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You Can Now Get Paid (A Little) For Using Bitcoin’s Lightning Network

Those running lightning nodes are earning a little extra bitcoin.

Trumpeted as a way to scale bitcoin to handle mainstream adoption, there's a lesser-known perk to spinning up a lightning node to allow users to send cheap, instant payments – you can make money.

To be clear, we're not talking very much.

Today's average fee on the lightning network clocks in at about one satoshi, worth a fraction of a cent, per hop (so every time a node routes the transaction to another node). As such, one of lightning's prominent application developers, Alex Bosworth, reported a monthly income of roughly $2.

Though the profits are pretty meager now, they could be a sign of how the network will develop over time.

The lightning network is what the name implies: a network. In order to send a payment to someone, the payment will typically bounce across several different nodes before it reaches the recipient – similar to the old-style mail carriers passing letters or packages from person to person to get it to its destination.

On the network, each node operator has the option of charging a small fee for carrying the payment a part of the way.

Because this fee market is already emerging, it displays that crypto enthusiasts are more than willing to take some risks (people using the nascent lightning network right now have actually been labeled "reckless" by the protocol's developers).

Speaking to this, Bosworth recently tweeted:

"I think for many people, even OG HODLers, the satoshis earned for providing routing will be among the first bitcoin they ever earn outside of coin trading."

Tweaking the fee

Still, there are some hurdles to earning satoshis with lightning.

For now, participating in the lightning network takes some technical know-how and quite a bit of digital storage capacity. Anyone who wants to route a lightning payment needs to download bitcoin's entire transaction history, nearly 200 GB of data, and then download the lightning software on top of that.

Currently, there are at least 3,000 nodes on the network.

After becoming a node, the user needs to update the default fee feature, which is set at zero. For the LND implementation of lightning, one of the most popular, this ability to change the fee and monitor how much you're earning from the fee is relatively new.

"In LND, it used to be that you couldn't see what kind of fees you were earning, but that feature was added in and that spurred more fee activity," Bosworth told CoinDesk.

Yet, another thing to keep in mind is that users are competing with each other here.

In order to get more people to use their node as a hop in their route, nodes can't charge too much (that's why Bosworth's fees are so low).

But even the lowest of fees are sometimes passed over. For whatever reason, right now, many lightning nodes aren't charging any fees; it's possible many of the nodes are just lightning enthusiasts that aren't worried about making money from their interest.

As such, Bosworth believes some users are probably avoiding his node.

And the users that do route payments through his node, Bosworth guesses, those are probably just users that don't have any other route options for getting their payment where it needs to go.

Reasons for fees

While it's impossible to know how the market will evolve at this point, developers believe there are beneficial reasons for allowing fees.

"You want the system to work not just because people have kind hearts," Ben Woosley, a developer of the lightning wallet app Zap, told CoinDesk, adding:

"As the network grows and a smaller portion are using it for ideological reasons, fees will move toward a more economic outcome."

Even if fees remain tiny, Woosley continued, they can be useful for a number of reasons.

For one, the network needs liquidity. Each lightning node has a certain amount of "liquidity," or how much money can be routed through it based on how much money the operator has locked up in the channel. Channels with more money will be able to support bigger payments or many more payments, and because of that service might be able to charge for those hops, Woosley argued.

Plus, fees also "provide a way for nodes to encourage or discourage people to join their channels," Woosley added.

In this way, lightning developers have even instituted a negative fee for the case where a node actually wants to pay users for routing money through them. This might happen if, for example, a channel runs out of money in one direction and needs to be "rebalanced" with more funds.

And, Bosworth notes, specialized lightning payments, such as those trading one cryptocurrency for another, will be more complex and as such, could be spendier.

Predicting fees?

Yet, according to Bosworth, "This is a market, so predicting [costs] will be super tough."

That said, many developers believe fees will remain quite low in the future as well.

For one thing, the costs of spinning up a node and routing payments via the lightning network are not that high. Sure, it takes time – more time than downloading a traditional mobile payment app. But it doesn't have a lot of financial costs.

For that reason, lightning network co-authors Tadge Dryja and Joseph Poon predicted back in 2016 that fees would be "effectively zero." And, so far, their prediction is holding up.

"I think the payment routing system will eventually settle to what is basically just a 'I scratch your back, you scratch mine' level," pseudonymous lightning developer ZmnSCPxj said.

In other words, the developer guesses that routing people's payments for a minuscule fee will be done so that others will route their lightning payments for cheap as well.

And with that, many believe that lightning payments will be far cheaper than current online payment systems – a scenario that will excite long-time bitcoin enthusiasts that were passionate about the technology because of its ability to upend the legacy systems.

"Credit cards charge around 3 percent, so lightning will probably be orders of magnitudes cheaper than credit cards," Woosley said, concluding:

"My expectation is [lightning fees] will be negligible, like less than a cent, forever."

Shiny penny image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Barclays Is Pitting Blockchains Against Each Other (For a Cause)

U.K. banking giant Barclays is challenging up-and-coming blockchain coders to help revamp the global derivatives market at a hackathon next month.

Revealed exclusively to CoinDesk, DerivHack will take place simultaneously in London and New York on September 20-21 at Barclays' Rise accelerator spaces. The International Swaps and Derivatives Association (ISDA), Deloitte and Thomson Reuters are co-sponsoring the event.

Those taking part will be asked to apply ISDA's Common Domain Model (CDM), a set of process and data standards, using their choice of distributed ledger technology (DLT) platform, to efficiently model post-trade processing of derivatives contracts.

CDM attempts to harmonize the way data is presented and reported across different firms and platforms. As such, its adoption is widely viewed as a prerequisite for the financial industry to adopt DLT and smart contracts.

One goal of the hackathon is to suss out which of the commonly used enterprise DLT platforms – R3's Corda, Hyperledger Fabric or ethereum – handles derivative life cycle smart contracts most elegantly.

"It's up to each team to decide what they code on," Dr. Lee Braine of the CTO Office at Barclays Investment Bank told CoinDesk, adding that it is a "good, and genuinely open, question" which will perform the most efficiently.

"I think the sort of things that will come out of this hackathon will include exactly that," he said.

Braine said, by way of an example, there may be cases where existing blockchain platforms benefit from some enhancements to make them more naturally compatible with the CDM.

Referring to object-oriented computing languages such as Java, which use classes to define data formats and available procedures for a given type or class of object, he said, "you could imagine this being equivalent to adding some extra classes to raise the level of abstraction closer to that of the CDM."

Braine pointed out that the CDM, which is all about how you alter the data structure before and after each life cycle event in a trade (such as an amendment, modification or termination of a contract), will give the judges a neat way to assess those solutions.

"Because it is the ISDA CDM, it will be very clear what are the inputs and expected outputs for each life cycle event – but it will be up to the hackathon coders to implement the smart contracts using a programming language and platform they think is appropriate," he said.

Fresh eyes

For ISDA, the hackathon presents an opportunity to get some feedback from members of the industry (and newbies) about the CDM.

"Following the release of ISDA CDM 1.0, it is important that the model is explored and validated by a broad set of industry participants," said Clive Ansell, head of market infrastructure and technology at ISDA.

A key component in the standardization of smart contract-enabled post-trade processing of derivatives are smart oracles which pipe in data to the contacts. Thomson Reuters was the first large industry player to launch a smart oracle back in June 2017 with BlockOne IQ.

"Making this capability available during the hackathon is a great opportunity to explore the evolution of standards for blockchain-based financial instruments, as they are a much-needed component in shaping the industry's future infrastructure," said Sam Chadwick, director of strategy in innovation and blockchain at Thomson Reuters.

Also, the two intensive days will give participants access to derivatives experts providing guidance on applying the ISDA CDM, said Braine, which should be useful whether the team is a fintech startup looking to implement derivatives smart contracts or a group of students looking to build skills and enhance their CVs.

Summing up, Sunil Challa from the business architect team at Barclays said:

"If the industry is to realize potential efficiencies and reduce costs via the adoption of standards, then there needs to be greater compatibility across different solutions in capital markets."

Image via Barclays

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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94 Companies Join IBM and Maersk’s Blockchain Supply Chain

IBM and shipping giant Maersk have recruited a sturdy crew for their global trade blockchain platform.

Revealed Wednesday, the companies have already signed up 94 firms for the platform since it was spun off from Maersk in January. They have also finally given it a name: TradeLens.

Leveraging Maersk's leviathan-like scale, TradeLens has attracted a wide variety of entities, ranging from dozens of port operators and customs authorities to logistics companies and even rival ocean-going carriers, such as Pacific International Lines, all of whom have been testing the platform.

The pilot stage now complete, TradeLens is available for participation through an early adopter program and is expected to be fully commercially available by the end of this year.

And to drive home the message that TradeLens is an open and neutral platform, IBM and Maersk have updated their marketing strategy, now describing the project as "joint collaboration" rather than a joint venture.

"At the time of the launch, we wanted to be clear that we were not offering a bespoke Maersk- or IBM-only solution," Michael White, head of global trade digitization at Maersk, told CoinDesk

While Maersk and IBM remain the only two shareholders, and both invested in the technology and jointly own the IP, White emphasized it is completely open to ecosystem participants.

"It was never about a joint venture," he said, although the Maersk press release for the launch described it as such.

But an IBM spokesperson said the original 49/51 percent ownership split will no longer apply under the collaboration model the two are now going to market with, in response to feedback from the industry.

Both IBM and Maersk will sell access to the TradeLens platform. The selling party will contract with the customer and receive all the fees and revenue rather than sharing it with the other partner, the IBM representative added.

This new model allows them to bring the solution to market faster, and be more flexible than the previously planned joint venture model, the spokesperson said.

Common tongue

TradeLens is built on the IBM Blockchain platform, which uses the open source relative of Linux, Hyperledger Fabric, and this presents a possible interplay with other IBM and Hyperledger projects.

"We have architected all of these solutions so that it's very easy for data to be exchanged between the two different blockchains – take TradeLens and IBM Food Trust for example – if clients were to be inclined," said Todd Scott, the vice president of global trade at IBM Blockchain.

To help foster this open supply chain ecosystem, TradeLens is pushing its open APIs for shipping as well as work being done with shipping standards bodies such as CEFACT and industry groups such as OpenShipping.org.

"On top of the bedrock of blockchain technology we are working with standards, and also have 125 or so APIs, and we are going to give all that access to the developer community so they can even create additional technologies of their own on top of it, " said Scott.

However, not everyone will see this as such a great and gregarious invitation to the industry.

"It's fine for them [IBM and Maersk] to say 'we are open for everyone to join,' but all they are really saying is 'come and use our system,'" said Sean Edwards, chairman of the International Trade and Forfaiting Association.

Edwards, who is also head of legal at Sumitomo Mitsui Banking Corporation Europe, said getting everybody to speak together is not a new problem and the answer, he said, has been to try and create ecosystems like Universal Trade Network (UTN), only they haven't really got off the ground yet.

Referring to other blockchain solutions aimed specifically at banks to optimize trade finance (which is related to but different than the supply chain processes TradeLens is digitizing), Edwards said the situation may become one where, just as consumers have a multiplicity of passwords and systems that we use, banks and other entities may have to be present on a number of different platforms.

"Either there are common enough standards that all the different underlying technologies can actually speak to each other, or you have initiatives that are so big everybody uses it," said Edwards, adding:

"I don't think somebody like Maersk is going to solve that."

Courting HSBC

And notably, TradeLens is not the only boat in this race.

In addition to the well-established supply chain payments platform TradeShift, which connects over 1.5 million companies across 190 countries, banking giant Citigroup is in stealth with a combined trade finance and supply chain platform which will leverage not only distributed ledger technology (DLT) but also the internet of things (IoT) and artificial intelligence.

Hence, TradeLens is at pains to come across as neutral and therefore appeal to the widest possible audience.

Speaking to potential data privacy concerns for companies that compete with Maersk's subsidiaries, White said the Maersk side of the collaboration team is a distinct and separate entity with no involvement with the commercial activities of either Maersk Line (the shipping container business) or Damco (the logistics provider).

On top of these Chinese walls, the platform itself features privacy protections, White said. "Sensitive information from other carriers are kept on separate nodes, so Carrier A cannot see Carrier B 's information or carrier C's information," he said.

