Is the Bitcoin Lightning Network is Run by the Banks?!

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In order for Bitcoin to continue its mission of changing the world, it needs to scale. Segwit and the lightning network seems to be good solutions, but one of them might just be the very thing that Bitcoin aims to overthrow - a centralized, corrupt system that benefits the few.

Scaling is just the first problem

With the scaling issues continuing to pester Bitcoin, the high transactions fees have caused, even initially pro-Bitcoin, companies to drop Bitcoin as a payment method. One of the largest gaming platforms, Steam, has dropped Bitcoin in December. When they started accepting Bitcoin the fees were below 20 cents, just before they decided to stop the fees were more than 20 dollars per transaction.

Why is this just the first problem? Well, the solution - the lightning network - might be a bigger problem than the problem it solves.

Is the Lightning Network a Problem Disguised as a Solution?

I won't go into the technical details too much (see the end of the article for other sources), but I will explain how the lightning network works on a more superficial level, and discuss its impact on the economic scale.

The lightning network introduces hubs to create payment channels between users. It's a second layer on top of the Bitcoin blockchain. This means, not every transaction will be directly peer-to-peer, but indirectly through a network of channels between users, which can be set up when you create a node. The only moment when the high transaction fee occurs is when a channel is opened. Channels can remain open, and as long as you have an indirect connection with the person you want to send something to, the network works (even if it goes through 700 people).

Take this, for example, I want to send an amount of Bitcoin to my aunt Barbara, but we don't have a lightning network channel between us. But we do both have channels opened with my old friend Jelle. This means we can then use the indirect link with his channel to transact - without high fees! It runs on the principle that ANYONE in the world knows ANYONE with 7 people in between. The people that run nodes get rewarded with a small reward.

At the moment of writing this article, there are 644 nodes in the network. You can check the current amount yourself at http://lnstat.ideoflux.com:3000/dashboard/db/lightning-network?refresh=5m&orgId=1. The Bitcoin mempool (how many unconfirmed transactions) is declining rapidly, and as an effect the transaction costs are dropping. You can check the mempool and transaction costs here: https://blockchain.info/nl/charts/mempool-size

While this all sounds great, there one problem I want to raise, which is: it won't be individuals connecting with individuals that will use the network, it will be a FEW users that connect A LOT of people - so called hubs.

Does the following picture remind you of anything?

Why? Because it is more beneficial for users to have shorter channels to the person they want to transact with, because of lower fees. This means you would want to use a node that has many channels. Another reason is that each channel has a maximum amount of bitcoin that can be transacted, based on how much you put into the channel.

So, it's advantageous to have channels with a people that have a LOT of other people connected AND have a lot of Bitcoin available for the channel(basically liquidity), so you can always transact.

Is there anything wrong with centralized hubs in the lightning network?

These hubs will profit from transaction fees, which isn't a problem by itself. The problem is that the hubs are off-chain, and because of the high amount of liquidity (Bitcoin available) in the network needed, they will be prone to regulation, hacking, and corruption. They will probably become institutions that collect fees for transactions, do KYC (know your customer), have security regulations, and individuals (single points of failure) running them. Now it's starting to sound a lot like the banks we know.

Long story short:

The whole reason Bitcoin got introduced could be undermined.

The truth is, I'm not a 100% sure, hardly anyone is in this space because it is so new. But I do want to raise awareness for this problem and advocate continuous thinking of other solutions like POS (Proof of stake), DPOS (delegated proof of stake), or even raising the blocksize until we find new solutions.

Let me know what you think and feel free to share your knowledge and intellect.

Thank you.

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For a technical explanation and Q&A by Andreas Antonopoulos watch this video:

See video for POS and DPOS: