Bitcoin in Layers: An Overview of the Ecosystem

Posted 3 months ago by LN+

In recent years, the Bitcoin Lightning Network has emerged as a prominent second layer payment system, augmenting the main Bitcoin blockchain. However, not everyone globally can or will operate their own Lightning node, due to factors like channel management fees and the technical complexity involved. With insufficient on-chain transaction capacity to directly serve billions of people and businesses, the evolution of multiple layers atop the Lightning Network and side chains is anticipated to meet global needs. Here's a breakdown of these layers and different types of Lightning Network nodes:

Bitcoin On-Chain

  • Function: Acts as the fundamental layer for monetary transactions, predominantly for savings and enabling payment layers through smart contracts.
  • Users: Several million private and business entities.
  • Technology: Basic Bitcoin full node.
  • Benefits: Highly secure and straightforward to operate.
  • Risks: Transactions can be costly and slow when the fees are high.

Side Chain Solutions

  • Function: Offers an on-chain-like experience with fewer drawbacks. Example: Liquid and Rootstock.
  • Users: Those needing confidential, offline and large bitcoin transactions.
  • Technology: Simple wallets or a sidechain node.
  • Benefits: Easy handling of any transaction amount. Cheap and relatively fast.
  • Risks: Potential risks with the sidechain federation.

Routing Lightning Node

  • Function: Facilitates payment routing across the Lightning Network.
  • Users: Services numerous Lightning nodes for payment routing.
  • Technology: A lightning node with hundreds of channels of varying sizes.
  • Benefits: Quick, reliable, and potentially revenue-generating through routing fees and selling channels.
  • Risks: Resource-intensive in terms of time and money. Lots of funds in hot wallets.

Non-Custodial Merchant or Exchange Lightning Node

  • Function: Geared towards businesses for receiving and occasionally sending larger payments.
  • Users: Businesses and bitcoin exchanges.
  • Technology: Node with sizable channels to mostly routing nodes.
  • Benefits: Low costs and risks, efficient and dependable payment for customers.
  • Risks: Requires continuous maintenance.

Custodial Wallet and Merchant Payment Lightning Node

  • Function: Optimized for high-frequency, bidirectional payments.
  • Users: Businesses catering to millions of clients.
  • Technology: Robust nodes linked to Routing Lightning Nodes and merchants run by professional node infra operators.
  • Benefits: Revenue from transaction fees and value-added services.
  • Risks: Security concerns due to large customer funds.

Family and Small Business Lightning Node

  • Function: Provides Lightning Network connectivity for a closed user group.
  • Users: Family or small business associates.
  • Technology: Nodes with private or high-fee channels to discourage routing and associated risks. Uses LNBits or similar account management software to separate out accounts.
  • Benefits: Low cost and risk, with stable performance.
  • Risks: Partial trust required for users.

Hobby Lightning Node

  • Function: Personal nodes for individual or small business use. For example Umbrel or Phoenix wallet.
  • Users: Private individuals.
  • Technology: Few channels connected to relevant nodes.
  • Benefits: Trust-free operation and full control over capacity and funds.
  • Risks: Limited receiving capacity unless incoming channels are purchased.

Fully Custodial Accounts

  • Function: Instant wallets for sending and receiving payments. Ex. Wallet of Satoshi or Speed Wallet.
  • Users: Private individuals and small businesses.
  • Technology: Basic wallets without a dedicated node.
  • Benefits: Easy to use, no maintenance required. Access to various value added services, such as a bridge to debit card systems, stable coins, gift cards, mobile top-up systems, subscription services, etc.
  • Risks: Dependence on custodian security. All funds and payment related meta information is at risk.

In conclusion, these layers collectively cater to a diverse range of needs, offering various benefits and risks. Continuous enhancements and new developments in the Bitcoin ecosystem are expected to further improve these layers and introduce novel solutions eventually allowing the entire world to be onboarded to the Bitcoin ecosystem.

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