By Ria Bhutoria and Wilson Withiam
Know & go
- An inside look – Power up with Lightning node launcher: This week, we used Pierre Rochard’s Lightning Power Users Node Launcher to set up our very own Lightning node. In our recap, we outline the (seamless) experience and why it’s important (and why Pierre was compelled) to make it easy to onboard more participants onto BTC and LN.
- Three things to know: (1) Coinbase acquired Xapo’s institutional custody service for $55 million (2) The U.S. SEC delayed ruling on the three bitcoin ETFs proposed by Bitwise Asset Management, VanEck/SolidX and Wilshire Phoenix (3) China’s central bank is expediting research into issuing its own digital currency.
- Market snapshot: Total crypto market capitalization is around $256.7 billion (-10% w/w) at press time. BTC is trading at $10,510 (-11.6% w/w), ETH is at $186 (-12.7% w/w). BVOL (the rolling 30-day annualized Bitcoin volatility as calculated by BitMEX) is 66.8%, down from 96.5% last week. (8/16 1:30PM ET)
An inside look: Power up with Lightning node launcher
This week, we used Pierre Rochard’s Lightning node launcher to set up our very own lightning node (which also requires downloading a bitcoin node). The requirements were very reasonable — 10GB of available disk space and a decent internet connection — and the process from start to finish was unbelievably simple. We downloaded the latest version of Pierre’s Lightning Power node launcher from the Github page, launched the application, and simply waited for the node to sync. Given that our laptop wasn’t connected to the internet consistently for more than a few hours at a time, syncing the bitcoin node took three days.
Such solutions significantly reduce the barriers needed to participate in the Bitcoin and Lightning network. Without node launcher (and certain other pre-configured solutions like Casa or Nodl), users have to be relatively more technically inclined to set up a full node.
What is a full node?
A node is a computer that participates in a blockchain network via a specific protocol, which allows nodes to communicate with one another. Full (or, more precisely, “fully validating”) nodes learn about new blocks of transactions from their peers, validate the new block, and propagate it to other nodes in the network. Each node authoritatively verifies each transaction and block. The purpose of running a node is to know the exact state of the blockchain without having to trust anyone to tell you what the truth is. By contrast, a pruned bitcoin node discards older blocks and provides a condensed copy of the ledger. It gives users the ability to independently validate with significantly lower storage requirements but it is less beneficial for the overall network than running a full node with a full copy of the ledger (which consumes about 225GB of space).
Why it is beneficial to operate a Lightning node?
The Lightning Network is a layer two solution built on top of Bitcoin that facilitates cheap and instant micropayments. In order to use and interact with the network, users are advised to operate a lightning node, but certain custodial services act as “hub operators” and allow users to plug into their hub without going through the process of setting up a local Lightning or Bitcoin node. Lightning Labs Neutrino light client technology also provides users a way to connect to the network without configuring nodes — it is an improvement over custodial services, but not as secure as running a node.
There are multiple benefits to operating a Lightning node to use Lightning Network. The most obvious of these is the ability to use non-custodial products and services, minimizing trust relative to custodial services and allowing users to maintain control of their funds. Another advantage of operating a node is enhanced privacy. At the highest level, two nodes that exchange transactions directly must only broadcast a payment channel opening and closing transaction on-chain. While the balance of both parties at closing is known, they never reveal the number or value of transactions that were exchanged between both nodes while the off-chain payment channel was open — it could have been a single transaction or a hundred transactions.
Further, Lightning Network leverages onion routing to enhance privacy when hops are involved (when a node does not have a direct channel with the payment recipient and must route the transaction over a series of nodes). In contrast to Bitcoin, user A’s node has to be online and in contact with user B’s node for the entire duration of the state channel – while this makes it easy to track, it also may be easier to disrupt the transaction. Onion routing helps address this challenge. With onion routing, the data package is encrypted. Intermediate nodes decrypt one layer of the package to determine where they are sending it next (like peeling back the layers of an onion). These nodes are limited to knowing the previous and subsequent node along the routing path — they never discover the origin or destination of the transaction or the number of hops needed to get from point A to point B. This level of privacy is available to people and entities that operate their own nodes. On the contrary, if someone relies on a custodial service to connect to the Lightning Network, the custodial service may be aware of the origin, destination and other details.
