Lightning swaps *are* the connective tissue
Arkade's hijacking of the Baltic Honeybadger point-of-sale system was rightly the event's headliner, but it also proves that Lightning will be bitcoin's interoperability layer...
There’s two conflicting camps in bitcoin scaling at the moment. One camp is insistent on taking technologies from other ecosystems and applying them to bitcoin. Examples of this include projects building rollups and EVM-compatible sidechains. The other camp is looking to build out what I call bitcoin-native protocols – systems that maintain compatibility with bitcoin UTXOs and enable users to unilaterally exit a protocol with pre-signed bitcoin transactions. Examples of this include Arkade and Spark.
Regardless of which camp you’re in, it’s worth reiterating that these systems don’t natively integrate with each other. For example, a user of a Spark wallet can not directly pay a user of an Arkade wallet. The systems are independent in their design and have different methods for coordinating offchain transactions.
To solve this, teams have consciously designed these systems to communicate with the broader bitcoin ecosystem. All systems coming to market are integrating with Lightning Gateways that connect their protocol to the Lightning Network. The idea of “Lightning as a connective tissue” has been touted by some as the logical path forward for the bitcoin layer 2 systems. Others, myself included at times, have called it cope.
The connective tissue notion argues that Lightning, while a self-custodial bitcoin L2, will trend towards institutional usage. The user complexity of managing channels has seen users opt for different solutions, but these new solutions will still be able to communicate with Lightning so that bitcoin has a universally accepted messaging layer and settlement system.
Not going to lie, at first, I thought this idea was bullshit. But as I’ve followed bitcoin L2 developments over the last 18 months, I can’t deny that all protocols coming to market, especially those that are truly bitcoin adjacent (meaning, no shitcoins), are leveraging integrations with the Lightning Network to ensure they can communicate with different protocols.
The connective tissue case was strongly made in Riga
This evidence was on full display in Riga last week. Ark Labs took Baltic Honeybadger by storm with their announcement that every payment that a user made at the event was facilitated by Arkade on the back end. Conference goers paid for goods and services with Lightning, and Lightning compatible, wallets (niftynei can confirm). But on the back end, merchants received Arkade VTXOs. These VTXOs are claims on Bitcoin L1 UTXOs that settle periodically with the help of the Arkade operator. How this worked:
To start the transaction process, the Arkade merchant gives Boltz a payment hash of the preimage. Using this hash, Boltz creates an invoice on their Lightning node that eventually gets sent to the paying user’s wallet. Let’s say it’s a Fedi wallet.
When a Fedi user scans the invoice, they take the invoice to their Fedimint Gateway. The Fedi user then locks up Ecash that will be spendable by the Gateway only after the gateway pays the invoice and receives the preimage as their proof of payment. Since the gateway charges a fee for this service, they’re incentivized to initiate the lightning payment. Boltz receives this payment “attempt”.
After receiving this attempt, Boltz, the Lightning Gateway for the Merchant, creates a VTXO contract, on Arkade, that is locked to the same hash that was provided by the Arkade merchant at the start of the transaction. The Arkade merchant then claims the VTXOs by revealing the hash preimage. Boltz uses this same preimage to claim the Lightning payment, and then the preimage is passed to the Fedimint gateway which uses the preimage to unlock and claim the Ecash from the payee.
The transaction is finalized.
A preimage is used as a “proof-of-payment” in the Lightning Network. After they’re generated by the recipient, only hashes of the preimage are initially given to payees. Payees then create contracts that basically state “I paid you this much if you can reveal the full preimage for this hash”. After the receiver reveals the preimage to the payee, the payment finalizes as the preimage satisfies the contract initiated by the payee.
After receiving VTXOs, merchants trust that the Arkade operator will collaborate with them to settle their newly received VTXOs into a new Ark round. Merchants no longer need to manage channels and inbound liquidity, but they must participate in a Batch Output transaction, with the Arkade operator, to settle the transactions and have unilateral, and irreversable, custody of their funds.
