Crypto News

Timeout Trees: A Solution To Scaling Lightning Network LSPs

Published

1 year ago

October 17, 2023

One of the biggest inherent limitations to the Lightning Network is the limited number of channels that can be opened or closed per block given the blocksize limit. Regardless of how many transactions can occur off-chain how cheaply, this is a fundamental bottleneck restricting how many people could actually realistically use the Lightning Network. Even the Lightning Network whitepaper went through in the conclusion that in a scenario where the entire world’s population of 7 billion was using Lightning, with only two on-chain transactions a year per person, Bitcoin would require 133 MB blocks for Lightning to work. This isn’t some out of left field problem, or unpredictable issue, it was a limitation of the protocol design fully understood from day one.

Part of the plan to address this issue has always been the idea of channel factories, i.e. a type of channel that more than two users participated in. This was always the direction things would have to go in order to scale Lightning and Bitcoin without a blocksize increase, but the issue is that solving the problem of on-chain footprints introduces a whole host of other problems. First of all, nothing fundamental changes about the requirement to enforce intermediate states if a counterparty becomes non-responsive. This has implications for the value-add. The entire point of a channel factory is that, for example, twenty people can share one UTXO and rearrange the liquidity inside with the other twenty people however they want. Once someone closes out on-chain non-cooperatively this starts to interfere with that goal.

If I close out my channel inside a channel factory, I drag a bunch of people with me out of the factory. Think of a factory like a merkle tree, there’s one UTXO at the top, and that splits in half off-chain, and those split in half, etc. until we get to everyone’s individual channels. Once I peel my channel out of the factory, everyone on my side of each split that goes on-chain is now cut off from everyone else in the factory. They can no longer reorganize their liquidity into that part of the group if everyone cooperates.

Another big issue is that even to start one you need to have everyone online at the beginning to pre-sign all the transactions. If you want twenty people in a factory, everyone needs to be online to start it. If you want a thousand people, a thousand people need to be online, etc.

This makes channel factories a big design space full of lots of problems to solve. So we solve an existing problem for Lightning, but make a bunch of new ones. Sounds like engineering to me.

Timeout Trees

John Law’s recent proposal, Timeout Trees, attempts to offer a solution to the one core issue of channel factories. I wouldn’t quite call a timeout tree a channel factory, more of a “proto-factory,” but it offers a potential solution to the issue of opening and closing massive amounts of channels without introducing the problem of non-cooperative closes ruining the use of the factory for other users. It requires CHECKTEMPLATEVERIFY (CTV) and a Lighting Service Provider (LSP) in order to work functionally.

A Timeout Tree is essentially a channel factory guaranteed by covenants, with no ability to change how the liquidity is reorganized off-chain after it is made, with a special escape clause. An LSP, we’ll call them Bob, plays the role of bridging casual users into the wider Lightning Network. Bob can take coins he controls and create a CTV tree that creates a single UTXO unfurling to open channels to any arbitrary number of users of his LSP service. The nice thing about CTV is it enables this to be done without everyone being online at the same time. Bob can simply get everyone to sign their initial channel state one at a time and hold onto them until everyone has set up the channel, and just spend the funds into the CTV tree when he has channels set up with every user.

This addresses the problem of everyone having to be online at the same time in order to set up the “factory” and start using Lightning. Because of CTV, once Bob spends coins into the tree setting up everyone’s Lightning channels, there is no way for him to back out and take the coins (yet). With that first UTXO in the CTV confirmed on-chain, everyone can treat their channels as open and there is no risk of them being doublespent.

Now the last part, closing the channels. Even though opening them only requires a single UTXO on-chain because of CTV, closing them still would require the entire CTV tree to unfurl on-chain so everyone can submit their channel states, right? Wrong. This is the Timeout part of Timeout Trees. Every branch in the Timeout Tree has a script branch where Bob can sweep all of the funds after a timelock.

A diagram of a Timeout Tree.

