. The off-chain transactions eventually become on-chain transactions on the Bitcoin Blockchain. Not every off-chain transaction needs to be on the Bitcoin Blockchain, just the last final off-chain transaction between two people. In-between off-chain transactions are not needed or necessary on the Bitcoin Blockchain.
The Lightning Payment Network is also a Peer-to-Peer (P2P) Payment Technology. Only two people are involved in a transaction. Or, just between you and the merchant. There is no third party involved. Just only you and the other perspn or merchant involved and thus so called Peer-to-Peer (P2P). Because there is no centralized third-party involved, the Lightning Payment Network is also Decentralized. Visa and Mastercard are Centralized Payment Processors. Every transaction involves you, the merchant, and Visa/Mastercard as the third intermediary or middle man.
A Lightning Wallet is actually a 'Lightning Payment App' Not a Wallet at all. You first need a Bitcoin Wallet app to purchase some Bitcoin (BTC). Then, you would fund your Lightning Pay App with some BTC next from your Bitcoin Wallet app. Now that your Lightning Pay App has some BTC, you can then send, receive, spend on the Lightning Payment Network with someone else having their Lightning Pay App. It's just between your Lightning app and the other person's Lightning app and no one else.
So when you see "Lightning Network", think/substitute "Lightning Payment Network". And when you see "Lightning Wallet", think/substitute "Lightning Pay App". There is NO Lightning Wallet!
Lightning Network ----------> Lightning Payment Network
Lightning Wallet ----------> Lightning Pay App
There IS the Bitcoin Wallet App, and then separately the Lightning Pay App.
Here are the Transaction Throughput Comparisons between Centralized Payment Processors and Decentralized Blockchain Payment Networks:
Centralized:
MasterCard ~5,000 transactions per sec
Visa ~24,000 transactions per sec
( up to ~65,000 possible maximum)
Decentralized:
Lightning Payment ~1,000,000 transactions per sec
Network (possible maximum)
(on Bitcoin Blockchain)
USDC Solana ~50,000 transactions per sec
(on Solana Blockchain)
Now there are two types of Bitcoin Wallets. Hot Wallets touch and are online to the Internet. Cold Wallets never touch and are offline from Internet, i.e. 'air-gapped' from the Internet.
Bitcoin (Hot) Wallet Type Example:
Coinbase.com Web is a Custodial Wallet (They Own your BTC on your Behalf)
Coinbase.com Mobile App is a Custodial Wallet (They Own Your BTC on your Behalf)
Coinbase.com Wallet App is a Non-Custodial Wallet (You Own the Private Key
and your BTC Directly.)
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Bitcoin Cold Storage Wallet - How To Setup Up
The Ultimate Guide to Bitcoin Wallets, Seeds, Private Keys, Public Keys, and Addresses. (I Give It My 5-Star Rating.)
2140: What Happens When Last Bitcoin Mined?
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The Bitcoin Lightning Payment Network Explained: How It Actually Works.
(I Give It My Excellent 5-Star Rating.)
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USDC Solana. The Stablecoin on the Solana Blockchain. SuperFast, Low-Cost, and Highly Scalable.
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Bitcoin Lightning Network vs Visa and Mastercard: How do they stack up?
https://cointelegraph.com/news/bitcoin-lightning-network-vs-visa-and-mastercard-how-do-they-stack-up
Bitcoin’s Lightning Network has been growing at a slow pace. What’s keeping it behind, given its high transaction throughput?
Bitcoin changed the world as a decentralized, nongovernmental form of currency that can facilitate peer-to-peer (P2P) transactions that transcend national borders.
But despite this functionality, Bitcoin’s role as a payment mechanism has been called into question due to its low transaction throughput. The Bitcoin blockchain can handle up to seven transactions per second, which means that network demand has seen the average transaction fee on the network reach an all-time high above $62 during specific periods.
In order to address low throughput and high transaction fees, developers made the Lightning Network — a layer-2 scaling solution that allows for off-chain transactions.
The Lightning Network creates a P2P payment channel between two parties in a transaction. The channel “allows them to send an unlimited amount of transactions that are nearly instant as well as inexpensive. It acts as its own little ledger for users to pay for even smaller goods and services such as coffee without affecting the Bitcoin network.”
Users of the network lock in a certain amount of Bitcoin in order to create a channel. Once the BTC is locked, recipients can invoice amounts as they need.
