Lightning Pool: Liquidity Leasing Market in Lightning Network｜Project Introduction
Original title: "Understanding the Lightning Network Liquidity Leasing Market Lightning Pool in 5 minutes"
Original source: Lianwen, LeftOfCenter
For a long time, the liquidity problem of the payment channel has been one of the bottlenecks restricting the development of the Lightning Network. In fact, in the Lightning Network, without "inbound liquidity", transactions cannot be completed. Especially for merchants or service providers who use the Lightning Network as a payment option, how to always maintain sufficient "inbound liquidity" is a very difficult problem.
On November 2, the Lightning Network development team Lightning Labs announced the launch of a peer-to-peer liquidity leasing market "Lightning Pool", trying to design To solve this problem originally caused by inherent technical limitations, the liquidity in the Lightning Network is packaged as a tradable asset, allowing users to buy and sell freely. On the other hand, allowing users to self-custody assets while obtaining a considerable return on capital, Ultimately solve one of the main pain points currently existing in the Lightning Network: effectively deploying capital and increasing overall liquidity in the network.
For Bitcoin holders, in addition to earning income through the centralized custody platform and the Ethereum blockchain, the encapsulation and synthetic Bitcoins are earned , You can also lend Bitcoin liquidity on the Lightning Network to obtain stable income. This means that there is not only one more way for Bitcoin to protect capital and manage money, but it is also non-custodial, so it is more secure.
At present, Lightning Pool is still in the internal testing period, and it is impossible to predict the future development prospects, but as the first decentralized finance native to the Bitcoin ecosystem (by It is called LiFi (Lightning Finance), which is of great significance, which means that, independent of the Ethereum network, Bitcoin finally has its own financial system.
Liquidity pain points in Lightning Network
Lightning Network is based on the Bitcoin blockchain The above-mentioned two-layer payment channel mainly realizes a faster and lower transaction cost payment scheme by distributing the transactions of the Bitcoin main network to the two-layer lightning network.
The lightning network consists of a series of point-to-point payment channels. Whenever a user has a transaction demand, a point-to-point payment channel can be constructed, and then one party will send the other party Send Bitcoin to complete the payment. Opening a payment channel requires sending a small amount of bitcoins to an address on the chain. At this time, the bitcoins are locked on the Bitcoin mainnet and then unlocked on the Lightning Network.
Lightning Network, as a second-tier expansion solution based on the Bitcoin blockchain, can instantly trade small amounts of Bitcoin in an environment where trust is minimized. At the same time, the transaction cost of this scheme is low, which is very suitable for merchants to use Bitcoin as a payment scheme to sell goods and services.
However, the reality is more complicated. In the Lightning Network, building a payment channel is only the first step. The completion of a payment requires "inbound liquidity". In fact, the efficient capital allocation of "inbound liquidity" has always been one of the pain points in the Lightning Network. one.
What is "inbound liquidity"?
To understand inbound liquidity, you first need to understand how Lightning Network channels work.
As we have learned earlier, the first step in building a lightning channel is to create an on-chain transaction, and both parties need to take out a certain amount of bitcoin to lock In the channel, the amount invested by the channel initiator is called the local balance (local_balance), and the amount invested by the peer is called the remote balance (remote_balance).
However, for the payee, the successful completion of a transaction requires the payer in the transaction channel to deposit a sufficient amount of remote balance, that is, it is necessary to guarantee the Other parties also invest a sufficient amount of purchase funds in the channel, which is called "inbound liquidity". Conversely, funds that need to be paid by the other party are called outbound liquidity.
Generally speaking, merchants or service providers are payees. As the initiator of the channel, it is natural for them to put funds in the channel, but But there is no obligation to cooperate with you to put funds.
In fact, in the absence of effective access to "inbound liquidity" sources, various Lightning Network users have begun to seek some solutions on their own. To meet your own needs:
For example, the Bitfinex exchange will post regularly through official tweets to collect payment channel connection requirements from users
Other node operators create dedicated Telegram groups, create channel maps based on channel supply and demand summaries, or post demand on Twitter for inbound flows sex.
And there are also a number of specialized OTC services for buying inbound liquidity in the market, such as Bitrefill directly selling inbound capacity, LNBig is a channel fee service, and PeerNode provides channel application services. Users can fill in the application form and attach the required inbound liquidity request requirements.
