In this chapter, we will begin where most people start when encountering the Lightning Network for the first time - choosing software to participate in the Lightning Network economy. We will examine the choices of two users who represent a common use-case for the Lightning Network and learn by example. Alice, a coffee shop customer, will be using a Lightning wallet on her mobile device to buy coffee from Bob's Cafe. Bob, a merchant, will be using a Lightning node and wallet to run a point-of-sale system at his cafe, so he can accept payments over the Lightning Network.
The Lightning Network is accessed via software applications that can speak the Lightning Network protocol. A _Lightning Network Node_ (or simply "node") is a software application that has three important characteristics. First, nodes must communicate on a peer-to-peer basis with other Lightning nodes creating the network. Nodes also include "wallet" functionality, so they can send and receive payments over the Lightning Network as well as on the Bitcoin network. Finally, Lightning nodes also need access to the Bitcoin blockchain (or other blockchains for other cryptocurrencies) to secure the funds used for payments.
Users have the highest degree of control by running their own Bitcoin node and Lightning node. However, Lightning nodes can also use a lightweight Bitcoin client (commonly referred to as Simplified Payment Verification (SPV)) to interact with the Bitcoin blockchain.
The term "Lightning Wallet" is somewhat ambiguous, as it can describe a broad variety of components combined with some user interface. The most common components of lightning wallet software include:
A Lightning wallet may contain all of these functions, acting as a "full" wallet, with no reliance on any third-party services. Or, one or more of these components may rely (partially or entirely) on third-party services that mediate those functions.
A key distinction (pun intended) is whether the keystore function is internal or outsourced. In blockchains, control of keys determines custody of funds, as memorialized by the phrase "your keys, your coins; not your keys, not your coins". Any wallet that outsources management of keys is called a "custodial" wallet because a third party acting as custodian has control of the user's funds, not the user himself. A "non-custodial" or "self-custody" wallet, by comparison, is one where the keystore is part of the wallet, and keys are controlled directly by the user. The term "non-custodial" wallet just implies that the keystore is local and under the user's control. However, one or more of the other wallet components might or might not be outsourced and rely on some trusted third parties even if some of the components (other than the keystore) rely on some trusted third parties.
Blockchains, especially open blockchains like Bitcoin, attempt to minimize or eliminate trust in third parties and empower users. This is often called a "trustless" model, though "trust-minimized" is a better term. In such systems, the user trusts the software rules, not third parties. Therefore, the issue of control over keys is a principal consideration when choosing a Lightning wallet.
Every other component of a Lightning wallet brings similar considerations of trust. If all the components are under the control of the user, then the amount of trust in third parties is minimized, bringing maximum power to the user. Of course, this brings a direct trade-off, as with that power comes the corresponding responsibility to manage complex software.
Every user must consider their own technical skills before deciding what type of Lightning wallet to use. Those with strong technical skills should use a Lightning wallet that puts all of the components under the direct control of the user. Those with fewer technical skills but a desire to control their funds, should choose a _non-custodial_ Lightning wallet.
If users decide to outsource some functionality to a third party they usually give up some privacy as the third party will learn some information about them.
Finally, those seeking simplicity and convenience, even at the expense of control and security, may choose a custodial Lightning wallet. This is the least technically challenging option, but it _undermines the trust model of cryptocurrency_ and should therefore be considered only as a stepping stone towards more control and self-reliance.
Lightning wallets can be installed on a variety of devices, including laptops, servers, and mobile devices. To run a full Lightning node (one that participates in "gossip" and creates its own map of the network for path finding and routing) you will need to use a server or desktop computer, as mobile devices and laptops are usually not powerful enough in terms of capacity, processing, battery life, and connectivity.
Lightning wallets have to strike a careful balance between complexity and user control. Those that give the user the most control over their funds, the highest degree of privacy, and the greatest independence from third party services are necessarily more complex and difficult to operate. As the technology advances, some of these trade-offs will become less stark, and users may be able to get more control without more complexity. However, for now, different companies and projects are exploring different positions along this control-complexity spectrum and hoping to find the "sweet spot" for the users they are targeting.