Looking ahead, another possible blockchain interoperability play for TradeLens would be some of the trade finance blockchain platforms built on IBM Blockchain and Hyperledger, such as we.trade and Batavia.

Although it's probably still rather far off in the future, you could imagine an all-encompassing platform, so that if radio frequency identification (RFID) trackers indicate physical proximity to something, a payment can be released or a document signed, or similar.

On the subject of trade finance, IBM said banks were present among the 92 TradeLens pilot partners, but these were not being named. However, CoinDesk learned from a source in the trade finance arena that HSBC has "met with TradeLens a couple of times and agreed to reconnect post-launch."

And both IBM and Maersk agreed a world of opportunity awaits with regard to bringing trade finance banks, marine insurers and the like on to TradeLens as the platform takes to the waves.

Maersk's White concluded,

"We have found is there are number of industries and institutions including financial institutions and insurance companies, that are looking to take advantage of this platform."

Shipping container image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Microsoft Rolls Out ‘Proof-of-Authority’ Ethereum Consensus on Azure

Microsoft has just rolled out an additional consensus mechanism for clients building ethereum-based apps on Azure that does away with mining.

Called "proof-of-authority," the mechanism notably replaces the proof-of-work mining process that is common in public blockchains. However, it is only applicable in a permissioned network scenario – that is, on private or consortium blockchains where only invited parties may participate as nodes, Azure software engineer Cody Born wrote in a post on Tuesday.

The addition of proof-of-authority allows Azure's institutional clients to verify transactions more efficiently and maintains high levels of security, Born said, although "the underlying ether has no value."

He explained:

"An alternative protocol, Proof-of-Authority, is more suitable for permissioned networks where all consensus participants are known and reputable. Without the need for mining, Proof-of-Authority is more efficient while still retaining Byzantine fault tolerance."

Proof-of-authority consensus essentially requires the presence of invited parties as a proof of their participation in the decentralized network.

To that effort, the post said the mechanism allows "each consensus participant to delegate multiple nodes to run on their behalf" – the goal being to ensure that even if one node goes down, a consensus authority can still maintain its presence on the network.

It should be noted that proof-of-authority is not new, and was first conceived by developers from ethereum client Parity. It has also been deployed on the VeChain blockchain.

The addition follows Microsoft's May launch of the Azure Blockchain Workbench – a tool designed to streamline the process for enterprises building decentralized applications on the cloud computing platform.

Microsoft image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Ethereum Classic Is Down 30% Since Its Listing on Coinbase

The price of ethereum classic (ETC) has depreciated more than 30 percent against the U.S. dollar since its listing on Coinbase.

Prior to the August 7th listing date, ETC's price surged on two recent occasions, the first of which began on June 11th when Coinbase announced its intention to add ethereum classic to its platform. ETC's price went from $12.19 to $16.40 over the next 48 hours, printing a 34 percent gain.

The next and most dramatic boost began on August 3rd, following another announcement from Coinbase which stated that ETC trading would finally go live on August 7th.

From August 3rd to the 7th, the price rose more than 50 percent in U.S. dollar terms, hitting a peak of $21.25, according to data from Bitfinex.

It's not exactly a surprise when prices rise significantly after news of this nature is released, as investors would regard an asset as undervalued when taking into account the potential for a large cash flow increase that may accompany an exchange listing.

That said, this period of volatility often causes prices to rise to an amount where the asset is no longer considered undervalued, setting the stage for a market sell-off.

Ethereum classic was no exception to this reality. After the recent price high of $21.25, the price has fallen more than 30 percent versus the US dollar and is currently trading at $15.

That said, it's worth noting that the entire cryptocurrency market has been in a major slump as of late, shedding billions of dollars worth of market capitalization value during Wednesday's trading session.

Ethereum classic emerged in 2016 following the divisive collapse of The DAO, the ethereum-based funding vehicle that failed following a debilitating code exploit. An eventual "fork" of the ethereum blockchain to unwind losses tied to the DAO resulted in two distinct blockchains.

Disclosure: The author holds BTC, AST, REQ, OMG, FUEL, 1st and AMP at the time of writing.

Image via Shutterstock; Graph via TradingView

This article has been updated for clarity.