To a certain extent, the network is seen as a solution to Bitcoin’s scalability problem, but its adoption has been somewhat slow. The network currently has 87,000 payment channels and 4,570 BTC locked in, worth over $111 million, compared to the 19.1 million BTC in circulation, the market capitalization of which is over $460 billion.
Despite its slow adoption, the network has the potential to outcompete existing payment solutions.
Lightning Network's Transaction Throughput
Payments giants like Visa and Mastercard are used to process payments worldwide. Mastercard’s network is estimated to process up to 5,000 transactions per second, making it far superior to Bitcoin’s seven per second.
Visa’s transaction throughput is even more impressive, being able to process up to 24,000 transactions per second. In a recent interview, Visa chief financial officer Vasant Prabhu said that the network could, in theory, handle up to 65,000 transactions per second.
The Lightning Network goes much further, however, processing up to 1 million transactions per second, making it the most efficient payment system in the world in terms of transaction throughput.
Speaking to Cointelegraph, Ovidiu Chirodea, CEO of Romanian cryptocurrency exchange Coinzix, noted that the network marks the next phase in the evolution of money. Per Chirodea, first, there was gold, which was a store of value but wasn’t a convenient medium of exchange, with fiat currency following up as a convenient medium of exchange.
Bitcoin, Chirodea said, was an evolutionary step that created a new store of value, with the Lightning Network serving as a platform for it to also become a medium of exchange:
“Visa is charging businesses around 3% to process payments, so I think the Lighting Network is a game changer. Companies will increase their revenue by using it, and that’s not something that you can ignore.”
He noted, however, that the network’s scalability “isn’t so great,” as users need to open a channel with each party and tie up BTC on it, which affects their liquidity. Per his words, tying up liquidity can be avoided by “using other routes and other payment channels,” but the solution “isn’t very scalable, as payments channels keep opening and closing.”
Thomas Perfumo, head of business operations and strategy at crypto exchange Kraken, told Cointelegraph that since the firm launched Lightning Network support in April 2022, it has “steadily increased network capacity” to the point that it’s now the fifth-largest node on the Lightning Network:
“We currently have over 800 open channels that can facilitate upward of 18 billion satoshis worth of payments. Clients are routinely funding their accounts via the Lightning Network on a daily basis.”
Perfumo added that the exchange sees the Lightning Network as “essential for the creation of a permissionless payment system that will ultimately help accelerate the adoption of cryptocurrencies worldwide.”
While the Lightning Network’s advantages in terms of transaction throughput are now clear, it has some notable downsides.
Firstly, opening up a Lightning wallet and funding it may not be as easy or as ingrained as opening a bank account and using a debit card.
Furthermore, funding a Lightning Network wallet requires users to send BTC from a traditional Bitcoin wallet, and creating a payment channel involves locking up funds.
Once funds are locked into a payment channel, they can freely transact, but the funds can only be recovered after that channel is closed. Moreover, offline transaction scams are possible, as one party may close a channel when the other is offline to try to steal funds. While third-party services may mitigate the risk, it keeps some from entering the network.
Privacy, Ease of Use, And Censorhip-Resistance
Keeping these disadvantages in mind, Max Rothman, head of crypto and digital assets at global payment processor Checkout.com, told Cointelegraph that being able to use cryptocurrencies to exchange goods and services “is only effective when crypto can seamlessly exchange hands.”
The Lightning Network being peer-to-peer, Rothman added, puts the responsibility for the transactions process on both merchants and customers. On an institutional level, “This can be challenging and resource-intensive to administer in-house without a trusted partner to manage thousands or millions of cross-currency transactions.”
Rothman said that solutions like the one used by Checkout.com, which rely on partner companies like Visa to offer on-ramps that allow for crypto-to-fiat conversions, are that “bridge that offers a more seamless translation experience between Web2 and Web3.”
Onboarding the next million or billion people to crypto “requires guidance, support and bespoke solutions that work for every level of payment needs and acknowledge the current payments environment in which we operate,” he stated.
Speaking to Cointelegraph, Bruce Fenton, a board member at the Bitcoin Foundation and a candidate for the United States Senate in New Hampshire, said the Lightning Network “enables Bitcoin to do more transactions” while being “more decentralized and censorship-resistant than centralized companies or most other chains.”
