The Last Mile Problem: Bringing Self-Custodial Lightning to the Masses
The Lightning Network is revolutionizing Bitcoin payments, offering instant transactions with minimal fees. However, while custodial Lightning wallets are flourishing, reaching the vast majority of users through platforms like Coinbase, Cash App, and Binance, self-custodial adoption remains a challenge, particularly for mobile users.
This disparity, often dubbed the "last-mile problem," is analogous to the hurdles faced in expanding transportation networks to remote areas. Just as it’s less cost-effective to build infrastructure in sparsely populated areas, enabling self-custodial Lightning for mobile users presents unique challenges compared to the established and dense network of custodial wallets.
As Bitcoiners, we believe in the mantra "not your keys, not your coins," underscoring the importance of enabling self-sovereignty for every user. To bridge this gap, we need to refine the user experience (UX) of self-custodial Lightning, making it comparable to the seamlessness offered by custodial options.
Two key areas requiring user experience improvement are:
Wallet interactivity: Currently, an open Lightning Node is required to sign a Hashed Time-Locked Contract (HTLC) for every payment, making the process cumbersome for mobile users who can’t guarantee constant online connectivity. Fortunately, the Lightning Network community is actively addressing this. ACINQ and Breez are exploring background notifications on mobile operating systems, while the Async Payments initiative proposes leveraging always-online Lightning Service Providers (LSPs) to forward payments even when a user’s device is offline. Moreover, Atomic Multi-Path Payments (AMP) in LND enables static invoices, allowing receivers to settle payments without active involvement from the sender beyond the pre-image reveal.
- Blockchain interactivity: Onboarding new users to a custodial wallet requires zero on-chain interaction once its channels are open. However, self-custodial users face on-chain transaction fees for channel creation, typically requiring confirmation within minutes. Operations like submarine swaps (moving funds from on-chain to LN) and channel splicing (resizing a channel) also generally entail on-chain transactions, albeit with potential cost savings by batching multiple operations.
This article focuses on blockchain interactivity as the primary obstacle to a seamless self-custodial Lightning experience, assuming wallet interactivity issues are being addressed. We’ll explore the ideal solution, dissect current market attempts, and propose future paths.
The Holy Grail: Channel Factories
The optimal solution, often referred to as a channel factory, would eliminate blockchain interactivity for self-custodial users. Imagine a partnership between a Lightning wallet company and a liquidity provider, jointly creating a dedicated multisig wallet. This channel factory would then enable:
- Instant channel creation: New users would be instantly provided with a direct channel, eliminating on-chain confirmation delays and fees.
- Off-chain channel management: Channel splices and liquidity reallocations would occur off-chain, drastically reducing costs.
- Batch confirmations: Periodically, all off-chain updates would be confirmed with a single on-chain transaction, achieving significant economies of scale.
Essentially, this envisions a world where channel factory nodes seamlessly manage on-chain transactions, delivering an experience comparable to custodial Lightning wallets’ instant transaction speeds and negligible fees.
This ambitious ideal, however, hinges on the development of covenants, complex scripting capabilities that allow for more sophisticated on-chain actions. While proposals for implementing covenants using OP_CAT, OP_CTV, and OP_CSFS exist, their practical implementation is still pending.
Alternatively, a channel factory could be realized without covenants by adding a trusted co-signer to the multisig wallet. This approach, however, introduces a new trust assumption, requiring the co-signer’s ethical conduct to prevent potential collusion with the routing nodes.
Ecash: Chaumian Bitcoin Banks
Recognizing the need for faster onboarding, Mutiny Wallet introduced a novel solution using Chaumian ecash. Instead of directly connecting new users to a Lightning channel, they receive ecash tokens in a Fedimint until a certain spending threshold is reached, after which they’re migrated to their own channels.
This design offers a similar on-boarding UX to the channel factory, removing blockchain interaction for both initial setup and ongoing user maintenance. Users enjoy instant payments with minimal overhead, owning a balance of coins without needing to manage individual channels.
However, Fedimints introduce additional trust assumptions:
- Ecash tokens are not Bitcoin: They lack the auditability and verifiability properties that define Bitcoin.
- Federation of Guardian nodes: Fedimints rely on a group of nodes for operational security. Any malicious behavior by this federation could potentially compromise user funds.
- Data loss: If the Guardian node federation suffers data loss, user funds might become inaccessible.
Despite these drawbacks, Fedimints are operational on Bitcoin’s mainnet. Fedi recently launched its mobile wallet, providing scaled access to a similar on-boarding experience offered by custodial Lightning platforms. Cashu, another Chaumian ecash protocol, has also seen development with several wallets in progress, though generally relying on a single custodian rather than a federation.