When selecting a wallet, keep in mind that even if you don't see these trade-offs, they still exist. For example, many wallets will attempt to remove the burden of channel management from its users. To do so, they introduce central "hub" nodes that all their wallets connect to automatically. While this trade-off simplifies the user interface and user experience, it introduces a Single Point of Failure (SPoF) as these "hub nodes" become indispensable for the wallet operation. Furthermore, relying on a "hub" like this can reduce user privacy since the hub knows the sender and potentially (if constructing the payment route on behalf of the user) also the recipient of each payment made by the user's wallet.
In the next section, we will return to our first user and walk through her first Lightning wallet setup. She has chosen a wallet that is more sophisticated than the easier custodial wallets. This allows us to show some of the underlying complexity and introduce some of the inner workings of an advanced wallet during our example. You may find that your first ideal wallet is further towards "ease of use", by accepting some of the control and privacy trade-offs. Or perhaps you are more of a "power user" and want to run your own LN and Bitcoin nodes as part of your wallet solution.
Alice is a long time Bitcoin user. We first met Alice in Chapter 1 of _"Mastering Bitcoin"_ footnote:["Mastering Bitcoin 2nd Edition, Chapter 1" Andreas M. Antonopoulos (https://github.com/bitcoinbook/bitcoinbook/blob/develop/ch01.asciidoc).], when she bought a cup of coffee from Bob's cafe using a bitcoin transaction. Now, Alice is eager to learn about and experiment with the Lightning Network. First, she has to select a Lightning wallet that meets her needs.
Alice does not want to entrust custody of her bitcoin to third parties. She has learned enough about cryptocurrency to know how to use a wallet. She also wants a mobile wallet so that she can use it for small payments on-the-go, so she chooses the _Eclair_ wallet, a popular non-custodial mobile Lightning wallet.
Unfortunately, many fake wallet applications will steal your money, and some of these even find their way onto reputable and supposedly vetted software sites like the Apple and Google application stores. Whether you are installing your first or your tenth wallet, always exercise extreme caution. A rogue app cannot only steal any money you entrust it with, it might also be able to steal keys and passwords from other applications by compromising your mobile device operating system.
Alice uses an Android device and will use the Google Play Store to download and install the Eclair wallet. Searching on Google Play, she finds an entry for "Eclair Mobile", as shown in <<eclair-playstore>>.
Alice notices a few different elements on this page, that help her ascertain that this is, most likely, the correct "Eclair Mobile" wallet she is looking for. Firstly, the organization "ACINQ" footnote:[ACINQ: Developers of the Eclair Mobile Lightning wallet (https://acinq.co/).] is listed as the developer of this mobile wallet, which Alice knows from her research is the correct developer. Secondly, the wallet has been installed "10,000+" times and has more than 320 positive reviews. It is unlikely this is a rogue app that has snuck into the Play Store. As third step, she goes to the ACINQ website (https://acinq.co/). There she goes to the Download section or looks for the link to the Google App store. She finds the link and clicks it. She compares that this link brings her to the very same app in the Google App Store. Satisfied by these findings, Alice installs the Eclair app on her mobile device.
Always exercise great care when installing software on any device. There are many fake cryptocurrency wallets that will not only steal your money but might also compromise all other applications on your device.
When Alice opens the Eclair Mobile app for the first time, she is presented with a choice to "Create a New Wallet" or to "Import an Existing Wallet". Alice will create a new wallet, but let's first discuss why these options are presented here and what it means to "import an existing wallet".
As we mentioned in the beginning of this section, Eclair is a _non-custodial_ wallet, meaning that Alice has sole custody of the keys used to control her bitcoin. This also means that Alice is responsible for protecting and backing up those keys. If Alice loses the keys, no one can help her recover the bitcoin, and they will be lost forever.