When asked about the pros and cons of using the Lightning Network over solutions from companies like Visa, Fenton dismissed Visa as “entirely centralized,” which means it can “be stopped or censored.” While centralization may be a concern on the Lightning Network for some, he said that it does not affect the Bitcoin blockchain itself and added:
“It’s mostly about what money you are building on and for. For those who believe in Bitcoin as the superior money, LN is the most well-known scaling solution.”
Chad Barraford, technical lead at decentralized liquidity protocol THORChain, told Cointelegraph that when checking out at online stores, the Lightning Network enables a “cash” option, in which “there is no other party participating, no exorbitant fees and substantial privacy benefits.”
He said that the network is “not solely motivated by the best interests of shareholders or board members” but serves its participants’ interests as a public good, adding:
“Visa is a financial institution that inherently seeks profit and control and is at the behest of governments. The Lightning Network is purely a public good. It only exists to provide a fundamental and critical service for every person on the planet in need of access to financial services.”
The Lightning Network’s adoption and success are “tightly coupled with the Bitcoin network itself,” Barraford stated. He believes that as the world sees BTC less as a speculative asset and more “like a currency to purchase items,” then inflationary pressures “will push more and more people to the Lightning Network.”
While the comparison against networks like that of Visa or Mastercard is clear from these answers, it’s worth pointing out that some of these arguments apply to other solutions such as PayPal, which can be forced to freeze customers’ assets or charge higher fees, for example.
Blockchain technology has been developing over time to the point that other blockchains are also able to compete with Visa’s transaction throughput without seeking to profit from it.
What About Other Chains?
Speaking to Cointelegraph, Fenton hinted that the Lightning Network stands out as “more decentralized and censorship-resistant” than most other blockchains.
Decred co-founder and project lead Jake Yocom-Piatt built on that idea, telling Cointelegraph that other blockchains are unable to match the Lightning Network’s qualities.
Yocom-Piatt claimed that the high-throughput blockchain Solana, with a theoretical
throughput of 710,000 transactions per second, is a “centralized, noncustodial blockchain that requires its validating nodes run in datacenters on high-end hardware.” Comparing the Lightning Network, Solana and Decred itself, he said:
“Of these three, Lightning Network is the most decentralized, sovereign and most aligned with the original ethos of the cryptocurrency space. Solana sacrifices most of its decentralization via its onerous validating node requirements, but at least it does not appear to be able to censor users and merchants arbitrarily.”
Whatever the future holds, it’s clear that innovation in the cryptocurrency space is increasing transaction throughput. Whether users will end up choosing to sacrifice privacy and immutability for more convenience remains to be seen.
As it stands, more convenient solutions are available. It’s now easier to use layer-1 blockchains for payments via centralized entities that allow crypto assets to be converted to fiat currencies at the point of sale.
For the Lightning Network to gain a wider audience, more services are likely going to have to support it. Leading exchanges like Coinbase, Binance and FTX haven’t followed the footsteps of other exchanges in embracing the network, hindering its growth. As the network relies on having more payment channels to keep routing transactions, other networks and centralized payment providers are likely to stay ahead.
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There Is No Such Thing As A "Lightning Wallet"
The wallet metaphor incorrectly describes the nature of the applications providing Lightning Network services.
Although Breez often ranks highly on lists of the best “Lightning wallets,” attentive readers will have noticed that we never refer to Breez as a “wallet.” We’re not trying to confuse anyone. On the contrary, it’s the language of “wallets” in the context of Bitcoin and Lightning that’s confusing.
Wouldn’t it be odd to hear someone refer to a fiat payment app, like CashApp, PayPal, or Venmo as a “wallet?” Nobody, not even the companies themselves, describes them as “wallets.” And though many Bitcoin and Lightning companies and apps are both more versatile and further removed from what we normally think of as “wallets,” that’s still what we call them.
This is a very common misconstrual, as Gigi has also noted and (independently) debunked. So let’s think about what a wallet really is, what a Bitcoin “wallet” really is, what a Lightning “wallet” really is, and what we should call these things instead of “wallets.” We will spare no effort in pursuit of truth and liberating ourselves from “scare quotes.”
What's A Wallet?
“A wallet is a flat case or pouch often used to carry small personal items such as paper currency, credit cards; identification documents such as driver's license, identification card, club card; photographs, transit pass, business cards and other paper or laminated cards.” As Giacomo Zucco put it in a recent chat we had, wallets contain little documents and pieces of information we use to interact with others.