Sidechains: Federated Bitcoin Banks
The concept of connecting Liquid, Blockstream’s sidechain, to the Lightning Network has been explored for years. Aqua Wallet spearheaded this integration in 2024, leveraging Boltz, a submarine swap server. When users receive their first Lightning payment, their funds are converted to Liquid Bitcoin (LBTC), enabling payments on Liquid or swapping back to Lightning through Boltz. Unlike Mutiny, Aqua users typically don’t manage their own Lightning channels, instead using Liquid as the primary ledger. MiBanco, a similar wallet developed by Amboss, also utilizes this architecture.
This architecture, like Fedimints, provides users with a streamlined experience comparable to channel factories, eliminating on-chain interactions for setup and ongoing activity. However, sidechains introduce similar trust concerns and inherent limitations:
- Federation control: Liquid, like other sidechains, operates under the influence of a federation, raising concerns about potential abuse.
- Blockchain interactivity: While Liquid offers low fees and fast block times (1 minute), both are susceptible to congestion if usage escalates, potentially impacting Boltz’s ability to provide instant swaps.
In the coming months, a surge of Bitcoin sidechains is anticipated, many aiming to minimize trust through projects like BitVM, which facilitates secure bridges between the main chain and sidechains. These new sidechains are likely to adopt similar Lightning integration mechanisms, offering a custodial-like UX with the caveat of relying on a federated system, robust LN swap servers, and sidechain stability.
Ark: Self-Custodial Blockchain Banks
Ark is a relatively new proposal aiming to provide a trust-minimized self-custodial Lightning solution, ideally leveraging covenants on Liquid or through a Bitcoin soft fork on the main chain. Ark revolves around Ark Service Providers (ASPs) who accept user deposits (on-chain or via Lightning), process transactions off-chain as virtual transaction outputs (VTXOs), and enable on-chain withdrawals.
ASPs manage liquidity constraints, allowing users to receive payments off-chain without needing to establish their own channels. The ASP periodically reconciles the off-chain system with a single on-chain transaction.
Ark designs utilizing covenants closely resemble the channel factory ideal, offering a user-friendly experience with minimized trust assumptions. Users can receive payments without interactivity, and the ASP handles liquidity management for the entire system, simplifying operations.
The primary downside is the ASP’s substantial capital requirements. The available liquidity for VTXOs scales with off-chain transaction volume, as spent VTXOs cannot be reused until the ASP refreshes the system. This implies that for a $10 million weekly transaction volume, the ASP needs to provide at least $10 million of capital, compared with LN’s ability to reuse liquidity.
This limitation could be partially addressed by transforming each VTXO into a Lightning channel, effectively replicating the channel factory experience, though requiring periodic VTXO channel refresh signatures from users.
Ark designs without covenants, known as clArk, present a less user-friendly experience due to increased interaction requirements:
- Depositing funds: Requires cooperation, making direct deposits from non-clArk wallets incompatible.
- Receiving VTXOs: Asynchronous with ASP collaboration, akin to statechains, potentially vulnerable to collusion. Trustless receives necessitate simultaneous online presence of sender and receiver.
- Pre-signed transactions: Required for unilateral VTXO exit, mandating user intervention for every system refresh.
Essentially, Ark serves as a proto-channel factory, showcasing the potential for covenant-driven solutions while also demonstrating the complexity of building a robust system without them.
Conclusion
The ideal last-mile solution for self-custodial Lightning will be the most user-friendly, reliable, and cost-effective option for both users and wallet operators. Each solution will necessitate its own unique Lightning integration, with speed and go-to-market strategy playing crucial roles in onboarding users.
While custodial Lightning presently dominates in terms of usability, cost, and reliability, exciting developments with ecash, sidechains, and Ark offer promising alternatives that could reshape the self-custodial landscape. Covenants, if implemented, would transform the design possibilities for each solution, potentially ushering in the long-awaited era of seamless, self-custodial Lightning.
Bitcoin and Lightning are steadily becoming the go-to networks for global value transfer, especially with the advent of Taproot Assets, a feature supported by all last-mile solutions. However, to ensure self-custodial users are genuine participants in this emerging world, continued investment and development in these last-mile solutions are crucial.
As the landscape evolves, it’s essential to remain vigilant regarding the trade-offs inherent in each solution, carefully evaluating trust assumptions, liquidity requirements, and user experience factors to ensure a truly decentralized and inclusive Lightning ecosystem.
