Lightning Network-Powered Bitcoin Exchange Sparkswap

April 8, 2019 BitcoinTalkRadio 0 Comments

During bitcoin’s massive price decline in 2018, one of the bright spots of the ecosystem was the development of the Lightning Network, which is effectively a secondary payments layer for Bitcoin with faster speeds and lower fees.

Although it is still early days for Lightning, there are some signs that the protocol has already overtaken altcoins in terms of the payments use case. For example, the Lightning Network is more popular than any altcoin at online retailer Bitrefill.

While most of the hype around Lightning has been focused on payments and microtransactions, the network may also have tremendous utility for cryptocurrency exchanges because it allows them to be non-custodial.

Indeed, Arwen announced their own non-custodial solution for existing exchanges back in January, and their technology is built on smart contracts similar to what is used in Lightning. Kucoin will be the first exchange to integrate Arwen’s technology via a closed beta in the near future.

Today, Sparkswap has announced the public beta launch of their own non-custodial exchange powered by Lightning technology. This initial public launch will allow users to trade bitcoin and litecoin.

TG: Fundamentally this is about solving the problem of non-custodial trading, which has been anticipated and promised pretty much since the birth of Bitcoin. Existing exchanges and trading platforms have offered at most two out of the three essential elements of a cryptocurrency exchange: bitcoin support, self-custody, and execution and settlement speed fast enough for professionals. Sparkswap is the first to provide all three, which will make it the first non-custodial trading platform to actually challenge the custodial exchanges that have dominated volumes for years.

This MainNet Beta is starting with one trading pair with trading limits in place, but this technology can be applied to most of the major cryptocurrencies and almost all cryptocurrency trading volume. This is a major step towards infrastructure for a Bitcoin-based financial system that actually reflects what Bitcoin is about: keeping control of your own assets.

Kyle Torpey: Do you think it is safe for exchanges to integrate with the Lightning Network at this point? What sort of limits will you be imposing?

Trey Griffith: Everyone needs to do their own risk assessment. We have the Lightning Network recommended channel limits still in place of 0.16777215 BTC and 10.066329 LTC, and we have an additional limit of $2,500 USD equivalent per day. Users still need to do their own analysis of the risk that they are willing to take, but we’re comfortable with the risk we’re taking at those sizes.

KT: Do you recommend users open channels directly with Sparkswap to avoid possible liquidity issues associated with multiple hops?

TG: The Sparkswap Broker software, which is open source and intended to be run by Sparkswap users contains everything a user needs, including a BTC and LTC Lightning node. For now, we require that users open channels directly to Sparkswap through a process we call “committing” in order to reduce the number of hops and also allow us to improve the UX by avoiding orders which are impossible to be completed.

KT: What coins are you looking at listing after bitcoin and litecoin?

TG: We have plans for a few, but nothing that we’re ready to share publicly yet.

KT: How much bitcoin and litecoin do you need to hold to act as a Lightning Network hub?

TG: It will depend on the volume that we gather, and we have some mitigation strategies we plan to employ if it becomes a large enough amount.

KT: What about the nearly-free options contract issue (see here for more detail on this known problem area for Lightning-powered exchanges)? How do you solve that?

TG: We’ve experimented with a deposit that is a fraction of the order size and is returned if the trade is completed successfully. For now though we are enforcing this behavior through reputation only, which should be sufficient while we have transaction limits in place (the free option is not worth much). We have plans to address this issue more fully when we increase the transaction limits and/or if it becomes an issue even at our current transaction size.

KT: What are the regulations around being a Lightning powered exchange? How relaxed will your anti-money laundering (AML) and Know Your Customer (KYC) policies be since you are non-custodial?

TG: We’re based in the US and want to serve US-based customers, so we need to follow the federal and state laws and regulations where they are applicable. This is is obviously an evolving area of regulation as we collectively grapple with how these new technologies do and should fit into the existing regulatory structure. We’re being relatively conservative with our rollout to make sure that we understand the regulations in certain jurisdictions before operating, but we do have in place a robust AML program as part of our overall regulatory compliance program.

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