The Lightning Network is still in the Innovator to Early Adopter phase of the Adoption S-Curve. Despite rapid growth, participants continue to have a unique opportunity to use minimal effort to capture a large potential upside in value. The creation of a node in under 2 minutes allows companies and individuals to have a stake in the Lightning Network and leverage this to build differentiating brands.
One of the interesting things about the Lightning Network is that you as a node operator have a “billboard” (an alias) with which to advertise your node. The alias is a human-readable, and changeable value that people interacting with your node can see. Payments and the bits and bytes of the protocol happen via public/private keypairs, similar to Bitcoin, but this alias feature is one that brands can get a lot of value from.
As a decentralized network with public accountability, the simple act of broadcasting your alias allows for a compounding effect of time on the value of trust. A strong brand relies on consistent and honest performance over time. Running a node permits you to build that brand and immediately illustrate dedication to customer security, customer privacy, Bitcoin, and a long time preference.
This brand display on the Lightning Network is a passive and effective means of showing support of Bitcoin. As the cryptocurrency space continues to grow more muddled and diverse, having a public statement in support of any one coin can become divisive. Running a node on the Lightning Network does not require any words to be spoken or any announcement to be made.Graham Krizek, CEO, Voltage
When transacting on the Lightning Network, there’s a high chance you’ll interact with a company of some sort. Whether that’s checking out at a store or using a streaming service, companies will be throughout the network.
There are two types of companies as it relates to the Lightning Network; those that run their own node or those that use someone else’s. The companies that outsource their transactions to a third party for the sake of convenience or price will, over time, be seen as risky to users. User transactions through these companies will be seen by a third party and therefore run a higher risk of being surveilled or assets being seized via the third party.
In the long run, these companies will be seen as inferior to those that have spun up a company node and emblazoned their brand on the Lightning Network. A great example of this today is River Financial. They’ve created a strong Lightning node over the years and built a brand that alludes to innovation, security, and reliability.
Just as there is a spectrum to comfortability around self-custody, privacy is flexible in Bitcoin and the Lightning Network. The most privacy-conscious individual can maximize their desire for discretion by running their own node and internalizing the data of every transaction. In this same vein, a company running its own node will remove most of the uncertainty of what happens to data that would otherwise be outsourced to a custodial payment processor.
A custodial provider could sell this information to other clients or acquiesce to various authorities. All consumers that choose to rely on a company will give up some data, regardless of if that company runs its own node or outsources to a payment processor. The difference is the additional risk that is taken in trusting both the company and the processor.
Robinhood’s reliance on payment to order flow is an example of this outsourcing to a payment processor and the additional risk and trust that their users require of a company that is incentivized to not have their best interests at heart. A company’s own node with an alias proudly displayed on the Lightning Network inherently creates the incentive to prioritize current and future clients.
The increase of channels that are opened to a specific public key is strongly indicative of trust. As the number of channels grows, the amount of this trust grows and there becomes a symbiotic relationship between the node and the end-user utilizing the node for transactions.Graham Krizek, CEO, Voltage
This brand display on the Lightning Network is a passive and effective means of showing support for Bitcoin. As the cryptocurrency space continues to grow more muddled and diverse, having a public statement in support of any one coin can become divisive. Running a node on the Lightning Network does not require any words to be spoken or any announcement to be made.
There are two viable paths that the future of the Lightning Network holds in this early stage. A few brands can continue to consolidate channels and capitalize on the network effect to become almost a necessary node to run through for transactions. These few brands could potentially sell their alias space to brands that enter into the Lightning Network too late to truly compete and find it a cheaper option. Or, brands and individuals can seize the advantage of the early stage of the Lightning Network to bolster the decentralized nature and provide more diverse routes for transactions to route through while gaining a profit for their advertisement.
To use a historical example, the first path is similar to that of the six Japanese railway passenger companies that exist today. Their dominance of the market comes from creating incentives for the population to desire a means of transportation by using the railway network as a byproduct of their rented-out real estate around train stops. In other words, their dominance of the network allows them to wield their “billboard” real estate space at a high premium.
The alternative path is loosely similar to a public metro system that operates through the collective input of citizens in its operation. Unlike any metro system that exists today, this network would permit every participating citizen to display any advertisement of their choosing on their station. If their station is desirable enough, traffic will flow accordingly, and not only will fees be collected, the station gets the opportunity to passively capture attention. Spinning up a node does not guarantee an individual or a brand that they will become the equivalent of Grand Central Station in terms of traffic flow, but in the current infancy of the Lightning Network, a Canal Street level of traffic for pure advertisement is both attractive and achievable.
Strong brands require the humbling reality that time in the public eye building trust is the key to success. Early adopters compound this value of time to dominate a market. The Network Effect is a byproduct of this reality and in the particular instance of the Lightning Network, is particularly fitting. The increase of channels that are opened to a specific public key is strongly indicative of trust. As the number of channels grows, the amount of this trust grows and there becomes a symbiotic relationship between the node and the end-user utilizing the node for transactions.
This relationship creates an increasing de-incentivization for bad actors as the value of this trust compounds in value. These incentive structures are similar to the structure of the credit score system. While not a perfect system, the premise remains generally sound. The longer a user is within the credit system behaving positively, the more trust this user has through more points. As these points grow, better rates and various loans become available.
Time-building trust within this network compounds through the availability of capital allocation. The Lightning Network rewards time and the building of trust by increasing the amount of traffic through the establishment of more channels. Rewards that leverage the network effect weigh the value of time heavily. The amount of capital and energy required in exchange for the trust of the network grows in conjunction with the passage of time. The early nodes will always have an advantage.
The tremendous upside potential of building a strong brand in this uncongested space comes at the low expense of creating a node and capitalizing on time. As the Lightning Network continues to grow and move along the Adoption S-Curve, the barrier to entry to capitalize on this growing traffic only increases. Even if spinning up a node fails in building significant traffic or fees, the brand benefits of publicly showing customers your dedication to their security and privacy on the network that is now strengthened with an additional node is a significant enough byproduct.