Developer Warns Multi-Asset Lightning Network for Bitcoin (BTC) May Not be Viable Second Layer Solution


Bitcoin has been seen by many as the deliverance from the unjust traditional financial system. However, its transaction speed and rate are a major hindrance towards that goal. To address this Lightning Network [LN] was introduced.

This second layer is able to handle more operations and processes them quickly, leading many to hope that this will solve the scalability issues and lead to large-scale adoption of the technology.

Now, ZmnSCPxj, a contributor to the Lightning Network codebase has raised concerns about the viability of using LN. In an email, to the Lightning Development mailing list, he has delineated his views about the network.

The identity of ZmnSCPxj is unknown, yet that might have little bearing on the issue at hand. The collection of coders working on the LN are more driven by the success of the project. In any case, no recognition or monetary gain is sought.

The email was clearly written by someone who has the technical knowledge and is concerned about the network. It was also found that the alias had a recent pull request for Lightning, thus it's an active developer.

Technical barriers to success

In the message, the contributor has noted that the technical design of the LN will hinder any attempts to make seamless multi-asset conversions.

He went on to present his reasoning in the space of the American call options. He questioned the ability of Lightning Channels to be used for Options trade in a scenario where the value of an asset changes significantly during a particular trade window.

Detailing the core issue, the coder feels that “The root cause of this significant technical barrier is the use of hashlocked timelocked contracts to route payments.” He fears that trying to use the LN for multi-asset exchange will leave vulnerabilities that will have disastrous consequences. The email warned

” If cross-asset exchange nodes on Lightning Network exist, they will be exploited to create risk-free American Call Options. They will find that significant liquidity will be tied up in such American Call Options, and find that they will lose funds especially at times of volatility.”

Going a step further the email details various use cases where hashlocked timelocked contracts may function as American Call Options.

This is when he feels that “across assets, the ability of HTLCs to create American Call Options becomes troublesome.” Thus he is clearly not in favor of trying to modify the LN for this purpose.

American Call Options: a larger problem

As noted, ZmnSCPxj feels LN is handicapped by its technical design so seamless multi-asset conversion is not possible. Traders are able to manipulate the setup and, when there is a rate fluctuation, could potentially take advantage of their existing contract. Thus making transactions via Lightning Channels unviable. An issue that is nonexistent for single asset transactions.

Furthering this point, the impassioned writer noted that as Lightning UX would not otherwise survive, payment failures are free. This means

” American Call Options[are] free of premium [and] creating such options would be riskless, allowing potential earnings upon any strong volatility of exchange rates. This implies that a multi-asset Lightning Network may not be economically viable. Instead, Lightning Network would strongly prefer having a single asset across the network.”

This open letter highlights the limitations of the LN. Undoubtedly the rationale of the email was to bring forth the idea that if Lightning Network wants to handle multiple assets then it will have to transform from its current form in such a way, so as to permit it seamlessly.

Any viable solutions?

At present, there are too many loopholes that can not be adequately filled. A solution suggested was to make users bear the cost of a “payment failure.” While many others are discussing amending a special mechanism or developing an entirely new way to deal with this issue.

Addressing the concern another developer, Tamas Blummer noted that, “Although there is no escape from above reasoning, a market maker could still be profitable as long as the option is worth less than the bid-ask spread.”

Thus, he opines that it is not that the LN multi-asset solution is not viable, it is ” that there is lower bound on bid-ask spread, that of the option premium.”

It is always heartening to see a vibrant debate about how to tweak a technology to futureproof it. Lightning Network is supposed to be the answer to the scaling problem of the Bitcoin network. If Bitcoin is going to market itself as the premier crypto it certainly needs to handle multi-asset swaps.

While there might not be any quick answers, the right questions will certainly beget a viable solution.

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