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The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Overstock Blockchain Spin-Off Raises $134 Million – With Millions More Committed

Overstock.com subsidiary tZero raised $134 million in its security token offering, the company said Thursday.

The announcement – revealed as part of Overstock's second-quarter results – was paired with a separate disclosure revealing that Hong Kong-based equity firm GSR Capital has agreed to invest as much as $400 million in both tZero and Overstock. TZero said earlier this week that it had completed its token sale, though the firm originally had set a goal of raising $250 million through the offering.

During an earnings call, CEO Patrick Byrne reiterated a previous claim that tZero received $100 million in commitments when it first opened its token sale, saying "we did the very best we could ... eventually we went to Asia. In Asia it was quite different. The first three people we met ... all said 'we'd take $60 million' [but] it proved extremely difficult to get money out of Asia for many different reasons."

"That's what slowed things down so much," he said, referencing multiple extensions to the company's token sale.

Specifically, the deal would see GSR acquiring up to $270 million in tZero equity – at a valuation of $1.5 billion – as well as up to roughly $104 million in Overstock shares. As well, GSR has agreed to buy $30 million worth of tZero Security Tokens from Overstock, according to statements.

Overstock first announced GSR's intention to purchase equity in the firm in June 2018, according to a press release. At the time, Overstock said GSR would purchase $160 million in tZero security tokens.

The company said that it ended its sale "raising $134 million in aggregate consideration," adding that "this sum includes $30 million from repayment of intercompany debt between tZero and Overstock."

GSR is purchasing the same security tokens from Overstock that Overstock bought from tZero as part of "a repurchase agreement," according to Thursday's press release.

CEO Patrick Byrne said that the funding would help support tZero efforts, particularly when accounting for the amount kicked in by GSR.

"When GSR completes its planned investments, we should have over half-a-billion dollars," Byrne wrote in a statement Thursday. "We believe this will provide ample capitalization with which to build a company that can upend global capital markets."

Editor's note: This article has been updated with statements from an Overstock earnings call. Brady Dale contributed reporting to this story. CoinDesk is monitoring this developing story.

Image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Bitcoin’s Open Secret: Lightning Is Making Better Online Payments Possible

PayPal 2.0?

That may have been a rallying cry for early bitcoin believers who saw the cryptocurrency as a superior form of payment, but excitement tapered off as bitcoin ran up against technical limitations. Yet, the idea may now be coming back in vogue – apps being built on the layer-two technology lightning network, which this year entered beta, already showcase transactions traditional payments systems just can't do.

In that way, the technology might allow the cryptocurrency to leapfrog the card networks and other payment startups using traditional rails. The application that's getting the most attention is the ridiculously small digital payments lightning makes possible for the first time.

For instance, an app called SatoshiTweets allows users to pay a very small fee via the lightning network to send a tweet from a shared Twitter account.

After using the application, one user tweeted:

"I bought an exclamation mark."

The user noted that the punctuation cost 10 satoshis, worth a fraction of a fraction of a penny.

While a paywall for tweeting might sound like a user-experience nightmare, SatoshiTweets has drawn excitement for its novelty nonetheless – primarily because these kinds of transactions are unheard of through the payments systems that have mass adoption today.

That's because sending a digital payment isn't without cost, even if it isn't always passed directly onto the user.

PayPal, for example, charges $0.05 plus a percentage fee per transaction. In other words, if you were to make a payment that small, PayPal's fees would eat the entire transaction, making it nonsensical to execute.

Teeny-tiny payments might not sound all that compelling (some argue the mental costs are too high), but researchers working closely to the cryptocurrency now believe it could open up an array of new business models and maybe even enable some more sci-fi-sounding use cases.

As such, lightning's ability to make the dream of bitcoin outpacing the traditional, centralized payment giants a reality is spawning all sorts of experimentation to demonstrate how these new small payments can be applied to apps in other ways.

Lightning's leverage

First and foremost, many apps are taking advantage of the low fees allowed by the lightning network.

"With Paypal, you couldn't really send an amount as low as 1,000 satoshis - or $0.06 - because their fee is higher than that," Rui Gomes, a developer at Lightning Spin, an online gambling app running on the lightning network, told CoinDesk.

