Please describe your proposed solution
Like it says in the name, this is Cardano's answer to Bitcoin's Lightning Network.
It's an L2 optimised to be scalable and instant.
Scope Overview
Good protocols are critical but only a part of the adoption story. Without users, protocols die.
That is why we will start with clear specs, design and basic proof of concept implementation in this proposal and next in the "Product" proposal we will build the production software, SDKs and integration tools around it to further facilitate adoption.
Lightning Network in Two Steps
The Cardano Lightning Network is not simply a protocol; it is an end-to-end solution.
It will be delivered in two phases. Both are attractive from a business perspective in their own right.
Phase 1 - Payment Gateways
This will deliver the specs, smart contracts, and its implementation as a hub and spoke network with related SDKs. This phase consists of two proposals (this one and the next "Product" one).
Phase 2 - Routing & Discoverability
It will extend the hub and spoke network to be fully decentralised with optimal channel routing.
This will deliver the SDKs and full software suite. The SDKs will enable third parties to integrate and build on top of CLN.
So we will have two phases with two proposal each ("Concept" and "Product").
Phase 1 - Payment Gateways
This phase lays the foundations of the full CLN, but will also result in a network addressing a real world use case.
We will create a solution for merchants and customers to connect via "Payment Gateways".
This will allow them to transact instantly and securely through the CLN.
A single purchase in this scenario is a composition of two channels: one from customer to the gateway and the second from the gateway to the merchant. The Payment Gateway is to connect to all participating merchants and consumers. It handles all routing and the liquidity between channels.
Users have all the guarantees of the L1 via the secure payment flow with low fees and instant finalisation. The full implementation (Product proposal) will provide a basis for integration with mobile devices where payment applications will be disconnected from the wallets.
(Note that once the channel is charged by the wallet the app can operate independently).
The critical technical goal en route to full CLN is to demonstrate channel hopping between bidirectional channels.
Digital Cheques or How Lightning Really Works
Bitcoin Lightening provides us great inspiration, but Cardano has some significant benefits that we can leverage. Namely, the clean UTxO model and powerful scripting capabilities. As a result CLN is a simpler protocol involving the exchange of tiny messages - we call them cheques.
These are easily encoded/decoded by everyones' favourite languages, by mobile, web, wallets, backend, cloud, embedded, you get the idea. Portability - it can be sometimes surprising how this detail can delay adoption!
Cheques are signed intentions to make a transfer. At any time, a user can decide they want to cash the cheque on the L1. Just like an old school paper cheque - just in crypto. For a given channel, cheques are in a sense cumulative, only the latest one matters. But while the receiver holds a check, they are guaranteed what they're owed by the L1.
What is also really interesting it is pretty easy to make them bidirectional (we are leaving this as an exercise to the reader :-P).
"Why not hydra?" we hear some of you ask.
Any secure, decentralised, system rubs up against the blockchain trilemma.
A blockchain's design choices are trade-offs between security, scalability, and decentralisation. There is not a one size fits all solution.
Cardano Lightening Network focuses on secure instant settlement, but also scalability.
And not just in TPS, but in the number of independent participants.
What is Cardano Lightening Network not? It’s not "isomorphic".