Lighting Loops

Today Lightning Labs has released a new feature for the Lightning Network, the Lightning Loop.

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This new payment type allows a rebalancing of a channel without actually closing it. It works via trust-less escrows that convert a lightning balance in an on-chain BTC balance. This is the equivalent to sending somebody a lightning payment that promises to repay you with actual BTC, just without having to trust anyone.

This addresses one of the main problems in lightning, that each channel has a fixed capacity and once that is reached it is not possible to make more payments via that channel. As an example, when Alice opens a channel to Bob, she specifies how much money to lock up. She chooses 1 BTC and gradually pays Bob. Once she has paid Bob the full 1 BTC and Bob never paid anything back to Alice the channel is saturated. But now with loops, the channel can be rebalanced and Bob paid in onchain BTC.

At first sight this does not seem like a big improvement. In order to receive a payment there is also the need for an onchain transaction, similar to closing the channel. The loop transaction is however simpler and therefore favoured. It also saves reopening a new channel after closing the old one. Furthermore it increases user experience, since the same lightning channel could be used for all eternity.

But in my opinion the real advantage for this technology is for liquidity management of the bigger nodes in the network. Using a single loop payment it is possible to rebalance the liquidity of multiple big channels. Essentially every day the biggest nodes could send around some loops to make sure they always have sufficient liquidity amongst each other, and the residual is paid out onchain. This is much better than repeatedly closing and opening channels.

Ordinary lightning users will probably not notice much change, but this feature will certainly find a way into the major lightning wallets and end users will be using loop payments without even noticing. In the end, lighting has become a little bit more user friendly and a bit more scalable.