Plus, Gomes argued, when it comes to online casinos, smaller fees are what keep the business alive, since the company can charge a small fee on every play in order to keep a consistent revenue stream.

Lightning Spin also showcases how the lightning network can enable faster payments.

With bitcoin by itself, users still had to wait for miner confirmation on their transactions and so couldn't cash out immediately. But with lightning, real-time payments are a breeze, as long as users already have a payment channel (or a connection with other peers on the network) established.

"I've built [Lightning Spin] with the sole purpose of demonstrating that it is possible to have a betting game where you can deposit and withdraw your earnings instantly," Gomes concluded.

Another advantage of using bitcoin-based payment technology is that the companies launching these applications then have more control over the development.

While Visa, for instance, offers a way for developers to integrate payments into an app, users need to register on the website, which means Visa has some level of control over who uses their system.

Speaking to this, David Knezic, who developed a lightning app that he presented at a recent "hackday," said:

"Bitcoin payments can be integrated by anyone into anything without ever having to ask for permission – unlike many other systems."

From cute to futuristic

With that freedom, developers are envisioning applications that range from the silly and sweet to the sci-fi.

Knezic's recent contribution to lightning development is a candy dispenser that spills out M&Ms when sent a lightning payment. According to him, the fun project was meant to show how bitcoin payments can reach beyond the digital realm.

And while that's probably not lightning's "killer app," what has taken hold among lightning users is a digital artboard.

Called Satoshi's Place, the application allows users to send a small lightning payment to purchase and paint single pixels (or the whole board for roughly $65) on an online canvas. The application garnered huge amounts of attention in June as it became a magnet for a mixture of vulgar graffiti, memes and cryptocurrency symbols which displayed the territorial battles that continue to rage in the space.

And even today is remains the most popular lightning app.

Lightning K0ala, the pseudonymous developer who maintains Satoshi's Place, believes the application could go far beyond just trash-talking though.

Speaking to an age-old idea and what he hopes will be an emergent use case for lightning, Lightning K0ala told CoinDesk: "Over time, hopefully it will give insight into micropayments as a spam-prevention mechanism."

But some of the concepts for lightning go far beyond solving problems that already exist today.

For instance, one of the most ambitious early lightning adopters is the AI imaging company CloudSight, whose CEO believes lightning will pave the way for allowing autonomous machines to make small, instant payments to one another.

Why would machines need to pay each other? According to founder and CEO Brad Folkens, autonomous cars could pay each other for tiny bits of data, such as fuel price and traffic conditions. And that's just one use case.

Right now, Cloudsight is using lightning for something simpler (and fun). The company recently began accepting lightning payments for customers who want to use their AI API. Customers send images to the API, which spits out a caption generated by an AI.

"This new tool can now enable advanced value interactions for an exchange of information that was previously impossible," Folkens said.

Getting there

Still, while it might seem like everyone should be flocking to lightning because of its perks, there's still one big downside – it's a complex setup.

As it relates to Cloudsight's application, the instructions for paying with lightning are quite long, asking users to spin up a bitcoin node well over 100 gigabytes, which is a considerable storage requirement.

It's a far cry from the convenience of PayPal – input some personal information and a credit card number and start spending.

Despite this and other hurdles that might appear as the network gets real usage, the hope is that lightning will grow easier to use as the technology matures – much like bitcoin has become since its release.

Someday, maybe even easy enough that users can buy exclamation points and photo captions without blinking an eye. And that's the bitcoin that many of the industry's first enthusiasts are looking forward to.

As Chris Steward, a contributor to the bitcoin software, tweeted recently:

"Lightning fits the bill for how bitcoin was advertised in 2013."

Lightning-enabled candy machine image via Exchange Union Twitter

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Crypto Unicorn Bitmain Weighs $18 Billion IPO, One of World’s Largest

Bitmain Technologies, Ltd. is about to go public.

According to documents obtained by CoinDesk, the cryptocurrency mining company is filing for an initial public offering (IPO) potentially as high as $18 billion this September at a market capitalization of $40 to $50 billion. It will be underwritten by ABC Capital Management and listed on the Hong Kong Stock Exchange in Q4 2018 or Q1 2019 amid a wave of Chinese unicorns hitting the public markets, including bitcoin mining competitors Canaan Creative and Ebang Communication.

