Lightning Labs Brings DeFi to Bitcoin With Lightning Pool

Lightning Labs, a software development firm for the Bitcoin Lightning Network, a system of channels that allows people to send Bitcoin quickly and cheaply, today announced a way to trade funds locked up in the network.

Lightning nodes—computers that coordinate how to process Bitcoin transactions on the Lightning Network—don’t have access to the information that helps them determine how to fund those transactions, and other node operators don’t have a way to notify nodes that they need liquidity. 

To solve the problem, Lightning Labs today came out with Lightning Pool, a marketplace where node operators can buy the liquidity they need to run the network. This helps everything run smoothly, but it also creates a new way of making money on the Lightning Network. 

Nodes that usually send liquidity can use the Lightning Pool’s auction function to work out where to send liquidity to parts of the network under stress, and earn money for doing so. Nodes that are set up to receive liquidity can use the Pool’s auction to work out the best channels to buy from.

Theoretically, this should make it easier for people to make money from the Lightning Network. 

Said Lightning Labs in an explainer: “Businesses and node operators can use Pool to streamline their channel management processes and focus on acquiring customers instead of access to liquidity.” It also makes the network “more reliable, resilient, and efficient for all participants,” it said.

It’s calling it “LiFi,” because the whole thing’s non-custodial and because it sounds like DeFi, or decentralized finance, which refers to (generally Ethereum-based) non-custodial financial protocols that pay people for providing liquidity to exchanges and lending protocols. 

Now that’s coming to Lightning Network. On LiFi, “Pool sellers can earn yield on real bitcoin without trusting a third party or losing custody of their funds. This yield is earned from buyers on Pool willing to pay a premium for access to new capital on Lightning without counterparty risk.”