During the 2017 Bitcoin bull market, the scaling controversy and many heated debates on the future direction of the Bitcoin Protocol took center stage. At the time, there was not enough space for anyone in a trading block to hurry their bitcoins into a cash exchange when the price hitched. The protocol has since started to scalable with the implementation of Segwit and released the Lightning Network protocol carried out through several open-source software projects, and later Bitcoin’s proposals for enhancement for the combined realization of Schnorr’s signatures and Taproot that will set the stage for further success and enhanced privacy.
Those are fantastic news, but work is ongoing and it takes little effort to figure it out: the blockchain Bitcoin layer can not scale the masses in its current form. This isn’t a concern at this time but if we want to push the Bitcoin experience to a limit, the number speaks for itself: around 2,500 transactions are validated every ten minutes, adding up to about 131M each year. This amount is far from enough to cope with the volume of transactions we see in the retail sector, let alone anything like wages, taxes, mortgages, loans, financial transactions and one last IoT micropayments.
The First Step for Bitcoin: Lightning Network
The Lightning Network (LN) was introduced as a network layer extension to the Bitcoin blockchain to begin addressing this limitation. In a few words, LN works by creating an inner signature network of jointly financed Bitcoin transactions between participants (nodes) assisted by a communication protocol. The channels are called channels. Once a channel has been developed, its users can send and receive Bitcoins and keep an account of the balance of the jointly signed transaction without interfering with the Bitcoin blockchain. The more participants connect to the network, the more ways Bitcoins can be sent from a growing network of participants. Transactions across the LN tend to be controlled by protocol implementation and game theory to ensure compliance across all network nodes. The participants can choose to close a channel and there are a few variations of how this is done, but this is most often done via a negotiated settlement transaction which is broadcast on the Bitcoin blockchain.
A Giant Step for Scaling: Channel Factories
The LN implementations are moves in the right direction and do a great deal to minimize on-line traffic between users, but the LN protocol has not yet dealt with the issue of the mass embedding on the network. Let’s run rough numbers here to see how the Bitcoin protocol is impacting the number of LN channels to be added to the blockchain. For a moment, to keep it simple, let’s presume that all transactions in the chain are used to construct LN channels. This would allow room annually for 131M LN channels. Suppose, too, that most of the world population will only open a single channel and have one of the major LN hubs. Overall, this is a very ambitious onboard scenario, and even then it will take 60 years for us to open channels without closing them.
Fortunately, the combination with the idea of channel factories presented in 2018 by Conrad Burchert, Christian Decker, and Roger Wattenhofer, of the forthcoming improvement proposals for Schnorr and Taproot signatures, together with the improvement proposals proposed for 2019 by Alejandro Ranchal-Pedrosaa, Maria Potop Butucarub, Sara Tucci-Piergiovannia could be sufficient to scale ma order.
A channel factory essentially works by putting a large number of users together to open an LN channel under a single shared account (i.e. an on-line multi-signature transaction). This is a massive improvement in scalability over the two-party channel setup. Interestingly, sub-channels can be opened for payments, frequently balanced and closed, etc, within one newly created LN channel only, without going back in the chain. Channel plant participants can also participate in other plants and therefore function as gateways between channel factories which contribute further to the model’s scalability and performance.
Intuitively, if a large number of participants may enter a channel factory at once, this leads directly to a reduction in blockchain pressure. To use my previous back-of-a-napkin calculation, while all people using two-party channels that take 60 years to board, one year could take transactions with 60 participants per channel. All this is abstract, but my goal is to demonstrate the massive positive effect of canal factories on Bitcoin scalability and how it ultimately facilitates mass adoption.
Where Can I Join a Channel Factory?
At the time of writing, the Channel Factory definition continues to be in the whitepaper stage, it is debatable whether these factories are primarily instantiated by companies providing factory setup services and overlapping fees, or are built using a to-defined automated installation process for the factory. This may sound like today’s discussions on distributed exchanges (DEX) vs. custodial exchanges. For now, this is still a region, even conceptually, to be explored. Due to the many parallels between sub-channels and LN networks, I agree with the resources and work that we see today for LN will possibly be used in channel companies. Below are some areas of technology that are likely to emerge from the original concept:
- Factories of third-party channels set up / subscribe services. Would this cause compliance with AML / KYC rules and other financial laws?
- Public channel factories produced by distributed, known-permitting engine(s).
- Regulations on liquidity and network optimization. Are some factories for the network better than others?
- User interface and user experience and how simple these improvements for end-users will be.
Some Views On a Road to Adoption
If the majority of the on-chain activities are by holders who collect and lend Bitcoins and traders who move their assets and seek arbitration opportunities between exchanges, then it seems possible that they are the first larger LN channel user group. In this case, it should be remembered that the channel manufacturing paper presents also the idea of LN cold wallets in a factory. This may well resonate with these early adopters as well.
The push of large retailers to add Bitcoin to their current payment options could also catalyze another adoption market. So long so Bitcoin remains unpredictable, most retailers convert bitcoins to fiat when buying via payment processors ‘ services and in this situation, I can see how good channel factories between retailers and payment processors can be set up in tandem with crypto exchanges. Again, exchanges may also play a part by supplying channel overlapping factories.
Besides these cases of first use, my guess is just as good as yours, but Bitcoin’s future is always exciting. Whilst the LN protocol is gaining momentum through maturing implementation, I look forward to the first implementations of channel factories and the related business models.
How Many Developers Does Bitcoin Have?
Bitcoin (BTC), the largest of all market-capitalized cryptocurrencies, also has a strong developer base, totaling more than 50 designers a month. The report states that this data does not include ecosystem initiatives. On 7 March, the report was released in a medium post.
Bitcoin, on the other hand, is the second most popular one every month, with an average of 47 core protocol developers.
Another point made in the study is that while the market has lost about 80% since its peak, data show a decrease of only 4 percent in monthly active developer base. Also, the report shows that in the last two years the number of developers working on public coin repositories has doubled.
According to the global data of the organization, more than 4,000 developers contribute code to more than 2,800 public coins per month. As mentioned in the report, these data do not take into account private, not already begun, or non-coin projects like the Lightning Network.