Earlier this year Blockstream deployed a small test store with payments being settled on the Lightning Network. Soon after, Lightning Labs and Acinq, also working on the development of Bitcoin's second layer solution, went onto the Mainnet with their offerings. And growth has been remarkable. Nodes are up by 8600% and the Bitcoin funds on the network are up by 3600% from the start of the year. It’s less clear, however, whether the concentration of capacity amongst the largest nodes will improve with more adoption.

The Lightning Network (LN), the second layer payment protocol primed as the solution to Bitcoin’s scalability woes, has been growing in popularity - and quite rapidly. The LN, which leverages smart contracts built on top of Bitcoin, allows for near instant, low cost and scalable transactions between two parties.

The number of nodes as well as the fund capacity has been steadily increasing ever since Lightning Labs, one of the three development teams actively working on the LN, officially launched the beta version in March (see table). The LN currently has more than 2,500 nodes, 7,800 channels and a total network capacity north of $150,000. On average, each node has more than 4 channels open and each channel has an average capacity of $20.

But while the capacity and the number of nodes as well as channels are increasing steadily, the reliability of successfully routing a payment on the Lightning Network is still quite low, especially for larger amounts. The success rate for a payment for no more than a few dollars between random LN nodes is 70% (see chart).

A current woe facing the LN is that it's not ideal for sending large payments. If only the nodes that have at least one channel with sufficient capacity to route the payment are considered, the probability of successfully routing the payment of less than $200 between random LN nodes is a mere 1%. However, there is an effort underway for what developers have dubbed as the Atomic Multipath Payment (AMP), which would allow large LN transactions to be split into many smaller transactions and then would be automatically joined back together.

While LN is still in Beta, Individuals might become more willing to lock up more funds as the development teams iron out kinks, which would result in a higher probability of successfully routing a payment.

And an increase in merchants accepting Bitcoin for payment of goods and services would also be key to the growth of funds on the network. Acinq, which currently holds close to 5% of the total BTC capacity on the LN has already addressed this with their launch of Strike, a Lightning payment processor (Diar, 11 June).

|| START OF A TREND?

One of the criticisms of the LN is that transferring funds requires that the sender, receiver, and intermediaries through which the transaction is routed to be online at the time when the transaction occurs. Unlike sending the transaction on chain, it is impossible to send funds to someone who is offline. It is more convenient to open a channel with someone who is always online and has enough liquidity to route even larger transactions.

This leads to another criticism of encouraging the creation of large hubs. The lack of liquidity between nodes, and the online factor, has led to the concentration of capacity to only a few large nodes. Ten of the largest LN nodes (0.4% of total nodes) currently have 53% of the network’s capacity while the remaining 2,500 nodes have 47% (see table).

|| KYC REQURIMENTS TO BUCK TREND OF LARGE HUBS?

While these hubs exert no control over the network, they could, technically be considered money transmitters, should regulators see it as such.

Bitcoin expert Andreas Antonopoulos said in January “I don’t think Coinbase will run Lightning, and I think there are many reasons why we’re not going to see regulated exchanges run Lightning Hubs. They have a fully KYC/AML-ed customer on one end of their connection, but if they receive a payment that’s going to that customer over the Lightning Network, they have no idea whether that customer’s the final destination. If they receive one coming in from that customer, they have no idea if that customer’s the origin, which means their KYC just fell apart – completely fell apart.”