With the Eclair Mobile wallet, Alice has custody and control of the keys and, therefore, full responsibility to keep the keys safe and backed up. If she loses the keys, she loses the bitcoin, and no one can help her recover from that loss!
Similar to most Bitcoin wallets, Eclair Mobile provides a _mnemonic phrase_ for Alice to back up. The mnemonic phrase consists of 24 English words, selected randomly by the software, and used as the basis for the keys that are generated by the wallet. The mnemonic phrase can be used by Alice to restore all the transactions and funds in the Eclair Mobile wallet in the case of an event such as a lost mobile device, a software bug, or memory corruption.
The _mnemonic phrase_ is often mistakenly called a "seed". In fact, a seed is constructed _from the mnemonic_ and is something different.
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When Alice chooses to "Create a New Wallet", she will be shown a screen with her mnemonic phrase, which looks like the screenshot in <<eclair-mnemonic>>.
Alice needs to be careful to store the mnemonic phrase in a way that balances the need to prevent theft and accidental loss. The recommended way to properly balance these risks is to write two copies of the mnemonic phrase on paper, with each of the words numbered as the order matters.
Once Alice has recorded the mnemonic phrase, after touching "OK GOT IT" on her screen, she will be presented with a _quiz_ to make sure that she correctly recorded the mnemonic. The quiz will ask for three or four of the words at random. Alice wasn't expecting a quiz, but since she recorded the mnemonic correctly, she passes without any difficulty.
Once Alice has recorded the mnemonic phrase and passed the quiz, she should store each copy in a separate secure location such as a locked desk drawer or a fireproof safe.
Never attempt a "DIY" security scheme that deviates in any way from the best practice recommendation in <<mnemonic-storage>>. Do not cut your mnemonic in half, make screenshots, store on USB drives or cloud drives, encrypt it, or try any other non-standard method. You will tip the balance in such a way as to risk permanent loss or theft. Many people have lost funds, not from theft but because they tried a non-standard solution without having the expertise to balance the risks involved. The best practice recommendation is carefully balanced by experts and suitable for the vast majority of users.
After Alice initializes her Eclair Mobile wallet, she will see a brief tutorial that highlights the various elements of the user interface. We won't replicate the tutorial here, but we will explore all of those elements as we follow Alice's attempt to buy a cup of coffee!
Alice now has a Lightning wallet. But, it's empty! She now faces one of the more challenging aspects of this experiment: she has to find a way to acquire some bitcoin and load it onto her Eclair wallet.
All of these methods have varying degrees of difficulty, and many will involve paying a fee. Some will also require Alice to provide identification documents to comply with local banking regulations. However, with all these methods, Alice will be able to receive bitcoin.
Let's assume Alice has found a local Bitcoin ATM and has decided to buy some bitcoin in exchange for cash. An example of a Bitcoin ATM, one built by the Lamassu company, is shown in <<bitcoin-atm>>. Such Bitcoin ATMs accepts national currency (cash) through a cash slot and send bitcoin to a Bitcoin Address scanned from a user's wallet using a built-in camera.
To receive the bitcoin in her Eclair Lightning wallet, Alice will need to present a _Bitcoin Address_ from the Eclair Lightning wallet to the ATM. The ATM can then send Alice's newly acquired bitcoin to this bitcoin address.
To see a Bitcoin Address on the Eclair wallet, Alice must swipe to the left column titled "YOUR BITCOIN ADDRESS" (see <<eclair-receive>>), where she will see a square barcode (called a _QR code_) and a string of letters and numbers below.
The QR code contains the same string of letters and numbers as shown below it, in an easy to scan format. This way, Alice doesn't have to type the Bitcoin Address. In the screenshot <<eclair-receive>>, we have purposely blurred both, to prevent readers from inadvertently sending bitcoin to this address.
[NOTE]
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Both Bitcoin addresses and QR codes contain error detection information that prevents any typing or scanning errors from producing a "wrong" Bitcoin address. If there is a mistake in the address, any Bitcoin wallet will notice the error and refuse to accept the Bitcoin Address as valid.