Now I’m sure you’re thinking “what!?” This is the real genius of how this proposal works. Because Bob can sweep the on-chain UTXOs himself without anyone else after the timelock, these channels all have an expiration date unless users actually unfurl the whole tree and confirm the real channel funding on-chain. This allows Bob to do something neat: when that timelock is coming up, he can open a brand new Timeout Tree with all the users of the current one, and have them move all of their funds from the expiring tree into the new one entirely off-chain on Lightning and then sweep the single on-chain UTXO of the last tree.

This allows for efficient closing of all these channels on-chain. The only problem left now is enforcing an HTLC on-chain if the other party stops cooperating. Well…that isn’t really an issue in this case, or rather it’s an all or nothing issue. The reason channels have to be closed to enforce an HTLC is if the other party of the channel stops responding in the middle of routing it. In a Timeout Tree every single user’s counterpart is Bob. So if Bob, as long as he is being honest, is not responding to update a failed or successful HTLC for one user, he’s not responding for any other user either. In that case everyone can still close out their channels on-chain before the timeout and stop using Bob’s LSP.

Wrapping Up

Users will still have to pay fees for on-chain interactions, there is no way around that, and an entire Timeout Tree closing out on-chain non-cooperatively would be a large and expensive on-chain footprint, but this is ultimately an issue any multiparty channel system will have to address. Timeout Trees however does have compelling solutions to the cooperative case of both opening and closing a massive multiparty channel without degrading the trust model of the system to something custodial.

John has even in his most recent version of the paper proposed a scheme where users could be penalized for non-cooperative closures enough to cover Bob’s cost for eventually sweeping a bunch of fragmented tree UTXOs after the timeout. Potentially there are ways to do the reverse if Bob’s inactivity or dishonesty is the cause for users having to non-cooperatively close their part of the tree.

At the end of the day though, this is a very concrete and specific proposal for a channel factory design that actually attempts to address the real issues of use and implementation instead of a half-defined and vague concept. That is massive progress in terms of addressing Lightning’s long-term scaling limitations.

John Law’s Timeout Tree proposal is one of the first concrete designs for a channel factory to address Lightning’s scaling limitations.

Crypto News

Texas State Rep Files For Strategic Bitcoin Reserve

Published

2 hours ago

December 12, 2024

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Today, Texas State Representative Giovanni Capriglione officially filed for a Strategic Bitcoin Reserve bill for the state of Texas during a 𝕏 spaces with Dennis Porter of Satoshi Action Fund, a Bitcoin advocacy organization working with politicians on pro-Bitcoin legislation.

To summarize, the bill would effectively:

See Texas buy and hold bitcoin as a strategic reserve asset.
Securely store the BTC in cold storage for at least five years.
Allow Texas residents to donate bitcoin to the reserve.
Ensure transparency via yearly reports and audits.
Allow state agencies to accept cryptocurrencies, and convert them to bitcoin.
Establish rules for security, donations, and management.

“This Act takes effect immediately if it receives a 12 vote of two-thirds of all the members elected to each house, as 13 provided by Section 39, Article III, Texas Constitution,” the legislation states. “If this Act 14 does not receive the vote necessary for immediate effect, this Act 15 takes effect September 1, 2025.”

This is yet another step towards America embracing Bitcoin, fueled by President-elect Donald Trump and Senator Cynthia Lummis’ lead by introducing a Strategic Bitcoin Reserve bill for the United States earlier this year. The hype around implementing a Strategic Bitcoin Reserve has caused a snowball effect of other states and countries introducing legislation to adopt one as well. Other states like Pennsylvania and countries like Russia and Brazil are among those introducing bills for a Strategic Bitcoin Reserve.

“Chairman Capriglione is the Chair of the Texas Pensions, Investments, and Financial Services Committee so this bill has legs!” commented Lee Bratcher, President of the Texas Blockchain Council. “No taxpayer funds will be spent on the bitcoin.”

Texas State Rep Files For Strategic Bitcoin Reserve Representative Giovanni Capriglione filed it live during a 𝕏 spaces.

Crypto News

Can Realized Cap HODL Waves Identify The Next Bitcoin Price Peak?

