Tech Talk: "The Lightning Network" mit Fabian Hemmerich

Tech Talk: "The Lightning Network" mit Fabian Hemmerich

Hi, my name is Fabian and today I’m going to talk about the lightning network!

So, let's start with a little story. Let's imagine you’re buying coffee. You go to your favorite little coffee shop, the owner is called Susan, you walk out to her, you’re like: ”Hey, one coffee please”, Susan's like: ”Yeah, sure, here you go.” And now you’re up to pay for it. So, you take out your credit card, you hold it to the little card holder thing. Susan and you both look at the transaction, see if it went through and you got your coffee and you’re on your way now.

So, when you made that payment, what happened in the background? A transaction was sent to the payment provider that authored the card to you, it checked your funds, Susan had to pay a small fee of like 1-2 % and maybe some extra and everything went through and that was it. So, the question I want to ask today is: “Can we do better?”, and some people might say: ”Yes”, and that is with the help of crypto currency.

So, the biggest crypto currency – as you probably know – is bitcoin, so let’s talk about bitcoin for a second. So, bitcoin is basically programmable money and, in my opinion, bitcoin has some properties that make it money that is better than any money we in society have ever had. Bitcoin is permissionless, which means that no one can stop any transaction that you make, bitcoin is completely trustless, nobody can take away the money that you have, bitcoin is borderless, you can just send it around the whole globe in the manner of minutes, and everything happens without a middleman, so we cut it out. But you probably know, or you might say that there is still issues with it, so lets take a look at this.

This number here 193, this is the amount of transactions PayPal can handle in a second – or does handle in a second rather. This number here is what a payment provider like Visa handles in a second. Could go even higher a lot, but this is what they just have to handle. Well, you know what that number is for bitcoin? 3-7. We’re not going to get very far with this number right now. So let's take a look at other things. What about the fees? When we bought the coffee right now, we had to pay 1-2 % that Susan took over for us and usually something small like 30 cents, to make it worth the while for the payment provider. What about PayPal? 2,9%. Just the same thing, just a small percentage. With bitcoin due the technical reasons, how the system works, from time to time you have to pay more or less – I’m not going to get into this right now – but we have seen this before, in the craze in 2017. The price can go up to over a 100 dollars. This is obviously also not really well suited for smaller transactions.

What about the transaction time? When we bought the coffee how long did we have to wait? A few seconds. Same thing with PayPal, you just click and the money is going to be wherever it should be in the matter of seconds. But in bitcoin, due to the way the system is programmed, it can take up to an hour for you to be a 100% certain that the money is going to be where it should be. This is also kind of a problem, you're not going to want to wait in the coffee shop for over an hour.

So, enter the lighting network. The Lightning Network is a proposal from 2015. That is set out to solve these problems exactly. As I said it started in 2015 in a white paper and it is a so called second layer protocol, which means that it doesn’t work with bitcoin itself, but it’s handled very close to it. So let’s say, we're going to see what that means in a second. So, in a lightning channel – so how it works – you open a lightning channel, and in this channel, you can then transact money from side to side as much as you want. And in that channel, you have properties. If you make a transaction, the transaction is basically free, you pay fractions of a cent – if anything at all – the transactions are completely instant, you don’t have to wait at all, they are as small as you want, you can also just pay for fractions of a cent, and they are scalable to a global level. If everyone in the world would use this network, it wouldn’t be a problem and it could just handle it.

