Lightning – cryptocurrency and the Internet of Things


Bitcoin is an experiment. That's granted. The fact that it's trusted and actually useful is nothing short of phenomenal. Last week for example, the trade volume amounted to US$229m.

Nevertheless, Bitcoin has some fundamental constraints that keep it from going mainstream: it has a ballpark limit of 7 transactions per second, and having confidence that a transaction has 'gone through' – non-recourse transactions – takes roughly 20 to 60 minutes depending on the level of confidence you're looking for. (The user experience sucks too, but that's not for this post.)

While 229 million dollars is no small chunk of change, Visa processes many thousands of transactions per second, peaking at tens of thousands, and will have processed around US$130 billion last week.

State channel – more exciting than it sounds

The crypto awesome sauce underpinning Bitcoin is known as the blockchain, perhaps the No.1 tech buzzword of recent times. It's at the heart of the currency's success – preventing users spending the same money twice – but is also the nub of its relatively slothful nature. It's with a fair degree of excitement then that I've been tracking the progress of Lightning, a protocol first mooted to my knowledge in 2013.

The jargon here is state channel – blockchain interactions that could occur on the blockchain but get conducted off-chain without impairing the trust parties have in the interaction. Lightning facilitates state channel to speed things up and attenuate the costs needed to prove transactions (and offers a little more spark in terms of brand appeal!)

New, just like before

Joseph Poon, a co-inventor of Lightning, observes:

I think that it is important to look at the way financial systems work because bitcoin development is replaying the history of money. The Lightning Network has significant similarities with how existing financial systems solve this problem.

This immediately makes sense to me. I ran a peer-to-peer payments company called Nochex from 2001 to 2003, and my experience there might help you grasp Lightning more readily.

Nochex was effectively the UK equivalent of Paypal (which only operated in US dollars in the US back then), and we became the dominant e-payment service used on eBay(UK). In designing our service, we had two options for processing customer transactions: (1) move the value of each transaction out of and back into the traditional payment infrastructure, incurring the associated transaction costs and passing these costs plus our mark-up onto our customers; or (2) allow customers to keep a pool of money circulating within the system at no fee, charging only when they wished to transfer money in or out of the system.

These two approaches were known as straight-through and stored-value respectively, a distinction I recall labouring over when asked to advise the forerunner of Her Majesty's Revenue and Customs about the money laundering ramifications. We opted for the latter to avoid excessive costs and encourage 'flow'. (It also helped that we earned a bit of interest on the millions in the bank.)

Lightning might be said to be Bitcoin's stored-value equivalent. It achieves the same ends in not too dissimilar a fashion, ie, avoiding mining costs and encouraging 'flow'. And I mean a helluva lot more flow.

By thunder

To explain this, I need to introduce a couple more names that may well be new to you. Sorry about that, but new worlds come with new words. ...

I'm prompted to write this post today having just read that later this month we might see a 100,000 transactions per second proof-of-concept of Raiden.

Where Bitcoin has Lightning, Ethereum has Raiden, its instantiation of Lightning. The word Raiden is derived from Raijin, the Japanese god of Thunder.

What's Ethereum?

Borrowing from the US fondness for verb-izing nouns, I tend to describe the Ethereum project as platform-izing the blockchain – the project is developing a blockchain-based distributed computing platform. They are making it easier for everyone to innovate with blockchains for all variety of applications, including but not limited to currency.

Raiden makes Ethereum relevant for high volume, distributed micro-payments for example, which undoubtedly sounds useful when it comes to billions of things looking to earn their keep in the emerging Internet of Things.

Decentralized and distributed disruption

Your organisation needs to understand how such technologies transform your competitive landscape – and indeed the land beneath you.

Take this slide from a stack I presented at Workfront's annual shindig earlier this year for example. Just as we contemplate the incredibly rapid rise and dominance of disruptive 'sharing economy' brands in certain sectors – Uber in transport and Airbnb in accommodation are most often referenced in this context – then we can also contemplate the imminent disruption of the disruptors.

sharing lite v sharing orig

For the benefit of anyone using a screen reader here, the image describes Sharing Lite as decentralized and monopolistic, commercialising surplus for extractive value. It's biggest threat is Sharing Original. The characteristics of Sharing Original are distributed, natural, liberating surplus for mutual value. It's worth emphasising the definitions the slide adopts for decentralized and distributed:

  • A decentralized system decentralizes location but not control
  • A distributed system also distributes control.

The blockchain may have been mentioned in your organisation. Perhaps someone is keeping tabs on Ethereum. Maybe you're now the first to know of Lightning. Either way, there is no doubting the speed with which these distributed technologies are redefining the possible.

Further reading

Note: I have had nothing to do with Nochex since departing, and have no knowledge of its current products or business model.

Image credit: Fernando Flores, BY-SA 2.0