Published

4 hours ago

December 12, 2024

Bitcoin’s cyclical nature has captivated investors for over a decade, and tools like the Realized Cap HODL Waves offer a window into the psychology of the market. As an adaptation of the traditional HODL waves, this indicator provides crucial insights by weighting age bands by the realized price—the cost basis of Bitcoin held in wallets at any given time.

Currently, the six-month-and-below band sits at ~55%, signaling a market with room to grow before reaching overheated levels historically seen around 80%. In this article, we’ll dive into the details of Realized Cap HODL Waves, what they tell us about the market, and how investors can use this tool to better navigate Bitcoin’s price cycles.

When the 6-month and below #Bitcoin Realized Cap HODL Waves bands surpass ~80%, it’s a good indication the market is over-heated, and a major price peak is likely… 🔥

Currently we’re at around 55%, plenty of upside to go for #BTC!👆 pic.twitter.com/ZL5P7USMo9

— Bitcoin Magazine Pro (@BitcoinMagPro) December 12, 2024

Click here to view the Realized Cap HODL Waves live chart on Bitcoin Magazine Pro.

Understanding Realized Cap HODL Waves

At its core, the Realized Cap HODL Waves chart shows the cost basis of Bitcoin held in wallets, grouped into different age brackets. Unlike traditional HODL waves, which track the total supply of Bitcoin, this chart accounts for the realized value—a measure of the price at which Bitcoin was last moved.

The key insight? Younger age bands (e.g., coins held for six months or less) tend to dominate during bullish phases, reflecting rising market optimism. Conversely, older age bands gain prominence during bearish phases, often coinciding with market bottoms when investor sentiment is subdued.

This dynamic allows the chart to serve as a barometer for market cycles, identifying periods of overheating or underpricing with remarkable accuracy.

Why 80% Is Critical: Historical Context

The chart reveals that when short-term holders—represented by the six-month-and-below age bands—make up 80% or more of the total realized cap, Bitcoin is often nearing a major market peak. This level historically aligns with euphoric price action, where speculative mania drives the market.

For example:

2013 Bull Market: The six-month band surpassed 80% during Bitcoin’s meteoric rise, marking the peak of the cycle.
2017 Bull Market: A similar pattern occurred as Bitcoin reached its then-all-time high of $20,000.
2021 Bull Market: Peaks in the short-term bands preceded corrections, reinforcing the indicator’s predictive value.

At the current ~55% level, there is ample room for Bitcoin to grow before reaching the overheated territory historically seen near 80%.

What the Data Tells Us Today

The latest Chart of the Day, shared by Bitcoin Magazine Pro, underscores the importance of this indicator. Here are the key takeaways:

Room for Growth: With the six-month-and-below bands at 55%, the market appears to be in a healthy growth phase with significant upside potential.

No Overheating Yet: Historically, overheating occurs when these bands exceed 80%. This suggests Bitcoin has room to run before encountering similar conditions.

Cycle Perspective: The current cycle aligns with early-to-mid-stage bull market behavior, where newer investors are accumulating, and optimism is building.

The ETF Effect: How Bitcoin ETFs Could Impact Realized Cap HODL Waves

Unlike previous Bitcoin cycles, 2024 marks a significant shift with the introduction of Bitcoin ETFs. These financial products, designed to provide institutional and retail investors easy exposure to Bitcoin, have the potential to reshape the on-chain data reported by tools like Realized Cap HODL Waves. While this indicator has historically been a reliable measure of market cycles and price peaks, the dynamics of this cycle may differ.

Bitcoin ETFs aggregate investments from numerous participants into centralized custodial wallets, reducing the number of active on-chain addresses and transactions. This centralization introduces unique challenges when interpreting Realized Cap HODL Waves:

Younger Age Bands May Underestimate Market Activity: ETF trading occurs off-chain, meaning that short-term transactions and active addresses might be underrepresented in the six-month-and-below bands. As a result, the indicator could suggest less market enthusiasm than is actually present.
Older Age Bands May Dominate: Long-term Bitcoin holdings within ETFs could shift realized value into higher age bands, making it appear that the market is more conservative and less dynamic than in previous cycles.