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Alice can take her mobile device to the ATM and show it to the built-in camera, as shown in <<bitcoin-atm-receive>>. After inserting some cash into the slot, she will receive bitcoin in Eclair!
Alice will see the transaction from the ATM in the "TRANSACTION HISTORY" tab of the Eclair wallet. While Eclair will detect the bitcoin transaction in just a few seconds, it will take approximately one hour for the bitcoin transaction to be "confirmed" on the Bitcoin blockchain. As you can see in <<eclair-tx1>>, Alice's Eclair wallet shows "6+ conf" below the transaction, indicating that the transaction has received the required minimum of six confirmations, and her funds are now ready to use.
While in this example Alice used an ATM to acquire her first bitcoin, the same basic concepts would apply even if she used one of the other methods in <<acquiring-bitcoin>>. For example, if Alice wanted to sell a product or provide a professional service in exchange for bitcoin, her customers could scan the Bitcoin Address with their wallets and pay her in bitcoin.
Similarly, if she billed a client for a service offered over the Internet, Alice could send an email or instant message with the Bitcoin Address or the QR code to her client, and they could paste or scan the information into a Bitcoin wallet to pay her.
Alice could even print the QR code and affix it to a sign and display it publicly to receive tips. For example, she could have a QR code affixed to her guitar and receive tips while performing on the street!
Finally, if Alice bought bitcoin from a crypto-currency exchange, she could (and should) "withdraw" the bitcoin by pasting her Bitcoin Address into the exchange website. The exchange will then send the bitcoin to her address directly.
Alice's bitcoin is now controlled by her Eclair wallet and has been recorded on the Bitcoin blockchain. At this point, Alice's bitcoin is "on-chain," meaning that the transaction has been broadcast to the entire Bitcoin network, verified by all Bitcoin nodes, and "mined" (recorded) onto the Bitcoin blockchain.
So far, the Eclair Mobile wallet has behaved only as a Bitcoin wallet, and Alice hasn't used the Lightning Network features of Eclair. As is the case with many Lightning wallets, Eclair bridges Bitcoin and the Lightning Network by acting as both a Bitcoin wallet and a Lightning wallet.
Now, Alice is ready to start using the Lightning Network by taking her bitcoin "off-chain" in order to take advantage of the fast, cheap, and private payments that the Lightning Network offers.
Swiping right, Alice accesses the "LIGHTNING CHANNELS" section of Eclair. Here she can manage the channels that will connect her wallet to the Lightning Network.
Let's review the definition of a "Lightning Network Channel" at this point, to make things a bit clearer. Firstly, the word "channel" is a metaphor for a _financial relationship_ between Alice's Lightning wallet and another Lightning wallet. We call it a channel because it is a means for Alice's wallet and this other wallet to exchange many payments with each other on the Lightning Network (off-chain) without committing transactions to the Bitcoin blockchain (on-chain).
The wallet or _node_ that Alice opens a channel to is called her _channel peer_. Once "opened", a channel can be used to send many payments back and forth between Alice's wallet and her channel peer.
Furthermore, Alice's channel peer can _forward_ payments via other channels further into the Lightning Network. This way, Alice can _route_ a payment to any wallet (e.g. Bob's Lightning wallet) as long as Alice's wallet can find a _path_ made by hopping from channel to channel, all the way to Bob's wallet.
In other words: Alice needs one or more channels that connects her to one or more other nodes on the Lightning Network. She doesn't need a channel to connect her wallet directly to Bob's Cafe in order to send Bob a payment, though she can choose to open a direct channel too. Any node in the Lightning Network can be used for Alice's first channel. The more well-connected a node is the more people Alice can reach. In this example, since we want to also demonstrate payment routing, we won't have Alice open a channel directly to Bob's wallet. Instead, we will have Alice open a channel to a well-connected node and then later use that node to forward her payment, routing it through any other nodes as necessary to reach Bob.
