Today, Lightning Network development company is Lightning Labs it came out a peer-to-peer, non-custodial marketplace called Lightning Pool, where Lightning node operators can buy and sell access to channel liquidity.
The market is a way for node operators who need incoming liquidity to pay node operators with that liquidity to open channels in their direction.
“Users can buy or sell Lightning channels, the equivalent of money tubes, through the Pool marketplace,” as described in a Lightning Labs announcement shared with Bitcoin Magazine. “Traders and startups looking to make money on Lightning are natural buyers of channel liquidity, and node operators with additional capital looking to earn a return on their bitcoin are natural sellers.”
A marketplace for lightning-fast liquidity
The Lightning Network is basically a network of payment channels that allow for faster and cheaper bitcoin transactions by settling balances between users on the underlying Bitcoin network only when these channels close. Lightning Node operators process transactions through these channels and collect fees for them.
To handle bitcoin on the Lightning Network, you need to convince other nodes to lock bitcoin in channels with you. Lightning Pool was launched as a solution for users looking for participants with available BTC to create channels with.
“We developed Pool from a market need that arose from Lightning users looking for new sources of liquidity to enable them to more efficiently receive money and execute trades on Lightning,” said the announcement. “Users tried to solve this problem in various ad-hoc ways, such as chat groups and OTC services, and Pool offers a solution that allows them all to participate.”
Node operators that do have access to liquidity can now be paid to allocate it to the highest bidders.
“Existing node operators do not have access to price signals to help determine where in the network to allocate their outbound liquidity, and new node operators have no way of signaling that they need new inbound liquidity,” the announcement explains. “Lightning Pool brings these two parties together in one market, while preserving their money.”
More information about how the market works is available through a technical deep dive from Lightning Labs.
Introduction of Shadow Chain
Pool will use the Bitcoin blockchain as its settlement layer and will empty the market when a new Bitcoin block is added to the blockchain (as long as there is at least one bid associated with a demand).
In an interview with Bitcoin MagazineLightning Labs Business Development Lead Ryan Gentry said Lightning Pool is built on the first instance of a “shadow chain,” enabling non-custodial, off-chain bitcoin transactions with batch settlement on the main blockchain. Through Pool, users deposit their BTC in a time-bound, 2-of-2 multisig contract with the shadow chain operator node, which requires the users’ consent to move those coins. Because the operator node is a partial signer of each entry for each transaction, they can be run in batches on-chain, making them cheaper to validate.
“A shadow chain is a new way to design applications on top of Bitcoin with more complex logic,” said Olaoluwa Osuntokun, CTO of Lightning Labs. Bitcoin Magazine. “Users remain in control of their funds at all times and fully validate proposed blocks. Block validation can take place in a custom execution environment outside of the Bitcoin script, such as a regular program, and blocks can also be ‘compressed’ off-chain, increasing scalability. Upgrades can also take place off-chain and, unlike a sidechain, there is no new chain. Instead, new rules are applied to a subset of the UTXO set. “
More information about the shadow chain can be found at Lightning Labs’ Lightning Pool white paper.
The arrival of LiFi
Lightning Labs positions this release as a step toward an ecosystem of Lightning-based financial products, which it dubbed ‘LiFi’. By providing users with a way to earn revenue on their channels, the company has introduced a new service that could spark more interest in providing Lightning liquidity or inspire similar projects that help Lightning users reap rewards for their participation.
“Bitcoin native financial products, and LiFi in particular, are seeking to leverage the unparalleled security of the Bitcoin blockchain while creating a new generation of financial products linked to real bitcoin,” said Elizabeth Stark, CEO of Lightning Labs . Bitcoin Magazine. “These can range from discrete log contracts, to liquidity marketplaces like pool, to bitcoin backed assets, all of which are possible on top of Lightning.”
And Lightning Labs hopes this is just the beginning for Pool, which may become a fundamental marketplace for bitcoin-based financial services.
“As Pool matures and more markets are added, it will produce a yield curve that will provide benchmark returns for emerging bitcoin-native capital markets,” the announcement said.