What we call wallets first showed up around the 17th century, concurrent with the rise of paper money. And since there are only so many ways to make a small folding case to carry money, wallets haven’t changed much over the centuries. Compare these two specimens:
On the left is a leather wallet that archaeologists found in the wreckage of a 160-year-old submarine, and on the right is a typical wallet anyone might have in their pocket today.
The big difference isn’t in the wallets, but in their contents. The modern wallet contains credit cards, which arose in the middle of the last century. It’s no coincidence that credit cards entered the market around the same time as machine-readable standards enabled a transformation from physical to electronic money.
The more we rely on electronic money of whatever kind, the less we rely on wallets. The quantity of electronic money out there now outstrips physical money by a ratio of about 20:1 and each card in the modern wallet can contain balances dozens of times greater than the antique wallet could hold.
Now consider: if you took the modern wallet back 160 years to the time of the antique wallet, people back then could almost certainly tell you what it is and what it’s used for. Explaining credit and debit cards would be challenging, but they are still physical objects to represent electronic money. The next step would be to explain fiat payment apps, like PayPal. Your great-great-great-grandparents would positively no longer see a wallet there. By the time you try to explain your favorite Bitcoin/Lightning “wallet,” they’d not even be sure you’re speaking the same language.
We in the 21st century might want to expand the definition. Language evolves. Like Giacomo said, wallets contain documents and little pieces of information that let us interact with others. Phones can now contain digital driving licenses (for as long as driving licenses are still a thing), credit card information, photos of loved ones, passwords, contact info and membership info … phones can contain the digital versions of everything we carry in leather wallets.
As a matter of fact, the term “wallet” might cover more of the functions these devices perform than “phone.” (While we’re on the topic of proper labeling, “phone” is such an outdated term! Here in Israel, nobody younger than Methuselah refers to their mobile device as a “phone.” Get with it anglophones.) So the 21st century correlate of the leather wallet is the phone, right?
But then does it still make sense to call a specific, single-purpose app a wallet? Many apps store information that is readily available to us. If we don’t refer to a contacts app on the device as a wallet, even though it replaces traditional business cards, why use that term for a Bitcoin app like BlueWallet or Wallet of Satoshi? It’s the phone itself that is the wallet, not the apps. Apps are more like the compartments in the wallet. If we’re going to adapt the term “wallet” to our transhumanist age, let’s do it right.
Wallets haven’t changed, but money has, how we store information has, and the term “wallet” no longer fits.
What's A Bitcoin "Wallet?"
Bitcoin “wallets” and physical wallets are both storage media. Physical wallets store bills and cards that are marked with patterns of information. The right tokens with the right patterns denote value, and wallets move those tokens around in meatspace.
Bitcoin “wallets” also store patterns of information, but they don’t directly store value. Bitcoin’s value is stored only as records on the public blockchain. Bitcoin “wallets” store private keys that allow users to authorize changes to the blockchain on their behalf. Anything that can store a long string of numbers (i.e., private keys) — a piece of paper, neurons, or a fancy, password-protected flash drive — would count as a bitcoin “wallet.” In Bitcoin, the right private keys with the right patterns indirectly denote value, because these keys allow you to move value around in cyberspace.
When friends split a tab with cash, and bills move from one wallet to another, the value is transported. When friends split a tab with bitcoin, the sender encrypts a transaction with the recipient’s public key and then their numbers shift around on the blockchain, where the value was and remains.
Let’s compare again these two kinds of transactions visually:
Again, it’s easy to see where a wallet fits into the transaction on the left: cash exits wallet A, changes hands, enters wallet B. But when it comes to Bitcoin, what we call “wallets” are those colored boxes at the bottom containing the private keys. Does … does anyone else find that metaphor … silly? Like, if a piece of paper, neurons and a flash drive can all be called “wallets,” even though none of them contain any physical tokens of value or even any bitcoin (whatever that would mean), then isn’t that metaphor misleading and unhelpful?
As Kiara Bickers puts it in her great book, “Bitcoin Clarity,”
“With a physical wallet, you are directly holding cash that has value, but with a digital wallet you never hold the value directly, you only ever hold access to it on the blockchain. If you cross a national border from one country into another, did your bitcoin move with you? Well, no. … The private keys stored in your bitcoin wallet represent only the ability to move funds, not the funds themselves.” (p. 18)
If you want a better term that is less misleading and more accurately descriptive, how about “signers?” Same denotation plus vastly improved connotations equals Pareto-efficient semantics. (Hat Tip to NVK and Conor Okus for helping me to think through this question and terminology.)
