During the brief period of high fees, Bitcoin always comes under fire, and with the naysayers declaring it dead on arrival, that Bitcoin will never scale and eventually it will become unusable, baulking under the weight of the growing user base requiring block space that simply isn’t available when everyone needs it.
The moment you start to hear critiques about Bitcoin scaling, you’ll have a cohort promoting the use off-chain scaling, primarily in the form of the Lightning Network. This is a second-layer payment protocol that operates on top of the Bitcoin blockchain.
It allows any user to port funds from the base chain into this network at any time and take advantage of its properties. The Lightning Network offers fast and cheap payments between two parties without the need for every transaction to be recorded on the blockchain.
Lightning is anchored to Bitcoin through UTXOs
One of the key features of the Lightning Network is the ability to create channels. A channel is a two-way connection between two parties that enables them to exchange funds.
To open a channel, the parties create a multi-signature Bitcoin address. Once the channel is open, the parties can exchange funds by creating and signing off on transactions that update the balance of the channel.
Once you have funds in the Lightning Network, you’re free to send and receive funds as long as you have the capacity in your channels, but if you need additional channels, liquidity or you want to join the network for the first time, you need to have to perform an on-chain transaction first.
This still provides a choke point for new users who want to get into Lightning and adds complexity and cost calculations for users who wish to move liquidity to the network when needed. So yes, Lightning does help you avoid future chain fees for most of your transactions, but it cannot stop you from avoiding on-chain transactions altogether.
If Lightning is to increase its impact and help offload more transactions, it needs to address this chokepoint that is moving liquidity into the network when needed. Now there are several options in the works that can help transition funds between on-chain and Lightning, such as PayJoins, Splicing, Channel Factories, Eltoo and Non-interactive lightning channels.
What are non-interactive lightning channels?
Normally, when you open a Lightning Network payment channel, you have to find another peer looking to open a channel with you and both parties have to agree to it. This is because the Lightning Network uses pre-signed 2 of 2 multi-sig transaction to ensure that either party can close the channel at any time and secure their funds to an on-chain wallet.
A Non-Interactive Channel or NIC is a deferred channel that remains “cold” until you decide to reveal it to your partner, thereby making it “hot”.
This means the entire channel creation process doesn’t have to be done all at once; it could be batched alongside other transactions or delayed and activated only when needed or when on-chain fees are advantageous.
Using OP_CHECKTEMPLATEVERIFY, it’s possible for a single party to create a channel that can be closed by either party without the other party’s consent. This is done by using a special type of transaction using, a covenant and a shared key that can only be spent by someone who knows the secret key.
How would a non-interactive channel work?
Here’s an example of how OP_CHECKTEMPLATEVERIFY can be used to create a payment channel:
- Carol wants to create a payment channel with Alice.
- Carol creates a transaction that pays 1 BTC to a witness program that contains the covenant script.
- Carol broadcasts this transaction to the network.
- Alice sees the transaction and adds her signature to the witness program.
- Alice broadcasts the updated transaction to the network.
- The transaction is confirmed on the blockchain, and the payment channel is created.
Now, Carol and Alice can send payments to each other through the payment channel. If either party wants to close the channel, they can do so by broadcasting a transaction that spends the output of the payment channel.
What are the benefits of non-interactive channels?
Here are some of the benefits of using OP_CHECKTEMPLATEVERIFY to create payment channels:
- They can be opened and closed without the need for both parties to agree.
- Channel creation and channel closing can all be batched into one transaction on-chain making it more efficient to rebalance your on-chain and off-chain liquidity.
- They can be used to create more secure payment channels.
- Non-interactive payment channels can be used to send payments to someone who is not online because the other party can close the channel and claim the funds, which can be a substitute for asynchronous payments.
- Payment channels can be created during low-fee environments and activated later.
What are the risks of non-interactive channels?
However, there are also some risks associated with using OP_CHECKTEMPLATEVERIFY:
- If the secret key is lost, the funds in the payment channel can be lost.
- If the channel is closed by a malicious party, they could steal the funds.
- If the secret key is exposed, a third party could sweep the funds from this channel.
In the NIC of time
Why can’t I do this now? Well, you would need BIP119 soft forked in to be able to use covenants on the Bitcoin base chain. The CTV upgrade has seen wide debate, and we have not progressed in getting this BIP merged yet. There is also talk that now that miniscript has made progress, it would make it easier to manage and deploy covenants, not only on the Bitcoin base chain but the Liquid side chain too.
While NICS are just the one use case for covenants, it, along with pre-signed commitments, could provide Lightning node runners with a set of tools to remain proactive during fee spikes or consistent high fee environments. By employing these techniques unlocked with covenants, users can reduce on-chain transactions by building more complex transactions, congestion control, stockpiling future channels, and much more.
Do your own research.
If you want to learn more about Lightning, use this article as a jumping-off point and don’t trust what we say as the final say. Take the time to research, check out their official resources below or review other articles and videos tackling the topic.
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? Do you run a Lightning node? Have you tried all the forms of Lightning payments? Which one do you prefer?
Let us know in the comments down below.
