- Amboss Technologies launches Magma, a new marketplace for buying and selling liquidity on the Lightning Network.
- Magma uses a new “HODL” invoice that waits for three on-chain confirmations before finalizing a channel purchase.
- The market will also track reputation, removing repeat offenders and confirmed cheaters.
Lightning Network startup Amboss Technologies is launching Magma, a peer-to-peer (P2P) liquidity marketplace for Bitcoin’s Lightning Network, according to a press release sent to Bitcoin Magazine.
Amboss noted that while liquidity markets are not new, the company has integrated a suite of features to provide a unique offering, including a new smart contract setup and a reputation feature.
Why liquidity?
Liquidity is an essential aspect of managing a Lightning Network node and its channels. The inbound capabilities of its peers will determine how much bitcoin they can receive, and their outbound capabilities will determine how much bitcoin they can send.
Users can obtain outbound capability by opening a channel with another peer on the network, but receiving Lightning transactions requires inbound capability. But a tricky part of managing Lightning liquidity is finding new inbound capacity quickly so your business can continue to receive Lightning Network payments. This is where liquidity markets come in.
Liquidity marketplaces are looking to improve communication about where liquidity is needed in the Lightning Network. Market price information can help participants with extra bitcoins make the best decision about where their liquidity is needed (and get paid for it).
For a P2P market to work, channels between participants must have funds deposited in the channel that can be traded back and forth. Payments in the Lightning Network can be made in both directions. It’s about trading the same funds over and over again, rather than trying to introduce new funds into the ecosystem for each purchase, allowing the market to function without a central authority providing liquidity.
However, a problem arises when a buyer signals their need for liquidity.
“Opening a Lightning channel to provide liquidity uses a standard bitcoin transaction, which requires multiple confirmations before the payment is considered final. For Lightning, this process is almost instantaneous.
This inconsistency between confirmation times with on-chain and Lightning transactions creates a moment between a Lightning transaction and its corresponding on-chain confirmation that allows users to “trick” the system – a gap that Magma seeks to fill.
The “HODL” invoice
Magma aims to protect users purchasing liquidity on the platform through a new smart contract setup it calls an HODL invoice, which prevents a payment from immediately resolving while waiting for three confirmations on the Bitcoin blockchain. As a result, the window of time an attacker could exploit is removed.
This feature allows Amboss to function as a custodian without requiring custody of funds on either side of the transaction. If the client selling liquidity doesn’t create the channel in time, they won’t receive the Lightning payment because the contract is void.
The timeframe requirement creates a very responsive liquidity market, but Amboss has gone further and implemented another protective measure.
Reputation
Amboss will also create a reputation system on Magma to help ensure market integrity, rewarding market participants who follow the rules and penalizing those who manipulate the system.
If a consumer has purchased a channel that for some reason has not been resolved, Amboss will track fee updates and update seller reputation. Repeated abuse of the system or confirmations of cheating could lead to expulsion from the Magma market, forcing bad actors to use another channel for their liquidity needs.