When thinking about the challenge of onboarding, it’s important to remember that many incoming users aren’t coming from bitcoin, they’ll be onboarding directly from fiat. And they’ll need someone to guide them onto the network.
Even experienced, technically sophisticated users could use some help to avoid non-obvious obstacles. For example, even a user willing and able to open her own channels manually will have to spend money first (i.e. move local balances outward to create inbound capacity) before she can receive money, which is the opposite of what most new users would prefer. In choosing a hub for her initial connection, how can she tell which ones are stable and well connected? Even if she uses autopilot to help find active hubs, opening channels with the hubs it recommends is still a bet on the hubs’ stability. She’s betting her set-up fees that she won’t have to repeat the process should one of these hubs decide to close the channel unilaterally.
Those are the kinds of problems LSPs solve. They provide users with a stable connection to the Lightning network, simplified channel management, and liquidity.
If you’ve never heard the term “LSP” before, it’s because we coined it. The similarities between the Lightning Network and the internet in many respects are striking. It’s no accident that the term Lightning Service Provider resembles Internet Service Provider. They’re similar in that they both connect users to a wider network, but different networks require different functions from their service providers.
So let’s talk about those functions.What does an LSP actually do?
Lightning is a network of nodes connected by payment channels. Those payment channels come with a number of features that both make the network secure and trustless as well as potentially cumbersome for new users. These features would include capacity limits, inbound and outbound liquidity, routing through payment channels from send...