One of the most valuable cryptocurrency companies, Bitmain closed a $100 million pre-IPO financing round led by China International Capital Corporation on July 23 at a $15 billion valuation, nearly two times cryptocurrency exchange Coinbase's $8 billion valuation, reported in April.

Now, a possible $18 billion IPO sticker price positions Bitmain to displace social media giant Facebook as one of the largest public offerings in history. SoftBank Group and Tencent Music are expected to top Alibaba and Spotify for the number one and two IPOs of all-time in the same fiscal period.

Tencent Holdings, Ltd., Softbank Group, China National Gold Group and an unnamed sovereign wealth fund managing $15 billion in assets participated in the pre-IPO round. A minimum commitment of $5 million was deadlined by July 18 and signed over to Bitmain Technologies Holding Company, the offshore Cayman Islands investment holding group that has been linked to Chinese technology billionaire Lei Jun, founder of consumer electronics company Xiaomi, Inc.

Before this latest funding, Sequoia Capital China had led Bitmain's $50 million Series A and $400 million Series B rounds with the help of San Francisco's IDG Capital, Menlo Park's Coatue Management, Russia's DST Global and Singapore's EDBI and GIC. The Series A round accounted for 5 percent of shares at a post-mortem valuation of $1 billion and the Series B round valued the company at $12 billion. Both rounds were closed in the first and second halves of 2017.

Projected share price and volume are not disclosed, but investment banks close to the IPO are calculating the P/E ratio to be 20 within the first publicly traded year.

Financial numbers supporting this multiple indicate that Bitmain profited $2.3 billion in total across 2016, 2017 and Q1 2018, with revenues of $2.5 billion in 2017 and $2 billion in Q1 2018. Bitmain is forecasting $2 billion in profit by year's end.

A diversified crypto strategy

Five years ago, Jihan Wu approached Micree Zhan with the purpose of engineering advanced application-specific integrated circuit (ASIC) chips to mine bitcoin more efficiently. That work established Bitmain, the leading market player in the cryptocurrency mining industry. Operations have since expanded to the alternative cryptocurrencies bitcoin cash, litecoin, dash, siacoin and ethereum.

With the IPO, the co-founders' combined holdings could amount to roughly $30 billion, assuming they have retained 60 percent of the company together, per a January 2018 Bloomberg interview.

An investor prospectus for the IPO proves exactly how significant Bitmain's mining business has been. Last year, Bitmain machines accounted for 66.6 percent of the total mining volume and Bitmain-run cryptocurrency mining pools covered 40 percent of the total mining network.

When the prospectus was drafted, BTC.com, the largest mining pool in the world, counted over 560,000 machines that mined approximately 11,200 out of 36,000 total bitcoin blocks. The second largest mining pool AntPool served more than 440,000 machines for bitcoin and alternative cryptocurrencies.

In addition to income generated by hardware costs and pool transaction fees, Bitmain oversees its own international mining operation and has made $100 million, $1.1 billion and $1 billion off of its 2016, 2017 and 2018 Q1 cryptocurrency holdings, respectively, revealed to the public for the first time here.

Some of the funds have been set aside to back up to 30 blockchain companies for a blockchain research division, which shouldered blockchain data analytics service Blocktrail as early as 2016.

Outside investments are said to represent a broader effort to turn Bitmain into a digital currency infrastructure conglomerate, and this has appeared to be increasingly true in recent months.

Since May, Bitmain has invested in cryptocurrency point-of-sale system BizKey, incubated decentralized exchange DEx.top, financed cryptocurrency payments system Circle, added an ethereum extension to the Opera web browser, bankrolled blockchain developer block.one and partnered with Huawei Mobile Services on a mobile cryptocurrency application.

Bitmain is also using these technologies to build a wallet, exchange and trading platform that will facilitate the bitcoin cash ecosystem, a spin-off of the original bitcoin cryptocurrency that is seen as a likely breadwinner. The investor prospectus says Bitmain is "strategically developing" bitcoin cash by mining, investing and trading the coin and its peripheral technologies for the purpose of realizing substantial returns down the line.

