The Lightning Network has released bitcoin from many of the constraints of the base layer, and with this comes a host of new problems and innovative concepts and ideas to help expand the network. The DEFI space has gained considerable popularity even when yields aren’t sustainable, or risk is priced incorrectly. DEFI is space clearly crying out for a reliable rate that can act as a benchmark, while the Lightning network could benefit from added liquidity.
A problem that could be solved with a hybrid liquidity pool and auction concept known as Lightning Pool. At its core, liquidity as a service could push Bitcoin adoption to new levels, reduce issues with lightning payment routing and provide a return for investors.
Pool borrows some elements from DeFi to enhance the Lightning Network and tackles several problems with one solution.
The need for on-demand liquidity
The Lightning network is based on channels, which are payment tubes with constraints, and sometimes those constraints can pose issues for routing bitcoin. If a Lightning user’s payment channel doesn’t have enough “inbound capacity” (the minimum bitcoin needed to receive a routed transaction), then he or she won’t be able to receive payments.
Likewise, if a payment channel lacks enough “outbound capacity,” then it cannot send payments.
When these payments fail, it not only is a bad user experience but reduces the effectiveness of the Lightning network. Lightning Pool is built to address such obstacles in Lightning’s financial plumbing by providing a place for routing nodes to access liquidity on demand.
Through the service, Lightning Network users can lease liquidity from other Lightning users to access the liquidity necessary to route payments through the network.
What is Lightning Pool?
Lightning Pool is a non-custodial, peer-to-peer marketplace that allows node operators that need inbound liquidity to pay node operators with available capital to open channels in their direction while retaining full custody of their funds. Pool’s first product is a Lightning Channel Lease – an inbound channel with a pre-agreed duration.
Efficient capital allocation is one of the most widely felt pain points when using the Lightning Network. Existing node operators do not have access to pricing signals to help determine where in the network their outbound liquidity should be allocated, and new node operators have no way to signal that they need new inbound liquidity. Lightning Pool brings these two sides together into a single market while allowing them to maintain custody of their funds.
How does Lightning Pool work?
Lightning Pool is a non-custodial auction for liquidity where bids are kept private and trades clear periodically. Key aspects of Pool include:
- Periodic clearing – Market does not clear continuously. Instead, it clears every block (or after multiple blocks, if there are no bids that match with existing asks).
- Non-custodial – Clients maintain an on-chain account that is a timelocked, 2-of-2 multisig with the auctioneer. These funds are fully in the user’s control at all times.
- Sealed-bid – All orders are submitted off-chain to the auctioneer, so bidders don’t have visibility into the bids of other participants
- Uniform clearing price – All participants in a batch clear at the same price. If your ask is for 2% annualized interest, you will receive >=2%. If you bid 5%, you will pay <=5%.
- Batched execution – Due to the account structure, the auctioneer is able to batch all completed orders into a single transaction, greatly reducing individual chain fees.
Lightning cloud nodes
If you’re running a Lightning cloud node with a cloud hosting platform like Voltage then you can still interact with the LND product through Voltages interface known as Flow. Their native interface aims to make the Lightning Pool liquidity marketplace more accessible to everyday users.
Pool is an open market that allows Lightning nodes to open channels and purchase inbound or outbound capacity for a fee.
Why Lightning Pool expands the network
Pools provides an open market rate for pulling bitcoin into the Lightning network as those who provide liquidity may be able to earn some passive revenue this way.
It is the first time Lightning Network liquidity has become a tradable asset, and this could provide a base rate for the entire digital asset space. Until now, users have not been able to earn a return on their bitcoin without either handing over their funds or taking a considerable risk by wrapping their bitcoin into in-secure protocols.
In both cases, users have lost funds showing that these services are not properly priced. Lightning Pools may not offer insane yields like DEFI, but the critical aspect is how the Bitcoin holders will always keep custody of their funds, even leasing them out.
This concept is somewhat akin to decentralized finance solutions. However, with those platforms, users need to spend their funds to earn potential returns actively. Lightning Pool is intent on avoiding that debacle altogether. A strong showcase of how versatile Bitcoin can be in comparison to other blockchains actively exploring decentralized finance today.Â
Learn more about Lightning Pool
To get a better idea of how you can use Lightning Pool, check out the following tutorial by Bitcoin Summer.
Sources:
If you would like to learn more about lightning pools and dive down the rabbit hole, then we recommend checking out the following resources.
Are you a bitcoin and lightning fan?
Have you been using Lightning to make micro-payments? Stream sats or engage with apps? Which app is your favourite? Have you tried all the forms of Lightning payments? Which one do you prefer? Let us know in the comments down below.