While ETFs bring increased liquidity and price discovery through traditional markets, they also introduce complexities for on-chain analysis. This shift highlights the importance of adapting how we interpret indicators like Realized Cap HODL Waves in the context of evolving market structures.

Why This Cycle May Be Different

With Bitcoin ETFs now playing a central role, this cycle may not follow the same patterns as previous ones. The historical success of Realized Cap HODL Waves in identifying price peaks remains noteworthy, but investors should consider that ETFs represent a new variable. Increased adoption via ETFs could lead to more significant price movements that are less directly visible in on-chain data.

As always, it’s crucial not to rely solely on one indicator for investment decisions. Tools like Realized Cap HODL Waves are best used to supplement broader market analysis, providing valuable insights into underlying market trends. By combining on-chain indicators with ETF inflow data and other metrics, investors can gain a clearer and more comprehensive understanding of Bitcoin’s price dynamics in this new era.

How Investors Can Use Realized Cap HODL Waves

For investors, the Realized Cap HODL Waves chart offers actionable insights:

Market Sentiment: Use the six-month band as a gauge of market euphoria or fear. Higher percentages indicate bullish sentiment, while lower percentages often signal consolidation or accumulation phases.
Cycle Timing: Peaks in younger age bands often precede corrections. Monitoring these levels can help investors manage risk during bullish cycles.
Strategic Positioning: Understanding when the market is overheating can help long-term holders optimize their exit strategies, while buyers may find opportunities during periods dominated by older age bands.

Conclusion: Bullish Outlook with Room to Run

The Realized Cap HODL Waves chart is an invaluable tool for understanding Bitcoin’s price cycles. With the six-month-and-below bands currently at 55%, the market shows plenty of upside potential before hitting overheated levels. For investors, this means the current phase offers an attractive opportunity to capitalize on Bitcoin’s growth trajectory.

As always, it’s crucial to combine this indicator with other tools and fundamental analysis. To explore more live data and stay updated on Bitcoin’s price action, visit Bitcoin Magazine Pro.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Always do your own research before making any investment decisions.

Can Realized Cap HODL Waves Identify The Next Bitcoin Price Peak? The Realized Cap HODL Waves chart highlights how Bitcoin’s market cycles align with shifts in investor behavior. With short-term holders currently at ~55% of total realized value, the data suggests significant upside potential before the market overheats near 80%.

Crypto News

Why It’s Not Too Late to Invest in Bitcoin

Published

24 hours ago

December 11, 2024

For years, Bitcoin skeptics have watched from the sidelines, waiting for a moment to join the ride, only to convince themselves that they’ve already missed the boat. However, the reality tells a different story. Not only is it not too late, but Bitcoin continues to prove itself as a superior investment option compared to traditional assets—whether you have $25 a week to spare or millions to allocate.

Bitcoin Magazine Pro has a free portfolio analysis tool, Dollar Cost Average (DCA) Strategies, which enables investors to measure Bitcoin’s performance against other leading assets like gold, the Dow Jones (DJI), and Apple (AAPL) stock. This powerful tool provides hard data to demonstrate how consistent, disciplined investing over time can lead to outsized returns, even with modest amounts.

The Bitcoin Magazine Pro Dollar Cost Average Strategies tool helps you explore different DCA parameters to see how your portfolio would have performed across different time horizons and investment levels.

What Is Bitcoin Dollar Cost Averaging?

Dollar cost averaging involves investing a fixed amount of money at regular intervals, regardless of the asset’s price. This strategy eliminates emotional decision-making and smooths out the effects of market volatility. By consistently buying Bitcoin over a defined period, investors benefit from market dips while building their portfolios over time.

