RE: What is the Lightning Network
Many big-blockers are using the phrase "vaporware"; if I've understood it right we do have "proof-of-concept", but it's a long, long way until we can get "lightning support" into the more popular wallets.
Vaporware means something that doesn't really exist. And we already have real lightning transactions on litecoin blockchain, not to mention numerous testnets. I do agree that critical mass is important in order for lightning to truly shine. I think as soon as major wallets update their software we'll see adoption skyrocket.
(Lack of) network effect - I believe that in one year time it will still be more probable that two arbitrary parties can transact through some alt-coin than through lightning.
I understand your skepticism, but I think in one year we'll see two large ecosystems emerge: the bitcoin ecosystem, with numerous bitcoin forks (like litecoin) entangled with the original chain via lightning networks, and the ethereum token ecosystem. Ethereum will most likely be more popular in the western world, while bitcoin's ecosystem will have a stronger support in the asian world.
The lightning network do need some on-chain capacity - moving bitcoins into the lightning network takes two on-chain transactions if I've understood it correctly, and if one is not able to close the lightning channel the funds aren't secure. With bitcoin fees just growing and growing, this may be a major problem.
It does take two transactions to set up and teardown a payment channel. However, payment channels themselves have expiration dates, and once the channel times out your funds will be released to you. While a payment channel is active your funds are secure, but you cannot spend the amount you've staked to open the payment channel until you close it.
One has to move funds into the lightning network to be able to use it there, and out of the lightning network to be able to use it as bitcoins (if I've understood it right). With this constraint, the Lightning Network is not much different from being an alt-coin - one can move "bitcoins" around using i.e. ripple, bitshares, ethereum and probably lots of other altcoins.
It's kind of like an ultrafast altcoin, except without its own token. The benefit of a lightning network is that you don't need to use exchanges in order to achieve these fast transfer speeds, and you don't need to pay fees on the altcoin blockchain. Moving funds in and out of lightning network will be a simple, streamlined process from a user's point of view. Take a look at "zap wallet" prototype that litecoin's community is building.
Centralization risk; the easiest way to get connected to the lightning network in any meaningful way will probably be to connect to the largest hub available. Hence we'll end up with one (or in best case a handful) of hubs routing almost all of the traffic.
That is true, and this is why lightning network is not an altcoin killer. For some transactions it makes more sense to do them slowly, but anonymously, i.e. using Monero. For other transactions, like buying a cup of coffee, you'd probably use the cheapest and most convenient option. Different scenarios call for different solutions.
At the end of the day both you and I are simply speculating at this point, only time will tell how this all turns out. And that's the most beautiful and exciting aspect of modern cryptoeconomics.
Using the "vaporware" word on lightning ... that's really contested. Yes, there exists implementations that are ready-to-use or nearly-ready-to-use, but there doesn't exist a network and there doesn't exist users, and we still don't know if there ever will.
One of the characteristics with vaporware is that the marketing people are (ab)using the promise of the upcoming product to keep customers from escaping to competitors; "yes, we're well aware about problem X in our product ... but don't worry, soon enough we'll have our VaporFantastic 3.0 out and it will for sure solve problem X!". Or, in Bitcoin speech: "yes, the 1 MB block size limit is causing too high fees right now ... but don't worry, soon enough lighning will be out and it will make it possible to transfer an unlimited amount of micro-transactions nearly for free!"
I really hope the statement "lightning is vaporware" will be proved false in the very soon future, but ... we will see ... and I think we need bigger blocks nevertheless.
Indeed. The tech can be ready, but if nobody cares to use it then it might have never existed. Still, at least with litecoin Charlie Lee is working with wallet developers, so I presume there will be a web version much like MEW. And your point about forking is valid, that's why I think litecoin is still undervalued. It's the most similar codebase to bitcoin and already has a good volume. If it all boils down to choosing a bitcoin fork to use, why not choose the one that's shown it's stability.
Agree on bigger blocks.
Now, say I move 0.1 BTC into the lightning network and I do lots and lots of microtransactions there. When the channel times out, the transaction cost for closing the channel is like 0.2 BTC. What will happen?
(this is an honest question - I haven't read the white paper, I don't know the answer to this).
Hey, they say there might be negative fees for some transactions https://bitcoin.stackexchange.com/questions/42639/what-are-the-trade-offs-between-transacting-on-lightning-network-and-bitcoin-mai/42653#42653
I think people will keep using bitcoin as they already do. But businesses will probably be paying large lightning node operators for an always open lightning channel to receive payments without commission. And services like Stripe and Paypal will develop in crypto world. This will lead to a more widespread adoption of bitcoin and litecoin, which will lead to price increase. Just don't forget to cash out before it bursts if you think that centralized regulated payment providers for cryptocurrencies will be the end of it.
Negative fees for moving lightning funds from too-well-funded lightning hubs to the not-so-well-funded lightning hubs, yes, but to close the channel it's needed to pay the fee for the on-chain transaction, and that fee will never be negative. What happens if the channel cannot be closed due to lack of blockchain capacity?
Opening a payment channel requires two parties, but a payment channel can be unilaterally closed by either one. So in this case, the economic incentive to close the payment channel is on the person who has received more funds through the channel rather than on the one who has spent money. Basically, as long as one account has enough money to pay for the payment channel to close, everything should be alright.
The interesting edge case is when neither party has enough funds to close the payment channel. In this case, if I understood correctly, the payment channel will simply time out, and all the funds will be returned to the original state, as they were before the channel was open. Minus, of course, the payment channel opening fee that one of the participants has paid.