TD₿: The Barely Discussed, Incredible Benefit of the Lightning Network by Guy Swann
TL;DR Lightning could change how exchanges handle and custody bitcoin and could help prevent nefarious activity in the future.
Hey Bitcoiners,
If you have been unfortunate enough to peruse mainstream media this past week, you will have seen two things:
1.) A dumbfounding leniency towards Sam Bankman-Fried and other FTX executives despite them having allegedly committed one of the biggest frauds in the history of finance.
2.) They are blaming the failures of various centralized third parties on a decentralized monetary protocol, Bitcoin.
It shouldn’t be too hard for anyone to understand why Bitcoin shouldn’t be blamed for the blowups of over-levered, shady companies run by “crypto” advocates. Bitcoin is just money. Blaming Bitcoin for the follies of alleged criminals is like blaming the dollar for Bernie Madoff’s Ponzi scheme.
The reality is, outside the Bitcoin protocol itself, the broader crypto ecosystem has grown more and more centralized in that it is dominated by centralized exchanges like Coinbase, Binance, and (formerly) FTX.
Coinbase CEO Brian Armstrong just announced that Coinbase provides custody services for around 2 million bitcoin!
The good news is that a record amount of bitcoin has been withdrawn from exchanges in the aftermath of the FTX collapse.
The problem is that exchanges like Coinbase still have custody of a lot of bitcoin, and every Bitcoin transaction that occurs internally at these centralized third parties does not occur on-chain and, thus, is not secured and validated by the Bitcoin protocol.
Any user of these exchanges has to trust that these exchanges are being honest that the bitcoins they hold are secure and that they are not sending the bitcoins elsewhere to be used nefariously (cough…cough…Alameda/FTX).
What’s cool is that in the future, the Lightning Network may help eliminate this problem. By becoming a Lightning node themselves, exchanges could, in theory, relinquish custodial control of their users’ funds and facilitate transactions between user Lightning channels without ever taking custody of the bitcoin itself.
This would help prevent shady internal transactions from occurring at these exchanges that are unknown to the users and can’t be verified on-chain.
Guy Swann wrote this blog post years ago that covers this idea, and I still think about it from time to time, especially in light of recent events. (02/23/2017)
The Lightning Network is still young and growing, but it’s exciting to think about various ways it could improve things beyond enabling fast and cheap payments for the world. The possible use cases around the Lightning Network are mind-boggling.⚡
Bitcoin was definitely not the problem when it came to the recent contagion spreading through the “crypto” industry, but it, and the protocols like Lightning built on top of it, will likely provide solutions to help prevent these fiascos from occurring in the future given its transparent and incorruptible nature.
Tick tock next block,
Sam Callahan
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Nicely said. I'm not sure how likely that course of action is, because it would kneecap efforts at implementing CBDC.