The emergence of these solutions more or less proves that the channel liquidity demand of Lightning Network is gradually increasing. However, these are scattered on various platforms and Corner liquidity supply and demand cannot form an efficient market. On the one hand, the demand side seeks liquidity needs in various chat groups, forums, or Twitter posts; on the other hand, those nodes that want to provide liquidity to earn income cannot know where the liquidity demand is greatest.
No effective market has been formed, which means that node operators need to take greater risks, and may open channels in places where there is no demand , leading to capital inefficiency.
For this reason, Lightning Pool came into being. It regards "inbound liquidity" as a scarce resource, creating a two-way market based on buyers and sellers, allowing Participants participate in the exchange of liquidity in the Lightning Network and receive pricing signals, enabling efficient resource allocation.
What is the Lightning Pool?
According to an official announcement from Lightning Labs, Pool is a non-custodial peer-to-peer marketplace that allows Lightning Network node operators to buy and sell access to "inbound liquidity". To be precise, Pool allows participants to buy and sell Lightning Channel Leases (LCL) on the Lightning Network, using inbound (or outbound) liquidity as a tradable asset that is packaged into an LCL Carry out free transactions in the market. As a hybrid asset, the leasing party actually lends Bitcoin through the payment channel in exchange for income. On the other hand, enterprises and service providers can purchase liquidity on demand to manage the payment process of the Lightning Network.
This is the problem that Pool is trying to solve, that is, by building a liquid open market based on Lightning Network, allowing merchants or service providers to Routing in the purchase channel liquidity. On the other hand, Lightning Network node operators can put idle bitcoins into the Pool and earn interest through lending.
The most important thing is that Pool will add the pricing signal of the leasing market to the system, so as to know where the greatest liquidity demand comes from.
Pool will match supply and demand orders according to the "Frequent batch auctions" (Frequent batch auctions, referred to as FBA) mechanism. Match buyers and sellers based on quotations from both parties.
Frequent Lot Auctions is a way of countering market manipulation through reordering. In FBA, instead of processing transactions sequentially, a series of transaction batch processing based on a certain time interval will be collected. This batch processing order design will make the order in which orders are sent irrelevant, thereby eliminating the need for transaction manipulation. possibility, making early trading unprofitable.
That is to say, based on this auction mechanism, Pool can effectively match the supply and demand sides, match those who want to deploy funds based on channels and merchants who need liquidity to receive payments, so as to solve the problem of effective allocation of resources question.
Each successful execution of an auction results in the current interest rate of a single block, which is actually equivalent to the current capital lease rate in the Lightning Network, to distinguish Represented in Block Percent Yield or BPY. This means that every 10 minutes a new Bitcoin block is generated, and the liquidity interest will be immediately paid to the liquidity provider's lightning wallet. At the same time, all orders of the same batch are liquidated in one transaction, which greatly reduces on-chain fees compared with creating channels individually.
Similar to traditional bonds, the maturity date of an LCL is indicated by the Bitcoin block time. The expiration date of an LCL is enforced by the Bitcoin contract. During the time period set by both parties, the buyer of the contract can freely use the leased liquidity capital and pay the seller interest during the validity period of the contract. Currently, Pool is still in the closed beta period, and liquidity providers will use the method of charging prepaid fees. The maximum lease time for liquidity is two weeks, or 2016 Bitcoin block time, and it will be extended to 6 months in the future. More rental time options.
Lightning financial LiFi native to Bitcoin ecology
In the past, Bitcoin held Investors who want to protect their capital can use a centralized custody service such as BlockFi to lend bitcoins to obtain stable annualized interest. Income farming, the launch of Pool has brought a new profit method to the Bitcoin ecosystem. This model is not only native, but also non-custodial compared to centralized custodial services like BlockFi, so it is more secure . This financial model native to the Bitcoin ecosystem is called LiFi, or Lightning Finance.
Currently, Lightning Pool is still in the closed beta stage. It supports using Pool's open source alpha client to participate in auctions, and using Pool's command line tools or RPC API to buy and sell channel leases contract. In addition, many mainstream exchanges, wallets and service providers have tested this. At present, the maximum order capacity at launch is 10 BTC. Once the stress test is passed, the maximum capacity will be increased.
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