The Final Word on the Lightning Network
Happy new year to everyone in the Bitcoin Cash community! 2019 was a good year for Bitcoin Cash and I'm looking forward to an amazing 2020.
Overall, I think the Bitcoin Cash community should keep their nose to the grindstone, and focus on building and adoption. Our real competition is the US dollar and other fiat currencies. BTC and the Lightning Network are a distraction and will fail on their own.
That said, I have a few additional thoughts on the Lightning Network. My hope is by documenting these in an article now, it will free up mental resources for 2020. If the questions come up, we can simply point to this article and not waste time arguing with shills and trolls.
My earliest articles accurately predicted that LN would centralize into a hub-and-spoke network. This is the only way it can scale, mathematically. Despite all the noise from the trolls, my predictions have already proven to be true.
But the goalposts have already moved. LN is now more widely recognized as the hub-and-spoke model that it is, but proponents still make the claim that it doesn't matter in terms of permissionless, uncensorable money. Their argument is that you can "route around" any Lightning hub that would attempt to censor you.
As I've explained in the previous articles, the big difference between the normal Bitcoin system and Lightning is that ANY miner can put your transaction in a block, whereas with LN, if you want to route around a hub, you'd have to close the channel with them and open a new one with a different hub. This requires an on-chain transaction, which is the very thing that LN tries to avoid.
But let's play devil's advocate and jump to the next logical counter-argument that LN proponents would make. They would say that even if it costs money to switch hubs, game theory would prevent hubs from becoming censors in the first place, since no one would use those hubs.
There's 2 main holes in this argument.
First, hubs will not actually lose business by offering more permissioned solutions. In the BTC-maximalist utopia, everyone is using BTC, but that would necessitate huge fees to make an on-chain transaction. Thus most ordinary people will not even get to touch the base layer. They would be onboarded onto Lightning not by making a BTC transaction, but by signing up for a service. In order to exchange their fiat money for bitcoin-backed Lightning, they would have to go through AML/KYC procedures just like you would do today if you were using an exchange.
AML/KYC on-ramps are a necessary evil today, but at least once you get your money into crypto, you can move around as you please. But this wouldn't be the case on Lightning if the hub can control where you send your money (exchanges already do this today), and it is cost prohibitive to withdraw your funds to the actual blockchain.
But for the sake of argument, even if we imagine that everyone could afford to pay the base layer fee and onboard themselves, we know that most people will trade some amount of privacy for convenience. It is easy to imagine that large hubs could offer perks for good minions that follow whatever policies the hub wants.
The beauty of the Bitcoin system (without Lightning) is that not only is it free to "switch miners", it's also completely automatic. If a miner doesn't include your transaction in a block, and you do absolutely nothing about it, it will just sit in the mempool until another miner picks it up.
Even if there was 0 cost to on-chain transactions, the fact that you have to do anything at all in Lightning to "route around" a hub, makes the system much more conducive to incrementalism, the trading of sovereignty for convenience, and the erosion of permissionless spending.
The second general reason by which "hubs won't censor" is false, is that there is an entirely different set of "rules" that govern the behavior of cartels in Bitcoin mining vs. Lightning.
Mining pools can behave like a cartel, but hashrate providers can easily switch pools. Although pools are powerful, their power comes from network effect, first mover advantage, and so on. The actual hashing power is provided to them by their customers, who are widely distributed.
By contrast, with Lightning, the power of a large hub is from the liquidity they control, which requires owning a lot of money. This cannot be outsourced. Thus, hubs are powerful simply because they are the big fish. And when a group of the big fish form a cartel in this system, there is nothing to "shake them up" that's analogous to hashrate providers switching pools.
A large cartel in Lightning can force users to comply with whatever rules they want, since users rely on them for liquidity. An important caveat here is that a 51%+ cartel of miners can also do this, IF they are willing to reorg blocks and become a monopoly. However, reorgs are generally viewed as malicious already, and they are harder to do because of the fact we just mentioned: that hashrate can switch pools.
Using the lightning network to scale bitcoin has always been a broken idea. Users should educate themselves on why this is so, but then they should avoid wasting too much debating it. Instead, we should focus efforts our on building permissionless peer-to-peer cash for the world.
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