The Lightning Network(LN) enables instant payment finality once a payment channel is established. As a merchant, the incentivizes to accept LN payments are five-fold:
- Zero risk of charge-backs.
- Getting access to liquidity faster. Visa transactions can take days to settle before your money is available. LN payments shortens this process due to instant payment finality.
- Foster customer loyalty once they open a payment channel with you.
- A micropayment revenue model that would impossible with traditional payments.
- Ideally, lower merchant processing fees.
As a customer, the incentives to use the LN are:
- Zero risk of credit card fraud.
- Zero risk of identity theft as your method of payment is no longer tied to your personally identifying information.
- Speed of transaction compared to on-chain BTC payments or even Visa.
- Don't have to pay a Bitcoin mining fee for every transaction.
However there are a couple disadvantages to the Lightning Network:
- Establishing payment channels can take a while and is a terrible user experience.
- Bitcoin in a Lightning Network payment channel is tied up and is unable to be immediately liquidated for fiat such as USD. This is a feature many businesses require in order to hedge against volatility.
The first issue can be solved if LN wallets automatically opens payment channels once BTC is deposited. This is something eclair, a LN mobile wallet for android users, does. Another alternative is to front-load opening payment channels prior to or during the customer's experience with your store. That means publicly sharing the URI on your website or at the front door so that the channel can be established as they shop.
Solving the second issue is a bit more complicated. It requires collateralizing the Bitcoin in a payment channel with earmarked Bitcoin on an exchange to be sold. In light of this, BlockFuse has built a proof of concept LN merchant processor that automates this entire process. Below is a workflow, with the amazing help of The Tokens Agency, that breaks down how our system works within a Point of Sale solution (click on the image description to access the pdf).
We've also provided a brief video demonstration of our system. It has been built with our open-source platform CoinMesh and runs on regtest.
Our proof of concept focuses on Point of Sale because the Lightning Network is uniquely suited for brick and mortar stores. A normal Bitcoin payment with a 10 minute confirmation time is extremely cumbersome within this context as merchants have to wait at least 1 confirmation to ensure that the transaction wasn't double-spent. However, our system can be easily extrapolated for online businesses.
- AML/KYC- One of the biggest barriers to offering merchant processing for the Lightning Network is being compliant. This is includes adhering to all Anti-Money Laundering and Know Your Customer regulations.
- Banking Relationship- A bank to easily route fiat to the merchants.
- Gateway Operators- As the LN merchant processing network grows, Gateway Operators can be regionally distributed to de-risk the Bitcoin on the LN. This means rather than having a central point of failure, merchants and customers can connect to several different Gateway Operators. This will foster a more decentralized topology and increased success in routing payments as well.
- Github- If you'd like to take a look at the repo for our proof of concept or are interested in this project, reach out to us at contact(at)blockfuse.io or join us on slack!