About half of all Lightning Network nodes in the Bitcoin network do cloud computing through the services of providers Amazon Web Services and Google Cloud.
This figure could pose a centralization risk threat to Bitcoin’s secondary network, which leverages off-chain P2P payment channels.
Should the trend increase, the Lightning Network would be increasingly constrained and dependent on tech giants Amazon and Google.
However, the on-chain situation appears to be under control, with network miners validating network blocks in a fully decentralized manner.
Let’s look at all the details together.
Bitcoin’s Lightning Network and the risk of centralization: the massive exposure of nodes on Amazon and Google
Data from the on-chain data platform Mempool Space showed that a large chunk of the nodes on the Bitcoin Lightning Network payment channel are hosted by IPS providers Amazon Web Services (AWS) and Google Cloud.
In order for Bitcoin’s Layer 2 to work, it requires both entities involved in the satoshi payment to be connected to the internet in a stable manner, preventing the loss of their funds on the blockchain.
For this reason, about 48% of the participants in the network decided to do cloud computing through the services of tech giants Amazon and Google, taking advantage of a high reliability rate and an uptime of almost 100%.
In detail, on Amazon Web Services there are 532 nodes with a total of 1740 BTC, while on Google Cloud we find 80 nodes and 1230 BTC on-chain.
The remaining 52% of the actors involved in the Lighting Network use a multitude of providers, among which we find: Dataweb Global Group, Digital Ocean, Herzner Online GmbH, Lunanode, Alibaba, UAB interneto vizija and BlueVPS OU.
These are then joined by all those nodes that take advantage of anonymous browsing over onion routing protocols such as Tor.
This graphic showcases one of the most contradictory sides of Bitcoin’s Lightning Network:
Although the core network is highly decentralized in terms of both supply distribution and miners‘ presence, we cannot say the same for its layer 2.
The need for a stable internet connection and a very high server activity interval means that lightning nodes must necessarily rely on large players in the IPS market, risking centralization of the entire infrastructure.
In this regard Voltage, a Lightning as a Service (LaaS) platform a few months ago announced a partnership with Google Cloud to improve the scalability of its connections. The partnership allowed Voltage to deploy as many as 87 nodes without network latency issues.
The numbers of Bitcoin’s Lightning Network: still low adoption
The Lightning Network, Bitcoin’s layer2 scaling solution, represents a fast and inexpensive micropayment infrastructure that allows two parties to exchange satoshi through a dedicated channel.
Unlike the core network, the LN charges far less fees and allows near-instantaneous execution, keeping pace with the numbers of leading electronic payment providers Visa and Mastercard.
The main problem with this network is that it is currently scalable only up to a certain point: unfortunately, the maximum capacity of the network is only 4,755 BTC, equivalent to $138 million, with obvious difficulties in increasing this threshold.
The largest node at the moment is the ACINQ node hosted by Amazon Web Services, with 2849 channels and 503.31 BTC in liquidity, followed by Bfx-Ind1, which relies on Google Cloud, with 899 channels and 470 BTC in liquidity.
For Bitcoin’s Layer 2 to compete with the world of traditional payments, the number of nodes and the capacity of the network itself, which are still too narrow and ideal only for a niche market, need to be expanded.
Overall, LN handles 15,587 nodes and 68,070 payment channels with an average capacity of about $2,000 per transaction. Unfortunately, the adoption of this standard is low, despite the fact that since January 2021 the total capacity has increased by about 4000 BTC, in an upward trend even during the bear market of 2022.
The potential is very high and the growing numbers give hope that in the future payments can be handled through P2P channels and with a decentralized currency, but for now we are far from this goal.
Perhaps the recent integration of the Lighting Network on Binance, with Coinbase following in the same footsteps as the rival exchange, may help accelerate the adoption rate curve by pushing the entry of many nodes and increased network capacity.
Perhaps the high performance offered by Google and Amazon will also help bring new users into this ecosystem.
Alas, at the moment we can count more interest from bitcoiners and more capital on the Ethereum blockchain than on LN.
Indeed, wrapped versions of Bitcoin on the main smart contract development network are very popular, given the potential of DeFi and the associated profitability of some protocols.
All wrapped versions of Bitcoin on the Ethereum blockchain
While Bitcoin’s Lightning Network does not even reach 5,000 BTC on its network, on Ethereum we can count a much larger number of Bitcoin that have been locked via a smart contract to generate wrapped versions of the same coins under the ERC-20 standard.
Just think that Wrapped Bitcoin (WBTC) alone has a supply of 161,465 tokens, over 34 times the amount of BTC used in LN. Huobi Bitcoin (hBTC) also tops the payments network with 8,969 tokens in circulating supply.
As mentioned, such a strong presence of Bitcoin in wrapped versions on the Ethereum blockchain is due to the desirability of the DeFi world offering attractive solutions for investors.
Among the various web3 protocols we find a multitude of platforms where it is possible to use wBTC and other ERC-20 tokens that mirror the value of Bitcoin, as liquidity for exchanges or as collateral for decentralized loans (e.g., Aave).
These investment options are coveted by savvy users who are heavily exposed to these tokens in order to obtain a high financial return, with returns superior to CeFi solutions.
Of course, all of this comes with significant risks, which classic BTC holders do not expose themselves to by holding the coins on Bitcoin’s original blockchain.
A bug in the smart contract code or a hack on the address where the counterparts of the wrapped tokens are kept could generate huge losses for the degens of decentralized finance.