As mentioned in their Twitter thread, this doesn’t mean the merchants are operating Lightning infrastructure directly. It means that they operate a system that enables users of Lightning, Spark, Arkade, and even Ecash wallets to pay the merchant through service providers that communicate with each other over the Lightning Network. Any user of a Bitcoin second layer that interfaces with Lightning can transact with any other bitcoin second layer, since the protocols can execute swaps through Lightning, seamlessly handling inter-network exchange.
This arguably simplifies running a bitcoin point-of-sale system since merchants won’t need to care what network they’re users are on and vice versa.
This use case isn’t restricted to merchant payments. Also in Riga, two bitcoin developers engaged in an Ecash to Arkade transaction. Ecash notes can not be transferred to Arkade users directly. Swap providers, on both sides of the payment, execute the transfer across the Lightning Network.
In Riga, the Fedimint user initiated the payment request to their counterparty by swapping locally minted Ecash with the Fedimint Gateway. On the Arkade side, the user received a VTXO that was swapped to them via Boltz who generated the invoice, and received the payment, on the Lightning side. This payment was executed just like our example outlined above.
Users in this scenario don’t need to have channels open with each other directly. They don’t even need to be on the same network. Instead, they used systems that are able to communicate with a “bridge” protocol: the Lightning Network.
New bitcoin layers further confirm this trend
This trend is not isolated to events in Riga. It’s been gaining steam for months.
A few weeks ago, bitcoin Twitter was engulfed with Wallet of Satoshi’s Spark announcement. Wallet of Satoshi is building a payments wallet built on top of Spark, Lightspark’s implementation of a Statechain protocol. Instead of opening a channel with a counterparty, users deposit funds into a 2-2 multisig with the Spark Operator.
Having a central party, the Spark Operators, coordinate transfers across a network improves the user experience. Shortly put, the trust assumptions of a statechain are superior to custodial solutions but are greater than that of self-custodial Lightning. Plenty of users are willing to take on a stronger trust assumption related to the operator for an improved user experience. The reason can is because the Spark developers ensured that their network deployed Lightning Gateways from launch that accept Spark vUTXOs in exchange for paying Lightning invoices.
Wallet of Satoshi is not, literally, a “Lightning wallet”. It is a Spark wallet that can engage in Spark transfers. Users can use Spark transfers to engage with Lightning gateways that swap Spark vUTXOs for Lightning liquidity. Yes, Wallet of Satoshi users would’ve been able to pay for goods in Riga to merchants using the Arkade protocol. All through Lightning swaps.
“What’s most impressive? It’s completely invisible from the wallet experience. Users won't even notice Spark powering their wallet, and that’s exactly how we think infrastructure should be.” — Lightspark
Not competitive, but rather, an evolution
These developments aren’t competitive with the Lightning network. They’re an evolution of the network, from a purely peer-to-peer payments system, to additionally being a communication layer between various bitcoin-adjacent protocols.
Users will leverage different Bitcoin layers for different reasons. They might prefer distributing funds across various Ecash mints and leveraging multi-nut payments. Others might enjoy using Spark wallets as they have to deal with the complexity of managing channels and can receive payments directly on Spark without making a bitcoin transaction. Merchants may prefer to receive L2 payments over Arkade as it that them bitcoin finality without the need to manage channels.
Whatever the use case, it’s very clear that users of Cashu mints, Fedimints, statechains, ark protocols, sidechains, rollups, and more, will all be able to interoperate through the Lightning Network. Headlines will rightfully claim that this is a win for newly developed networks like Arkade. We should also maintain that bitcoin’s OG Layer 2, Lightning, is providing a platform that seamlessly facilitates instant, global commerce.
The connective tissue meme is playing out in real time. Enjoy it. It’s beautiful.
Want to see the different types of Layer 2 networks that are coming to market and integrating with Lightning? Bitcoin++ is hosting its Scaling Edition in September. Topics will range from new Layer 2 systems coming to market and the infrastructure supporting them. Tickets are onsale now. Use code INSIDER before August 21st to get 21% off your ticket.
it's cool to see swaps making subsystems in bitcoin interoperate!