Additionally, users that operate nodes can earn fee income by providing liquidity to the network and serving as a routing node that other nodes can connect to and use for hops to reach an indirect recipient. Routing nodes charge two types of fees — a base fee and a fee rate (percent fee charged on the value of a transaction). However, in the current early and mostly hobbyist stage of the network, many routing nodes may not even be charging fees at all. In the long run, should Lightning Network gain widespread adoption, competition will likely maintain downward pressure on fees in favor of users given that it’s quite easy to become a routing node. Christian Decker highlighted that fees earned on the network will, at most, cover the cost of someone’s use of the network rather than providing a rich income stream. BitMEX Research published a piece on routing fee economics to explore the minimum investment yield that liquidity providers would require for their services, if and when the network scales, and what factors could impact the yield and desire to provide liquidity. They similarly concluded that fees may remain low, favoring users.
Running a node locally also allows people to use certain applications and services that they would not have access to if they relied on a custodial solution. One of these is Will O’Beirne’s Joule browser extension. Will O’Beirne created the Joule extension at Chaincode Labs. The extension simplifies the process of making payments instantly through the browser without having to navigate through different wallets and tabs. Users must be running a Lightning node in order to connect to the application. In a follow up to his original node launcher post, Pierre outlines a seamless process for connecting to Joule.
Challenges of running your own node
In order to send and receive payments on Lightning, a Lightning node must have both outbound and inbound capacity. Outbound capacity is established by simply opening a new payment channel with another network node and funding it with a sufficient amount of bitcoin — from our own trials, Will O’Beirne’s Joule extension required slightly over 0.005 BTC (~$50 at current prices) to open a channel. It can also be created when a node receives a payment from an existing channel or when payments are routed through the node. Outbound capacity alone enables users to send Lightning payments, but in order to receive payments, a node needs to have inbound capacity as well.
Inbound capacity is not established until either a node operator sends payments via an existing channel to another node or other network participants open a channel to said node operator. Therefore, sufficient inbound liquidity (upfront BTC capital into the channel) and creating multiple channels with other participants, a high cost in terms of time and maintenance, are key factors in maximizing inbound capacity and potential fee revenue. To complicate matters, in a What Bitcoin Did episode, Pierre Rochard noted that the routing process tends to favor larger (often older) nodes or those with a greater amount of inbound capacity. Pierre observes that channels automatically route towards these larger nodes and, as a result, these “mega nodes” acquire more inbound capacity by default. In order to compete for routing fees, smaller or newer node operators purchase inbound capacity via service providers like Joule. While this inbound capacity market provides newer operators with the opportunity to accelerate its network connections, the added cost could eat into fee revenues and deter potential participants looking to turn a profit.
Default fee set at zero
Once a node establishes both inbound and outbound capacity, it can start routing payments between various network participants and earning fees for facilitating the process. This routing fee is set by the node operator, but the default fee feature is set at zero. Therefore, participants that don’t manually reset their fee structure (intentionally or unintentionally) will end up providing a free routing service. As noted earlier, this could already be the case as many routing nodes may not even be charging fees in these early stages of the Lightning network. A significant number of feeless routing nodes will likely place a downward pressure on fees in favor of users but curb operator interest due to the limited economic upside. However, many of these free routing nodes may not have sufficient liquidity, meaning larger node operators could still compete despite charging routing fees.
Must remain online
Base layer bitcoin payments can be received whether the recipient is online or offline. A sender only needs the right public address to make the payment. In contrast, Lightning node operators need to be online to sign-off on a transaction before receiving a payment. This can create a poor user experience by placing a burden on users to manually monitor any incoming payments. Further, the constant internet connection means Lightning wallets act essentially as hot wallets, presenting greater security risks beyond the comfort level of some participants. Therefore, Lightning may be impractical in certain scenarios, such as holding and transacting large sums of bitcoin.
