Sidecar Channels: A new user portal for Lightning Network

According to 1ML data, on August 2, the current number of Bitcoin Lightning Network nodes was 23,943, an increase of 7.92% in the past 30 days; the number of channels was 61,293, an increase of 17.1% in the past 30 days; the network capacity reached 2107.55 BTC, in the past 30 days An increase of 27%.

Behind this data are the changes brought about by the innovation and adjustment of Lightning Network product strategy.

At the end of 2020, the Lightning Network released LightningPool, which provides a derivatives trading market for node operations. In May, in order to make it easier for users to participate in LightningPool, the Lightning Network released SidecarChannels, a new user portal that lowers the threshold.

In this article, we will organize the relevant information of SidecarChannels and LightningPool to determine the product strategy of Lightning Network.

SidecarChannels is a new feature of LightningPool that allows new users to join Lightning more easily without investing money.

At the end of 2020, Lightning Labs released LightningPool, a non-custodial peer-to-peer trading market. Using LightningPool, node operators can bid and purchase the inflowing liquidity while maintaining custody of their funds.

However, in this way, LightningPool needs those node operators that obtain Bitcoin liquidity to connect with other node operators that have funds to deploy on the Lightning Network. It also requires users with liquidity needs to recharge their accounts with Bitcoin before bidding, which is not ideal for users.

SidecarChannels solves this problem by allowing third parties to purchase channels on behalf of users. These third-party representatives are regular channels created through LightningPool, which makes it very easy for new users who join the non-custodial way to enter the Lightning Network.

The process is simplified to start LND, scan the QR code from a node with a fund pool account, and receive payment through a well-connected routing node. This also creates a new revenue line for operators who are interested in leasing nodes through intermediary channels.

How SidecarChannels work: Bob’s friend pass

If Alice decides that he wants to receive Bitcoin payments through the Lightning Network. But she doesn’t have any bitcoin to pay for the channel. Before using SidecarChannels, Alice needs to top up her Pool account with Bitcoin before she can purchase inbound channels that receive lightning payments.

However, after enabling SidecarChannels, Alice can use the funds in Bob’s Pool account to buy channels. Bob may be a non-custodial wallet developer who wants to provide users with a seamless entry experience. Bob has a pool account with funds, which allows him to enter the routing node market, and can also sell channels in exchange for bitcoin revenue.

Assume that Carol is a routing node. Alice pays Bob to provide her with an inbound channel. Bob pays Carol the channel rental fee from his Pool account, and Carol opens a channel for Alice. Bitcoin payments can be accepted through the Lightning Network, Bob has obtained a small profit through intermediary channel leasing, and Carol has obtained risk-free benefits through her Bitcoin.

New channel structure of SidecarChannels

Dual funding channels: Alice does not necessarily only need to receive payments. She can pay Bob an extra fee and ask him to fund the channel between her and Carol so that she can send and receive payments immediately. Especially because it is cheaper than purchasing an inbound channel using the current pool reconfiguration.

Withdraw funds directly to the channel: If Alice is an exchange that supports the Lightning Network and has a Pool account, Bob can directly request on-chain withdrawals on the new channel between the Lightning node and Carol. Alice will pay the full channel balance and premium to Carol’s Pool account (with Bob’s money) so that Carol can open a channel to Bob and push the entire balance to the Bob side of the channel.

New users and new revenue models

In short, SidecarChannels makes LightningPool more portable and flexible within the network without affecting its trust relationship. They provide node operators with new revenue channels through agency channel leasing, and may provide a new trust-minimizing business model for operators who are interested in introducing merchants to the Lightning Network in a non-custodial manner.

In order to better understand SidecarChannels, we need to introduce LightningPool more.

Basic design of LightningPool

The goal of LightningPool is to connect people who want to buy inflow liquidity with those who want to get bitcoin returns in the Lightning channel, and promote a more effective capital distribution network on the Lightning Network.

It was ultimately designed as a non-custodial auction and leasing market, allowing participants to buy and sell Lightning Channel Lease Rights (LCL). LCL packs the liquidity (availability of sending and receiving funds) entering the channel (or leaving the channel) into a hybrid asset with traditional fixed-income assets (such as bonds) capabilities to help coordinate resource allocation.

Similar to traditional bonds, LCL has a maturity date expressed in blocks. The expiry date is enforced by the Bitcoin contract to ensure that the buyer of the contract can use the leased funds within a certain period of time and pay interest to the seller within the contract period.

As the auctioneer in this market, Lightning Labs, the auction itself is an unregulated internal bidding, with a unified clearing price, every about 10 minutes. With each successful auction, participants can discover the lease rate (percentage rate of return, or BPY) of funds in the Lightning Network.

Resource allocation issues in Lightning

Pool solves the problem of resource allocation by creating an auction that matches those seeking to deploy funds (through open channels) with those who need channels to operate lightning services. For each batch executed, the participants in the auction will come up with a lease rate.

Any new services launched on the Lightning Network may need to figure out how to obtain inbound channels so that they can accept payments. Pool provides an elegant solution where merchants can set up a series of “introduction points” through market negotiation. The merchant can pay a small portion of the total liquidity allocated to it and ensure that the funds will be put into use within a set time.

Previously, some wallet providers opened new inbound channels to users because they needed to invest in a ratio of 1:1, which provided users with the inbound bandwidth they needed to receive, which would bring a high price to wallet providers. The cost of capital, Pool allows them to reduce the cost of customer acquisition, because they only need to pay a portion of the funds allocated to new users. Like the above-mentioned merchant purchase inflow liquidity, a wallet can pay 1ksatoshis to allocate 1Msatoshis to users instead of facing the entire 1Msatoshis.

The goal of routing node operators is to join the network to facilitate payment transfers and successfully complete payments to earn fees over time. However, if a node does not regularly route payments (thus earning forwarding fees), then they will not be compensated for the various (albeit small) risks faced by their funds. Using Pool, routing node operators can ensure that their capital costs are consistently compensated.

Resource allocation through lightning channel leasing

Since the Lightning Network is a fully mortgaged system, in order to be able to receive more bitcoins (N) through a channel, another node on the network needs to first allocate at least N bitcoins to a channel leading to you. Similarly, a node that only opens the transfer-out channel cannot start routing payments immediately because it needs other nodes to allocate the ideal equivalent amount of funds to its nodes. New users who join the Lightning Network also encounter these problems, because wallet users cannot receive funds unless they spend part of the money on the channel, or somehow obtain an inbound channel from other parts of the network.

Lightning Channel Leasing effectively borrows the background of Internet resource allocation to create a new type of contract, which is the intersection of traditional Internet peer-to-peer agreements and bonds. Compared with the risk of existing hot wallets running Lightning Nodes, LCL allows capital providers to earn income or interest by allocating their funds to the network. There will be no additional risks.


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