At first, there are no open channels, so as we see in <<eclair-tutorial2.png>>, the "LIGHTNING CHANNELS" tab displays an empty list. If you notice, on the bottom right corner, there is a plus symbol (+), which is a button to open a new channel.
A "node URI" is a Universal Resource Identifier (URI) that identifies a specific Lightning node. Alice can either paste such a URI from her clipboard or scan a QR code containing that same information. An example of a node URI is shown as a QR code in <<node-URI-QR>> and below it as a text string:
While Alice could select a specific Lightning node, or use the "Random node" option to have the Eclair wallet select a node at random, she will select the "ACINQ Node" option to connect to one of ACINQ's well-connected Lightning nodes.
Choosing the ACINQ node will slightly reduce Alice's privacy, as it will give ACINQ the ability to see all of Alice's transactions. It will also create a Single Point of Failure, since Alice will only have one channel, and if the ACINQ node is not available, Alice will not be able to make payments. To keep things simple at first, we will accept these trade-offs. In subsequent chapters we will gradually learn how to gain more independence and make fewer trade-offs!
When Alice selects a node to open a new channel, she is asked to select how much bitcoin she wants to allocate to this channel. In subsequent chapters, we will discuss the implications of these choices, but for now, Alice will allocate almost all her funds to the channel. Since she will have to pay transaction fees to open the channel, she will select an amount a few dollars (or a few thousandths of a bitcoin) less than her total balance.
Once she clicks "OPEN", her wallet constructs the special Bitcoin transaction that opens a LN channel, known as the _funding transaction_. The "on-chain" funding transaction is sent to the Bitcoin Network for confirmation.
Alice now has to wait again (see <<eclair-channel-waiting>>) for the transaction to be recorded on the Bitcoin blockchain. As with the initial Bitcoin transaction that she used to acquire her bitcoin, she has to wait for six or more confirmations (approximately one hour).
Did you notice that the channel amount seems to have changed? It hasn't: the channel contains 0.018 BTC, but in the time between screenshots the BTC exchange rate changed, so the USD value is different. You can choose to show balances in BTC or USD, but keep in mind that USD values are calculated in real time and will change!
Alice now has everything ready to start using the Lightning Network. As you can see, it took a bit of work and a bit of time waiting for confirmations. However, now subsequent actions are fast and easy. The Lightning Network enables payments without having to wait for confirmations, as funds get settled in seconds.
Bob has a simple Point-of-Sale (PoS) application for the use of any customer who wants to pay with bitcoin over the Lightning Network. As we will see in the next chapter, Bob uses the popular open source platform _BTCPay Server_ which contains all the necessary components for an e-commerce or retail solution, such as:
To pay the invoice, Alice opens her Eclair wallet and selects the "Send" button (which looks like a right-facing arrow) under the "TRANSACTION HISTORY" tab, as shown in <<alice-send-start>>.
Alice selects the option to "scan a payment request" and scans the QR code displayed on the screen of the tablet (see <<bob-cafe-invoice>>), and is prompted to confirm her payment, as shown in <<alice-send-detail>>:
Alice presses "PAY," and a second later, Bob's tablet shows a successful payment. Alice has completed her first Lightning Network payment! It was fast, inexpensive, and easy. Now she can enjoy her latte which was purchased using the most advanced payment technology in the world. And from now on, whenever Alice feels like drinking a coffee at Bob's Cafe she selects an item on Bob's tablet screen, scans the QR code with her cell phone, clicks pay and is served a coffee, all within seconds and all without "on-chain" transaction.
In this chapter, we followed Alice as she downloaded and installed her first Lightning wallet, acquired and transferred some bitcoin, opened her first LN channel, and bought a cup of coffee by making her first payment on the Lightning Network. In the following chapters, we will look "under the covers" at how each component in the Lightning Network works, and how Alice's payment reached Bob's Cafe.
