Over the past 15 years, Bitcoin has visibly changed a lot from a social, political and monetary point of view. Going from a digital currency that amused a few geeks on the Internet to a financial asset that is attracting the attention of banks, businesses and governments worldwide.
However, few people know what is going on under the hood of Bitcoin, or rather how Bitcoin technology works and evolves. This is because the development of Bitcoin is quite slow and complex. Bitcoin’s development philosophy is based on ossification. That is, any changes to Bitcoin must be made without changing the rules of the past so that all nodes can remain compatible.
Compatibility between a large number of nodes is necessary in order to preserve the decentralized aspect of Bitcoin. This stands in stark contrast to the development methods of other cryptocurrencies, which rely on faster and drastic iterations of their protocol.
This particular type of development leads to carefully considered solutions that take years to develop.
In this article, we will explore a new solution recently implemented and implemented called Splicing. You will understand how this complex technology benefits Bitcoin and Lightning Network users.
The Lightning Network
Before launching into an explanation of Splicingit is essential to understand the second layer payments protocol that is Lightning Network for Bitcoin. As the name suggests, it is a network that is layered on top of the Bitcoin network.
This solution was proposed in a white paper in January 2016 by Joseph Poon And Thaddeus Dryja. This solution has evolved significantly since then, with dozens of companies and hundreds of developers contributing to its development. The main goal is to offer an alternative to transactions carried out on the chain. Lightning transactions are carried out off-chain and therefore they are never recorded in the Bitcoin blockchain.
Consequently, Lightning transactions are almost free and instant. All because they are not subject to Bitcoin’s protocol rules.
The Lightning Network works thanks to a network of nodes (peers) interconnected with each other which form liquidity channels. To create a liquidity channel, you must first complete a transaction on the main chain. For example, user A forms a liquidity channel with user B for the equivalent of 1 million satoshi, or 0.01 BTC. Thanks to this channel, he will be able to send a multitude of payments according to his preferences. Depending on the nature of the transactions, it could send 10 transactions of 100,000 satoshis, 100 transactions of 10,000 satoshis, or 1000 transactions of 1000 satoshis. This relationship is bidirectional; After receiving funds from user A, user B can send the funds back to user A as they wish.
There is no limit to the number of transactions that can be made. However, once users A and B want to terminate their transactional relationship, the liquidity channel must be closed and an on-chain transaction must be performed to finalize the amount that is owed to each.
Anyone is therefore able to operate their own node and open its own channels. However, in reality, these days, most users use services that will do this for them. Lightning wallets connect with professional nodes that have lots of liquidity and connections in the network. This means that a person who wants to make a payment via the Lightning Network to buy a coffee, for example, does not need a direct liquidity channel with the merchant.
Thanks to the interconnected nature of Lightning and a payment routing method, the payment successfully finds its way from the customer to the merchant. Obviously, professional nodes that hold a lot of liquidity do so for commercial purposes and will charge fees for routing payments.
A major challenge of the Lightning Network – rebalancing in liquidity channels
The Lightning Network is far from being a completed protocol and several players are working hard to resolve these issues. One of these issues is the constant need to rebalance liquidity in Lightning Network channels. Once a liquidity channel has been depleted of funds, but the need to make payments through it remains, there are few practical solutions currently available. Here are the remedies to which Lightning Network users have been entitled until now.
Close the channel and open another
Logically, it is always possible to open a new liquidity channel but this entails additional fees and waiting time because it is necessary to interact with the Bitcoin network.
Liquidity rebalancing
Each Lightning node is made up of inbound and outbound liquidity, or the ability to receive and send payments. This is a complex aspect of the Lightning Network that gives Lightning node operators a lot of headaches. It is possible to have a lot of incoming liquidity capacity without having outgoing liquidity, and vice versa. When there is an imbalance of this kind, a liquidity rebalancing must be carried out in order to continue to operate functionally. This is done by moving liquidity as needed between other nodes and channels in the network. However, as this involves movement of funds, transaction fees must be expected. Additionally, there is no guarantee that the requested liquidity will be available at that time.
As you can see, operating a Lightning node is not an easy task, this is where the Splicing join the game.
Splicing
Dusty Demon is the creator of the first implementation of splicing and the method was tested conclusively in May 2022. Simply, splicing involves resizing Lightning channels rather than rebalancing them. A user now has the choice of adding or removing liquidity to their Lightning channel without closing it or having to rebalance it with complicated methods.
Splicing is possible through the introduction of a trading transaction that invalidates the initial channel creation transactions and eventually replaces them with new ones. This avoids closing the channel and having to resort to a new channel opening transaction on the main chain.
If we take the example of users A and B at the beginning of the article, once user A has used all his liquidity, he can carry out a splicing transaction and add 1 million additional satoshis to his trading channel. liquidity. He can also decide to withdraw 500,000 satoshis and reduce his liquidity by half if he believes that he ultimately does not need it.
Benefits of Splicing
The main advantages of splicing are being able to avoid closing liquidity channels just to open others or having to carry out complicated, potentially costly rebalancing. However, its creator and several other developers place a lot of hope in this method to solve many other problems.
Better experience for the average user
On his site, Dusty Daemon explains that splicing will abstract the Lightning Network and the Bitcoin main chain. Many developers and businesses believe that having on-chain scale and having scale on the Lightning Network are too complicated concepts for the general public to understand. Ideally, a user should be able to use Bitcoin without worrying about whether they are making a Lightning or on-chain transaction. Splicing makes the two networks more interoperable, which can eventually lead to their merger from a user perspective.
Better liquidity for node operators
An additional Lightning channel management tool is always welcome for node operators to improve their liquidity offering. Splicing allows them to save on costs, improve their uptime and their service. The more efficient an operator is, the more likely it is that users will pass through its node to carry out transactions, thus increasing its profits. This news was also received with enthusiasm and certain Lightning implementations have already integrated it. The Phoenix wallet, which uses an implementation of the Lightning Network from the French company ACINQ, has already implemented this functionality. They reported a 60% reduction in Lightning transaction fees for its users.
Conclusion
Splicing is a revolutionary method of liquidity management in the Lightning Network, significantly improving the user experience. Since some companies have already started integrating this new method, we can expect splicing to be adopted by many wallets and Lightning node operators in the near future.
However, the limitations of this technique may prove to be greater than the advantages presented today, so it is important to remain on the lookout for its development.
https://lightningsplice.com/splicing_explained.html
https://voltage.cloud/blog/lightning-network-faq/why-do-lightning-nodes-need-inbound-and-outbound-liquidity/#:~:text=So%20if%20your%20goal%20in, able%20to%20forward%20the%20payments.
https://voltage.cloud/blog/lightning-network-faq/how-lightning-node-channel-rebalancing-works-simplified/#:~:text=It%20works%20like%20this%3A%20the,path% 20between%20the%20two%20channels
https://bitcoinmagazine.com/business/blockstreams-core-lightning-integrates-splicing-feature