It is generally the responsibility of the nope operator to select other Lightning nodes and open channels with them. This can be a manual process, and the effectiveness of the chosen counterparty may not be apparent. Thus, node operators are advised to open channels with multiple nodes to optimize routing efficiency as well as network resiliency. But setting up and managing various channels is burdensome in terms of time and complexity. Fortunately, there have been some recent developments to make efficient routing path discovery more seamless. Lightning Lab’s alpha release of its Lightning App in April included an upgrade to its “Autopilot” feature, which automatically selects ideal routing partners based on its internal scoring system. The latest version of Autopilot within the LND client will provide these scores externally so participants can monitor and compare the performance of Lightning node operators. Another project that faces liquidity challenges is 0x — it’s approach has been to use networked or shared liquidity via 0x Mesh (vs. previous standard relayer API), which we wrote about in a prior recap, to try and address these challenges.
With the Lightning Power Users node launcher, Pierre Rochard has significantly reduced the barriers to running a Bitcoin and Lightning node, and has done a great service to this community to “onboard the next wave of BTC/LN users.” This is nascent and experimental technology and users should not risk more funds than they are willing to lose. However, if users go into the endeavor knowing this and meet the requirements needed to run a full node, this is a great way to truly participate in the Bitcoin network and do so with minimal effort or technical knowledge.
Weekly market snapshot
In other news
- According to deputy director of PBOC’s payments department, China’s central bank is expediting research into issuing its own digital currency, which it has been working on since last year, potentially – it has been suggested – driven by Facebook’s Libra announcement. The digital currency is intended to replace M0 (or cash) and give them more control over the financial system. According to patents, users will be able to exchange their yuan for the digital currency through a mobile wallet to make payments, which the central bank could track. Source.
- Overstock’s security token trading platform, tZERO, opened up its preferred equity security token (TZROP) to be resold to non-accredited investors. Previously, only accredited investors were able to participate in the tZERO ICO last summer (which raised $134 million) and trade the TZROP token since tZERO launched in January. According to the company, token holders may be provided with direct exposure to tZERO’s revenue growth via a quarterly dividend model, which could equal up to “10% of tZERO’s adjusted gross revenue”. Source.
- According to CipherTrace’s Q2 2019 Cryptocurrency Anti-Money Laundering Report, cryptocurrency crime is down q/q, but investors, user and exchanges have still lost a combined $4.3 billion from illicit activity YTD. The blockchain forensics firm claims $3.1 billion of these funds were stolen via exit scams. These estimates include the QuadrigaCX collapse (~$195 million lost) and “pyramid scheme” Plus Token, in which suspected investor losses amounted to nearly $2.9 billion. Source.
- Crypto exchange Seed CX started testing physically settled bitcoin margin swaps through its subsidiary, Seed SEF (a CFTC regulated swap execution facility). The offering is described as “a type of derivative contract in which two parties typically trade a financial instrument over-the-counter and with customized features.” Seed CX has reportedly been working closely with the CFTC over the last 18 months and is waiting to receive official approval. In the meantime, the firm will be able to “self-certify” its bitcoin swaps offering following a test period. Source.
- Blockstack partnered with Lambda School, an online school pegged as an alternative to higher education that targets developers, to help students learn how to build decentralized applications on Blockstack’s blockchain network. According to a Blockstack blog post, the educational material will focus on security, privacy and data ownership. Participating students will also be considered for Blockstack’s App Mining program, which pays dapp developers based on a monthly ranking system. Source.
- Crypto derivatives exchange Blade raised a $4.3 million seed round with participation from Coinbase, SV Angel, A.Capital and Slow Ventures, among others. The exchange platform intends to go live within the next month and will focus on offering perpetual swaps — “a derivative product like a futures contract, but with no expiry or settlement date” — with leverage up to 150x on certain pairs. Source.
- MetaCartel DAO announced its first wave of accepted funding proposals, which included: (1) $1.5k to Mintbase, a NFT creation, management and exchange platform and (2) $2.5k to Kickback, an events management platform, to implement its services alongside Orochi DAO, a decentralization organization created to coordinate event sponsorship funding, in addition to some small and internal grants. Source.