The day before yesterday, Bitmain disclosed an investment in tribeOS, a bitcoin cash advertising network.

Computing the chips

In 2013, the Bitmain graphics chip progenitor BM1380 utilized the 55-nanometer process, a mode of circuit dimensionality considered to be the most cutting-edge at the time. The company then shuffled through the 28-nanometer BM1382, BM1384 and BM1385 chips from 2014 to 2015, before advancing to the 16-nanometer BM1387 chip in 2016 to keep up with the competition.

Today, the older generation of chip makers has been struggling to play catch-up. Bitmain has surpassed Spreadtrum Communications, a 17-year-old company, as the second largest integrated circuit design maker in China, according to the investor prospectus.

Huawei HiSilicon, the Chinese chip industry's frontrunner, is slipping as well.

As of December 2017, Bitmain matched Huawei HiSilicon in 16 nanometer chip sales, while Taiwan Semiconductor Manufacturing Company, Ltd., the world's largest semiconductor company to consumer goods vendors like Apple, Inc., supplied a greater quantity of 10 nanometer chips for Bitmain than the Kirin 970 chip equivalent for Huawei HiSilicon. The unreleased 10 nanometer chip joins a new class of 7 nanometer and 12 nanometer chips that Bitmain will roll out later this year.

In half a decade, Bitmain has captured 8 percent of the domestic chip design market where Huawei HiSilicon has taken 14 years to achieve 17 percent. At this rate, Bitmain could near or overcome Huawei HiSilicon's local stronghold very soon and, as the investor prospectus suggests, go head-to-head with the U.S. chip industry.

The Chinese market is already nudging out the American market within the worldwide chip economy, although Intel continues to lead the pack.

Silicon Valley has felt the pressure. It was reported back in February that Bitmain was as profitable as 24-year-old Nvidia, which had its stock price target lowered along with AMD's in April.

Analysts pointed to a likely drop-off in Nvidia and AMD chip orders due to an upcoming Bitmain ethereum mining rig. They feared cryptocurrency miners would be less inclined to purchase from Nvidia and AMD because Bitmain would outperform them at a lower cost. Ethereum had been the last major cryptocurrency to be untouched by the Chinese company's ASICs.

Aiming at AI

Still, U.S. chip makers have not been worried. AMD, 32 years Nvidia's senior, has assured investors that personal computers, gaming and data centers will sustain the business, with or without cryptocurrencies.

But the logic applies both ways. When almost every electronic device imaginable is powered by a graphics chip, making ends meet outside of cryptocurrencies is an opportunity for Bitmain as well, and the geopolitical incentive in China is stronger than ever.

Bitmain seems to be entirely aware of this fact. The investor prospectus outlines ambitions to enter into other technology fields, in part to "cope with the Chinese government's ban on ICOs, cryptocurrencies and mining activities," and in part to grow the company into a supercomputing titan with artificial intelligence.

An in-house artificial intelligence arm is predicted to generate 40 percent of revenue in the next 5 years for this reason. Bitmain is betting that neural network machine learning methods will heighten processing capacity in graphics chips for cryptocurrency and non-cryptocurrency applications alike, as with the BM1680 processor-based tensor computing card, deep learning accelerating card and intelligent server unit.

Bitmain claims testing has even shown that its AI chips have stacked up against the computing power found in Google's corresponding AI products.

With a team of "nearly 500 people" working on "R&D, platform architecture, algorithm development, software and hardware development," Bitmain has rapidly drawn on new and existing research from academic institutions and technology companies to pioneer artificially intelligent software and hardware, well beyond the scope of cryptocurrency mining tools.

Right now, the first move is robotics: the acquisition of smart robotics company Luobetec and the production of the Luo Xiaodou robotic pet.

Jihan Wu image via CoinDesk archives

Correction: A previous version of this article displayed incorrect financial numbers for the pre-IPO investment round, 2016-2018 profits and 2016-2018 cryptocurrency earnings due to translation errors in the investor documents. The charts and text have been updated to accurately reflect the accounting data.

Correction: A previous version of this article stated that China International Capital Corporation will be underwriting the IPO. CoinDesk has learned that China International Capital Corporation led the pre-IPO investment round, but the IPO will instead be underwritten by ABC Capital Management.

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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