Litecoin’s Role in the Development of Bitcoin’s Lightning NetworkBy Kyle Torpey
Many view the Lightning Network as one of the most exciting technical developments related to Bitcoin. According to 1ML.com, there are now more than 8,000 public Lightning nodes with a total capacity of around USD$5.8 million worth of Bitcoin.
In the past, Litecoin creator Charlie Lee has suggested his altcoin could be helpful in offering a faster, lower-cost option for getting funds onto the Lightning Network. But does this theory have any basis in reality?
As a brief reminder, Lightning is a secondary payments layer built on top of the Bitcoin network that enables faster, cheaper payments. One common worry about Lightning is that the on-chain Bitcoin fees will be too high for some people to use the layer-two system in an efficient and economical manner — even though it will eventually be possible for many users to share the costs of opening Lightning channels (see our previous post on this point).
Litecoin might be able to help Lightning in this area, and in others as well.
Using Litecoin to Add Bitcoin to a Lightning Channel
Any blockchain with the necessary characteristics can plug into the Lightning Network, which means intermediary nodes are able to process transfers between users holding different assets in a non-custodial manner. For example, a node connected to both the Bitcoin and Litecoin networks can route a payment from a Litecoin user to a Bitcoin user via the Lightning Network.
In other words, in addition to its potential ability to improve the user experience around Bitcoin payments, Lightning can also function as a sort of decentralized exchange. Sparkswap, which is a non-custodial exchange built on the Lightning Network, launched its public beta for users earlier this month.
Due to this interoperability between cryptocurrency networks, someone who needs to add more Bitcoin to a Lightning channel could do so via a new Litecoin channel opening, which is likely to cost less and occur faster than a Bitcoin channel opening.
“It’s faster and cheaper to establish a channel,” BlockFuse COO Andrew Yang (no, not the Andrew Yang running for U.S. President) told Longhash. “So, let’s say you already have a Bitcoin Lightning node and want to pay a merchant, but you can’t find a route. Your alternatives are to open another Lightning Bitcoin channel or use submarine swaps to refill. This can take up to an hour and you’d have to pay a Bitcoin transaction fee. If the merchant accepts Lightning Litecoin, you’d only have to wait 15 minutes, plus you’d be saving money on transaction fees.”
In fact, the merchant does not even need to accept Lightning Litecoin payments for this functionality to be useful. A user’s funds in a Lightning Litecoin channel could be used to pay a Lightning Bitcoin-accepting merchant by way of an atomic swap (another way of describing the aforementioned decentralized exchange functionality).
According to Litecoin creator Charlie Lee, Litecoin may also offer a useful alternative in situations where Bitcoin fees have spiked over a short period of time. “When the Bitcoin blockchain is congested and the fees are high, it’s easy to use Litecoin to onboard onto the Lightning Network,” Lee told Longhash. “Services like Boltz let users atomically swap litecoins with bitcoin or litecoin on the Lightning Network. This makes onboarding to the Lightning Network extremely easy.”
Yang shared a similar thought with Longhash: “Let’s say Bitcoin’s fee market is high and the mempool is severely clogged. It’d be difficult to close your channels and may take a while. You can swap Lightning Bitcoin for Lightning Litecoin and close your Lightning Litecoin channels. Then you can send your Llitecoin to an exchange to cash out or make a trade. This is a phenomenon similar to what we saw back in 2017 when people would trade Bitcoin for Litecoin and send it to another exchange to take advantage of arbitrage opportunities.”
To clarify, Litecoin would not be able to help in a situation where a Lightning Bitcoin user’s counterparty has attempted to cheat. In that situation, the user must broadcast the proof that their counterparty attempted to cheat on the Bitcoin blockchain.
Does This Make Sense in Practice?
According to Lightning Labs Infrastructure Lead Alex Bosworth, some of these use cases assume the user already has a well-connected Bitcoin Lightning channel open in the first place. Those use cases also assume the user will not have a route to their node from an exchange, which could be used to refill the user’s channel at an even lower cost and faster speed that what Litecoin can offer. “High value rebalances don’t work well with Litecoin because you’ll be paying conversion fees on both sides,” Bosworth added.
Additionally, if a user needs a new Bitcoin Lightning channel, Litecoin won’t be able to offer much assistance. Litecoin also tends to be more volatile than Bitcoin, so a tradeoff is made in that regard. Having said that, the insignificant amount of time in which the user is subjected to Litecoin’s price volatility may turn this into a non-issue.
Privacy and Litecoin as a Testnet for Bitcoin
Over the past couple of years, Litecoin’s sales pitch appears to have changed from “the silver to Bitcoin’s gold” to what effectively amounts to a testnet for Bitcoin. This point of view became prevalent after Litecoin activated the Segregated Witness improvement on its network before Bitcoin.
In the past, non-custodial investment app Abra has moved its crypto-collateralized smart contracts from Bitcoin to Litecoin in response to high fees on the Bitcoin network. In this way, Litecoin has benefited from having a codebase that is extremely similar to Bitcoin’s.
According to Yang, Litecoin is also useful as a testnet of sorts for developers who want to play around with the Lightning Network. “From a development and testing perspective, Litecoin Lightning is a lot easier to set up because it's only 20 GB (as opposed to 200 GB), and channels get established faster,” Yang told Longhash. “You can then convert your application to Bitcoin after using something like CoinMesh.”
Currently, Litecoin developers are focused on bringing Confidential Transactions (likely in the form of a MimbleWimble extension block), which is an in-development potential Bitcoin privacy improvement that masks the amounts associated with transactions, to the altcoin network. This would provide obvious privacy benefits to those who wish to gain access to the Lightning Network in a more anonymous manner.
According to Yang, Litecoin has privacy benefits even without Confidential Transactions. “Atomic Swaps across Lightning Litecoin and Lightning Bitcoin can’t be tracked from an outside observer,” Yang explained to Longhash. “So, let’s say you want to buy something with Lightning Bitcoin. You can swap Lightning Litecoin for Lightning Bitcoin and have that node pay the invoice on your behalf.” Yang added that on-chain atomic swaps are not private due to data that is left on both of the public blockchains involved with the swaps.
It should be noted that Litecoin’s potential utility as part of the Lightning Network does not necessarily make it a logical investment as compared to Bitcoin because holders have a much larger impact on price than the short-term use of a cryptocurrency network for payments. Obviously, the altcoin is also not operating in a bubble, and Lightning integrations with Monero or Zcash could also potentially offer privacy benefits to Bitcoin Lightning users in the future.
With all of this in mind, it seems clear that Litecoin may have a useful role to play in the development of Bitcoin’s Lightning Network, especially in the areas of channel opening and closings, privacy, and testing.
Note: Although not directly quoted in this article, thank you to London Bitcoin Devs organizer Michael Folkson for sharing his thoughts on this topic.