In light of the recent LN weaknesses discussion, this is a reminder that even when it works, being a “bank” as a hub is a requirement and is part of the LN specs.

The Lightning Network specs clearly outline that “bank-like” hubs must exist for the network to operate at all.

In the specs sheet, it is stated that Lightning Network hubs must have enough buffer capital to support most of the transactions routing through them, at the risk of a penalty if they don’t.

To quote their blog on that:

“Essentially, within a given period of time, some of a routing node’s users will be spending, while others will be refilling. However, there will be times when funds will happen to be moving in the same direction (e.g. more spending than receiving). In these situations, a routing node must maintain enough “buffer capital” to be able to wait until the flow of funds reverses and channels return to a more balanced state. Routing nodes that don’t contribute enough capital to handle periods of imbalance will experience channel exhaustion (when a node has no funds remaining in a channel) and routing failures.

This type of failure should happen relatively infrequently, because nodes that produce these routing failures will be routed around and eventually disconnected by other nodes. Thus, node operators have a strong incentive to provide enough buffer capital for the number and volume of inbound channels they’ve accepted (and implicity agreed to support).”

Basically, if they fail to provide such capital, I.e., liquidity, they’ll be routed around and eventually casted out of the network.

Now, we already know two things:

1. Lightning Network hubs are going to operate on a for-profit basis, generating revenue from routing transactions at the expense of miners.

This of course butchers the delicate Nash-equilibrium which Satoshi designed in bitcoin and renders BTC an alt-coin with a skewed incentive and value-stream model.

1. Lightning Network hubs are money processors.

Onion routing or not, since they need to stake large amounts of BTC in what’s always-online systems/watch-towers, it will be easy to coerce them into KYC/AML regulations or otherwise they’ll be literally disconnected off the internet, or worst, swatted.

With net neutrality almost dead, we know how easy it will be for ISPs to disconnect such hubs at the whim of the man.

What we don’t know still is, how large do these hubs need to be? How much bitcoin do they need to own and stake in order to operate as liquidity providing hubs without being routed around?

Are we talking DeutscheBank and Barclay’s scale eventually? Or is it more Coinbase scale? Or Luke’s basement fridge node?

Will Carol who is featured in the Lightning Network blog linked below really get to operate her Lightning Network hub for much longer, Ms. Stark?

https://blog.lightning.engineering/posts/2018/05/30/routing.html

submitted by /u/wisequote
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from Bitcoin - The Internet of Money http://bit.ly/2ERVCzh