- Coinbase acquired Xapo’s institutional custody service for $55 million. Launched just over a year ago, Coinbase Custody now claims to have over $7 billion in assets under custody. According to Fortune, a majority of Xapo’s former clients have agreed to transfer their assets to Coinbase, and if the remaining accounts follow suit, Coinbase Custody would hold approximately 4% of all bitcoins in the circulating supply. Source.
- M13 led a $2.5 million seed round for crypto mining startup Coinmine. Additional participants included Gumi Crypto, Republic Labs, Canaan Labs and Shervin Pishevar. The startup’s flagship product is the Coinmine One, a consumer-friendly mining device for a number of cryptocurrencies, in particular BTC, ETH and ZEC. Source.
- Xpring, Ripple’s investment subsidiary, granted 1 billion XRP (~$262 million at the time) to Coil to help drive XRP adoption. Coil, co-founded by two former Ripple employees, is a micropayments platform for content creators. The startup intends to use the grant to monetize content via Interledger Protocol, a former Ripple development that enables streaming payments. Source.
Global regulatory roundup
- The U.S. SEC delayed ruling on the three bitcoin ETFs proposed earlier this year by Bitwise Asset Management, VanEck/SolidX and Wilshire Phoenix. Final decisions (as in cannot be delayed again) on the Bitwise and VanEck/Solix proposals are set for October 13 and 18 respectively. The next decision on the Wilshire Phoenix proposal is scheduled for late September. The SEC has denied all previous attempts to launch a bitcoin ETF, citing market manipulation, market surveillance and divergence from futures trading as potential concerns. Source.
- New Zealand’s Inland Revenue Department (IRD) made it legal for employees to receive salary payments in crypto. According to the ruling, the crypto asset used as payment must be able to be exchanged for fiat currency and must act as a currency or “be pegged to the price of one or more fiat currencies, the IRD states.” Source.
- The SEC filed an emergency lawsuit against Veritaseum to stop spending the $8 million raised in its 2017-2018 ICO. The SEC alleges the token sale was fraudulent as the offering had material “misrepresentations and omissions” about the VERI token and misled participants about prior business success and demand for the token. Further, the project claimed that the VERI token was a utility token, but the SEC deemed them to be “plainly securities”. Source.
- SimplyVital Health settled with SEC over $6.3 million unregistered ICO. The SEC deemed the token sale (structured as a SAFT) violated the Securities Act of 1933 as the project did not register with the SEC, nor did it qualify for an exemption. Source.
What we’re reading
- Electric Capital Developer Report (H1 2019)
- Bitcoin Is Not Too Volatile by Parker Lewis (Unchained Capital)
- The Nightmare of Disintermediation by Jill Carlson
- Where Ethereum Is Going by Alex Van de Sande
- The Modern Portfolio: The Case for Allocating to Digital Assets by Matthew Beck (Grayscale)
- Proposal for the Zcash 2020 Network Upgrade by Joseph Todaro and James Todaro (Blocktown Capital)
- Five reasons why the bitcoin wealth distribution is skewed by Tim Copeland
- The potential of blockchain gaming marketplaces by Linda Xie
- How To Understand Bitcoin If You’re Over 40 by Matt Hougan (Bitwise)
What we’re listening to
- Chain Reaction: Hasu and Ryan Sean Adams: Bitcoin & Ethereum: A Rational Conversation Between Two Bulls
- Hidden Forces: What is Bitcoin? | A History and Ontology of the Cryptocurrency with Nic Carter
- Into the Ether: Ryan Selkis: Messari and the State of Crypto
- What Bitcoin Did: John Newbery on Building a Bitcoin Developer Community
- Unchained: The IMF on How to Design Central Bank Digital Currencies
- Unconfirmed: Kik’s Surprising Move in Its Lawsuit With the SEC
- Base Layer: Mike Belshe (BitGo)
- Epicenter: ShapeShift – There’s a New Fox in Town
- Blockchain Insider: Not crypto, but cryptography
Where we’ll be in August
- TPI Aspen Forum, Aspen, CO, 8/18-20
- Blockchain Summit Singapore, 8/20