Submarine Swaps

Future of Bitcoin – Bitcoin Lightning Network and its Components

After years of design and development, the first Lightning implementations are now in beta. Since then, more nodes are appearing every day, a growing number of users are opening channels with each other and some merchants have even started to accept payments via Bitcoin Lightning.

But of course these are still the beginnings of the Bitcoin Lightning Network

While the major implementations, some wallets and other applications are already available, the payment network will improve over the next few years in areas such as network architecture, security and ease of use. Below you will find the most important Bitcoin Lightning projects currently under development.

The Lightning Network consists of a number of payment channels. Each payment channel exists between two users, so funds can be sent back and forth between them.

However, at this early stage of development, the payment channels can only be funded by one of the two parties. The financing party must first make a payment with the counterparty, only then can the counterparty make a payment within the payment channel.

However, the Lightning Network whitepaper suggested Dual-Funded Channel, for which ACINQ, the company behind eclair, has now also proposed a specification. As the name implies, both users could finance a payment channel by depositing Bitcoin. This should give Bitcoin Lightning users more flexibility, as they can pay immediately after opening a channel.

Submarine Swaps

In order to make a Lightning payment, users must deposit money in the form of Bitcoin in a payment channel. Once in a channel, these funds cannot be sent to regular (on-chain) Bitcoin addresses (unless the channel is closed). This means that Bitcoin in a Lightning channel is different from Bitcoin in a normal wallet. But there are suggestions to make the switch between Lightning and on-chain payments more seamless.

One solution is Submarine Swaps. Developed by Alex Bosworth (but previously designed by Lightning Labs CTO Olaoluwa Osuntokun), Submarine Swaps essentially allows Lightning to send payments to an intermediary in the Lightning Network; this intermediary will thus send a corresponding amount of Bitcoin to a regular (on-chain) Bitcoin address.

It also works the other way round: users can send regular on-chain payments to the intermediary; this intermediary then sends a corresponding amount of Bitcoin to a receiving Lightning Node. It is important that this conversion is „atomic“ for Submarine swaps. With a trick already embedded in the Lightning Network, Lightning payments and on-chain payments can be effectively linked. This makes it impossible for the intermediary to steal funds by not forwarding the payment.