Scaling bitcoin to billions of self-custodial users with the lightning network creates many new usability issues.
Some of those issues include:
liquidity and uptime requirements
Lightning services offered by third-parties aim to solve these issues.
This section covers two categories of lightning services: Lightning service providers (LSPs), which focus on onboarding and providing connectivity to lightning users, and lightning wallet servers, which provide additional services not relating to connectivity.
To use lightning, a self-custodial user needs at least one payment channel. To send payments, this channel needs outbound liquidity, which the user usually provides. And to receive payments, this channel needs inbound liquidity, which needs to be provided by someone else.
Finding someone offering inbound liquidity and opening a channel with them can be difficult, especially for new users. LSPs provide inbound liquidity and open channels for users.
LSPs can alter how they open channels to achieve unique user experiences. These can come with additional trust or privacy trade-offs, so users should be made aware of these and be able to opt out if used.
Below we dive into the different ways an LSP can open a channel and the unique user experiences they can offer.
A user may only have on-chain bitcoin to fund their lightning wallet with. An LSP can allow users to open a channel using an on-chain payment with a swap.
LSPs will need to provide enough inbound liquidity to forward the payment to the user. They often provide more than the forwarded payment amount so the user can receive additional payments with the channel.
Opening a payment channel first requires an on-chain transaction to be confirmed, which leaves users having to wait to spend the bitcoin in their channel.
A zero-confirmation channel allows users to use the channel without it being confirmed on chain. This makes it faster to onboard users, though comes with trust that the LSP will not cancel the transaction after payments are made.
Once a user is connected to the lightning network, likely through an LSP, lightning wallet servers (LWS) offer services that make using lightning easier for users. LSPs sometimes offer LWS services as part of their offering but this is not exclusive to LSPs.
LWSs act as trust-minimized third parties, so when possible, users should be able to opt out and operate their lightning wallet manually.
Below are some LWS services and the user friction points they solve.
Payment channel states need to be backed up each time a payment is received or sent. Users can make these backups, though if done incorrectly or stored insecurely, users are at risk of losing their bitcoin.
An LWS backup service can automatically back up and store a user’s channel states whenever they are updated. Giving the user the option to encrypt their backup prevents the LWS from stealing funds.
Backing up your lightning wallet with a single LWS breaks non-freezability, meaning they can refuse to hand over your channel states when recovering.
A lightning wallet must be online on a regular basis to track it’s payment channels for cheating attempts. A daily spending wallet, in particular, is offline whenever the user stops using the app. This means there is a greater risk of cheating attempts.
A watchtower service can fix this. Watchtowers monitor the payment channels of offline users. If a counterparty attempts to steal a user’s funds, the watchtower can step in to help. The watchtower can prevent the theft by submitting a justice transaction.
It’s best practice to use a watchtower that is not controlled by the user’s LSP. This way, the watchtower has no incentive to cheat the user.
Multiple watchtowers can be used to limit the chances a users counterparty will collude with the watchtower.