Bitcoin's Lightning Network is Now Digital Asset Compatible

With Bitcoin's Lightning Network nearing launch, the number of tests seeking to upgrade the micropayments network is on the rise.

Now, industry startup Colu has unveiled a demo of how Lightning could be made compatible with colored coins (a technology that enables small amounts of bitcoin to represent other assets, such as the US dollar, stocks, or even houses or cars). Mashing this concept together with Lightning could mean more of these transfers at a higher speed.

Users can now send test transactions over the so-called "off-chain" network using Colu's demo, which perhaps offers the first user-experience for a Lightning Network project. The team worked with the startup Lightning Labs, tweaking its existing code to make it compatible with colored coins.

But are near-limitless transfers of mortgage records really necessary?

Colu co-founder and VP blockchain Mark Smargon said that he thinks that this functionality could help solve one of colored coins' bigger problems, while conceding that it might not be necessary for every use case.

He told CoinDesk:

"The biggest argument against colored coins is it doesn't give you scale right now. Bitcoin transactions are very slow to verify, expensive to approve and there is a bottleneck of the low amount of transactions per second."

He argues that the low-hanging fruit for this functionality is local currencies, a use case that has become a big focus for Colu, which raised nearly $10m earlier this year in its bid to narrow its focus from colored coins more broadly.

An interface for the idea

A couple of years ago, we saw the peak of debate over the size of a field in bitcoin's code (called OP_RETURN) that companies and developers use to store extra data on the blockchain for use cases such as colored coins.

Another small tweak to the protocol, it emerged as a contentious idea because of the possibility that it could "bloat" the blockchain in a way that harms overall scalability. Since all volunteers that are running bitcoin nodes need to store the extra data, the argument was that transactions that weren't peer-to-peer digital currency exchanges were perhaps unwanted freeriders.

But as Smargon suggested, making colored coins compatible with a platform that grows the network from roughly three transactions per second to millions of transactions that occur off-chain could mitigate the issue.

The demo shows how users might see this process.

Once you click the page, a new Lightning account is automatically created (the random string of numbers that it calls your "Lightning ID"), and it starts the user off with fake money ($5,000) that he or she can transfer over Colu's colored coins-compatible test version of the Lightning Network.

This is a demonstration of how the bitcoin in your account can represent US dollars with the help of the OP_RETURN field that adds more information about what the bitcoin are "colored" to represent.

Smargon explained how channels can be updated using the same pattern that Lightning Network already uses.

Once a "colored" transaction with OP_RETURN is initiated to open a channel, the channel parties can update the value back and forth off-chain. When it comes time to settle on the blockchain, the OP_RETURN data will reflect the finalized balances.

Charging ahead

Behind the scenes, the demo runs over "simnet," a simulated private bitcoin network run by Colu.

Smargon said that it would work much the same on the bitcoin testnet and that it's ready to go on the real bitcoin network, at least, if and when a feature known as Segregated Witness is triggered on the main bitcoin network that will the enable Lightning Network.

(Miners can begin signaling their support for the feature once a certain number of blocks have been added — probably as soon as 18th November).

For now, the demo's a taste of what the network might look like once it’s ready for users.

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Colu and Lightning Labs.

Rainbow lightning image via Shutterstock