Outperforming Traditional Assets Across Timeframes

Let’s break down the numbers using the DCA Strategies tool, starting with the last six months to emphasize recent performance::

6 Months:
Investing $25 weekly in Bitcoin would have turned $675 into $985.56, a 46.01% return. Meanwhile: Gold increased just 5.82%. Apple (AAPL) gained 10.32%. The Dow Jones (DJI) delivered a mere 7.34%.
1 Year:
With a total investment of $1,325 in Bitcoin, your portfolio would now be worth $2,140.20, reflecting a 61.52% return. By comparison: Gold increased by 14.50%. Apple gained 22.80%. The Dow Jones grew by only 11.36%.
2 Years:
A $25 weekly investment totaling $2,650 would now be valued at $7,145.42—a 169.64% return. Meanwhile: Gold rose by 26.56%. Apple grew by 36.22%. The Dow Jones delivered 21.13%.
4 Years:
The long-term case is even stronger. A $5,250 investment would now be worth $14,877.77, representing an incredible 183.39% return. In the same period: Gold increased by 37.26%. Apple gained 54.05%. The Dow Jones grew 27.32%.

Across every timeframe, Bitcoin outpaces traditional assets, offering compelling returns even during short-term periods of six months to a year.

Why Timing the Market Doesn’t Matter

For investors hesitant about entering the market now, it’s important to understand that Bitcoin’s long-term performance speaks for itself. Historical data shows that adopting a DCA strategy minimizes the risk of market timing while amplifying returns over time. Even small, regular investments compound significantly when Bitcoin appreciates.

Moreover, Bitcoin is no longer seen as a speculative asset but as a reliable store of value in a volatile economic landscape. With institutional adoption, technological advancements, and increasing scarcity due to its fixed supply, Bitcoin’s long-term outlook remains overwhelmingly positive.

Why You’re Still Early

The global adoption of Bitcoin is still in its infancy. Despite its impressive performance, Bitcoin’s total market capitalization is small compared to traditional asset classes like gold or equities. This means there’s still significant room for growth as more individuals, institutions, and even governments recognize its utility and value.

Despite Bitcoin’s impressive track record of outperforming gold in terms of returns, its market capitalization at the time of writing stands at only 10.82% of gold’s market cap. This highlights significant growth potential; at current market prices, Bitcoin would need to increase 9.24 times to reach parity with gold, translating to a projected price of $934,541 per BTC.

This price target is in line with recent Bitcoin forecasts, including Eric Trump’s confident projection that Bitcoin’s price will reach $1 million.

With tools like Bitcoin Magazine Pro’s DCA Strategies, anyone can explore how small, regular investments can create exponential growth over time. Whether your starting point is $25 per week or $2,500, the data proves one thing: it’s never too late to start investing in Bitcoin.

A Tool for Every Investor

The DCA Strategies tool available on Bitcoin Magazine Pro allows you to customize your investment parameters, including purchase amounts, frequencies, and start dates. This flexibility empowers investors to create tailored strategies that align with their financial goals and time horizons.

The tool also provides comparative analysis against other assets, so you can clearly see how Bitcoin outperforms over time. This isn’t just a theoretical exercise—it’s actionable insight for anyone serious about building long-term wealth.

Conclusion: The Time to Act Is Now

For those sitting on the fence, thinking they’ve missed their chance, the data is clear: Bitcoin is not only a viable investment—it’s the best-performing asset of the decade. With a DCA strategy, even the most cautious investor can start small and reap the rewards of long-term growth.

It’s time to stop watching from the sidelines. Use Bitcoin Magazine Pro’s Dollar Cost Average Strategies tool to craft your investment approach today. If history repeats itself—and there’s every reason to believe it will—Bitcoin’s future is brighter than ever.

To explore live data and stay informed on the latest analysis, visit bitcoinmagazinepro.com.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Always do your own research before making any investment decisions.

This article is a Take. Opinions expressed are entirely the author’s and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Why It’s Not Too Late to Invest in Bitcoin Think you’ve missed the Bitcoin boom? Think again. Despite its impressive past performance, Bitcoin continues to be a top-performing asset, even in recent months. With strategies like Dollar Cost Averaging (DCA), you don’t need a fortune to start investing. Learn why Bitcoin outshines gold, the Dow Jones, and other traditional investments, proving it’s never too late to join the Bitcoin revolution.