So, let’s take a concrete example of how lightning would work. In this example, we have two parties – classically called Alice and Bob – and both of these have bitcoin wallets, and they are using bitcoin right now. So, let’s say that Alice wants to send some money to Bob, but they don’t want to use normal bitcoin transactions and instead they say: „lets open a lightning channel!“ So, what happens now – by opening a lightning channel, they are doing one technical bitcoin transaction, and this means that each party puts money on either side of the channel and that is how much money they want in bitcoin. So, for example, Alice will put in 6 bitcoin and Bob will put in 4 bitcoin. Yes, now what can happen is these parties can send around money inside this lightning channel from each side to the other as much as they want, for free, instantly, no problem. So let's say Alice sends 3 bitcoin to Bob now. This means obviously on Alice’s side of the channel there is 3 bitcoin less, and on Bob’s side there is 3 bitcoin more. And this could just go on. There was no transaction fee and now Alice could send 2 more bitcoin over to Bob, Bob could send half of a bitcoin back, he could send 0,0001 bitcoin back if he wanted to, there is no problem at all. As long as this channel is open, as long as both sides agree to everything, it’s just going to happen. So now they are saying: “We are done with it, we don’t need the channel anymore.”, and they can do another normal bitcoin transaction, which means that the money on each side that is currently on the position will be put back into the respective bitcoin wallet. And now were done. That was a lightning transaction!

So, we could now go back to our coffee example and instead of using visa or paying in cash for Susan, we could just open a lightning channel. So how would this work in practice? Let’s say Susan and you decided to use the lightning network and you open a channel. You would put in 10 bitcoin for example – let's say in this world coffee is really expensive and 1 coffee is 1 bitcoin – and Susan put in nothing, because Susan is not going to give you any money because you buy the coffee from her. So now let’s say you bought a coffee, now your 1 of the 10 bitcoin you have is sent to Susan, Susan receives it instantly, doesn’t have to wait for a confirmation, and you receive your coffee. So now you can do this 10 more times, until all the 10 bitcoin are on Susan’s side at which point you will have to close the channel.

But there is still issues obviously, because you might say now: ”I mean, I don’t want to run around, opening, closing lightning channels all day because I would still have to pay 100 dollars for opening and for closing it and to make it worth it, I would have to deposit money for a billion coffees right away and I don’t want to do that.“ And yes, that is true, but I didn’t tell you everything about it, because we are not talking about lightning channels, we are talking about the lightning network. Because the cool thing – and what really makes it for me – is that if you have a lightning connection to someone and this person has a lightning connection to someone else, you can use this connection to directly make transaction with the third person. So, we can go further in our coffee example and say that Susan buys the coffee beans from her provider called Walt and now you love coffee so much that you don’t only want to buy Susan’s coffee, but you want to make your own coffee, but you want to use the exactly the coffee beans that Susan is using. So now we could go ahead – because you know that Susan and Walt have a lightning channel in between them, because obviously they pay with lightning right now and you have one with Susan. Now you can through the lightning network directly buy coffee from Walt without knowing that the transaction will go between Susan and Walt also and the network will just figure it out by itself for you.

And these network effects will just grow with the amount of participants that are here. So yea, I want to talk about network effect for a second. This means basically that for every network the more participants you have, for each participant the use and the usefulness of the network will just grow. So, for example: if we have two entities, we can only have one connection between them. If we have 5 entities, we can have up to 10 connections between them. If we have 10, then we can have 66 connections inbetween them. This just elevates and elevates the usefulness, and this is what it did for the telephone, for the internet and it will do the same for bitcoin and the lightning network. It already has for bitcoin.

So, what is the future going to look like? The truth is we actually don’t know yet how the lightning network will really work on a global scale, but a lot of smart people are already thinking about it and trying to figure it out. But there is a lot of opportunities to figure out ways to start companies – what ever you want, you name it! What you see here on the slide, this is a map of the world with all the current lightning notes that are active and their connections in between them. There are 10.000 lightning notes right now and they share 50.000 connections.

And you might also heard about this piece of news here: El Salvador becomes the first nation to make bitcoin legal tender. And this is huge! Because this means that even if just a small part of El Salvador starts using bitcoin and the lightning network, this will mean up to like millions of new users of the network and the network effect will just explode. And if we’re lucky even here in conservative Austria, in slow adapting Austria, in a few years down, we will start buying our coffee through the lightning network of bitcoin. Thank you!