What About Lightning "Wallets?"
The term “wallet” is applied to all manner of Lightning apps. While that term misses the mark in every case, it errs in different directions depending on the type of app in question. Interestingly, reflecting on how Lightning apps are not like wallets does help to identify what they are like, so let’s do that.
Custodial "Wallets" Are Accounts
Custodial “wallets” don’t transport tokens of value, but they do have an analog in the fiat world: bank accounts. Remember how custodial accounts actually work:
You pledge your bitcoin to some intermediary and authorize them to transact on your behalf.
They execute transactions as you instruct.
You really hope that they’re actually following your instructions, taking good care of your money, and will still have it when you want to close your account.
In effect, whoever’s operating the custodial “wallet” is “an establishment for the custody [and] exchange of money … and for facilitating the transmission of funds.” In other words, they’re a bank, and that’s not my judgment, it’s the Merriam-Webster Dictionary. That’s just what the word means. And the “wallet” they provide is “an arrangement in which a bank keeps your money but makes it available to you when you want it” – i.e., a bank account (Cambridge American Dictionary).
Custodial “wallets” are merely user interfaces for these accounts. They just provide a way for users to pass instructions to and receive messages from the custodial intermediary. Not really “wallets,” are they?
What a custodial “wallet” would look like in real life. Doesn’t look anything like a wallet, does it? (Image: Adam Norman)
Noncustodial Lightning Payment Apps
So an actual wallet contains tokens of value to carry them around physical space. A bitcoin “wallet” (or a signer, remember?), holds your keys, signs transactions and broadcasts them to the network. Custodial Lightning “wallets” are really like bank accounts, where the value is entrusted to a third-party who transacts on the user’s behalf.
So what about noncustodial Lightning “wallets”? (Ugh. It feels awkward just typing that.)
The Lightning Network consists of nodes connected by payment channels. Signing plays a role here too, because every Lightning transaction is a Bitcoin transaction. However, Lightning transactions require routing bitcoin from one Lightning node to another … and another … and another, along their payment channels, until the payment reaches its destination.
The point is that Lightning payment apps aren’t just flashy user interfaces to manage “wallets” or “account balances” — they have to route payments through a fluctuating network graph. And ensuring a decent routing-success rate entails a number of subsidiary tasks. These include, for example, channel management — opening and closing channels with other nodes in the network — and liquidity management — ensuring enough outbound and inbound liquidity.
Some users prefer managing their liquidity and available routes manually on self-hosted nodes. Most users, though, delegate these technical tasks to Lightning service providers, like Breez and Phoenix.
Reading this, did anyone think “Well, that’s simple! They’re just describing a wallet!”? That’s the point. There is no such thing as a Lightning wallet.
Give this network graph to a toddler with a box of crayons and try to find your way from minute to minute. That’s routing on the Lightning network. (Image: Annie Mole)
From "Wallet" To Payment App
Metaphors are great when they help people to communicate a complex reality vividly and succinctly. When E.M. Forster writes that “Life is a public performance on the violin in which you must learn the instrument as you go along,” it hits. It doesn’t require explanation; it’s already an explanation of something much bigger. “Lightning wallet” is not like that. As a metaphor, it confuses, misleads and obfuscates.
A better approach would probably be to use terms that describe functions (think: “bolt cutter”). If an app sends and receives payments, let's call it a payment app. If it's used to play podcasts and stream sats to podcasters, call it a podcast app. If it's used to manage finances, call it a finance app. This applies equally to bitcoin and fiat (remember PayPal, Venmo, CashApp etc.). The app’s name should derive from its function, not how it implements that function. And if we must use metaphors, those metaphors should at least reflect the current state of our technological reality.
We’re sure that many people will continue to refer to Lightning payment apps and
custodial accounts as “wallets,” and that legislating language never works (or we would be writing these posts in Esperanto, rajto?). I’m all for free speech, but simply using a term does not make it accurate or valid. It’s still important to think about the relation between how we talk about Lightning and how we think about Lightning, and how the former might influence the latter for better or worse.
Our world is made of concepts (ask Immanuel Kant), and concepts are made of language (ask Ludwig Wittgenstein). Therefore, getting the language right should help us understand and shape the world. How do you expect to launch the Lightning revolution with a mere “wallet?”
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