Lightning Labs just raised millions from Jack Dorsey and others to supercharge blockchain transactions

Lightning Labs, a young, Bay Area-based startup, is trying to make it easier for users to send bitcoin and litecoin to each other without the costly and time-consuming process of settling their transactions on the blockchain.

It has investors excited about its work, too. The company is announcing today that it has raised $2.5 million in seed funding to date from numerous big names in payments and beyond, including Square and Twitter co-founder Jack Dorsey, Square exec Jacqueline Reses, serial-founder-turned investor David Sacks, Litecoin creator Charlie Lee, Eventbrite co-founder Kevin Hartz, BitGo CTO Ben Davenport and Robinhood co-founder Vlad Tenev, along with The Hive, Digital Currency Group and others.

In an enthusiastic tweet earlier today, Sacks characterized the company as “one of the most important projects in crypto overall.”

Why is it notable, exactly? For starters, Lightning Labs works off Lightning Network, a protocol that’s sometimes called the second layer of bitcoin. (Think of it a little like HTTP.) Champions of this newer layer, including Lightning Labs, see it as a way to exponentially boost the number and speed of transactions of the bitcoin blockchain without increasing the size of blocks — batches of transactions that are confirmed and subsequently shared on bitcoin’s public ledger.

It’s all a little confusing to people still trying to get a handle on how the blockchain works, but the Lightning protocol essentially aims to let two or more people — and eventually machines — create instant, high-volume transactions that still use the underlying blockchain for security.

Here’s how it works: Let’s take two people. They assign funds on the blockchain into an entry that requires both to sign off on what they plan to spend. Say this is $20. After that transaction is recorded, they can transact that amount of money between each other as many times as they want. If they want to change the amount of that spend, they just update the entry on the blockchain. If they want to involve more people in this transaction, they can do this, too.

If you’re wondering whether there’s room for grift if these transactions move further from the blockchain, so were we. But one of the core tenets of Lightning Labs’s technology, it says, is that it allows you to do away with counter-party risk. You don’t have to trust someone you are transacting with because — ostensibly, anyway — no one can steal your cryptocurrency.

First, a so-called cryptographic “proof” is created when users initially broadcast that first transaction (and updated versions of it) to the blockchain. And that proof ensures that if one party tries to steal from another, not only will it be incapable of doing so, but as a penalty for trying, the thief’s currency will be awarded to the person they were trying to swindle.

As for people who try hopping offline in the middle of a transaction with the aim of stealing someone else’s cryptocurrency, there are separate safety measures in place in the form of time-out periods that, when they expire, ensure that the currency sender gets back his or her money. The blockchain acts as a kind of unbiased arbiter.

As for sending money to multiple parties, that’s called multi-hop routing and payments are conditional upon knowledge of a random number. Either the entire payment goes through across all participants or it’s canceled, so no one party can compromise the transactions.

Lightning Labs isn’t the only outfit that has sprung up around these smart Lightning contracts, but it’s the furthest along, suggests co-founder and CEO Elizabeth Stark, who says more than 1,800 developers are part of her company’s Slack channel and that thousands of volunteers helped Lightning’s seven-person team find glitches in the alpha version of its open-source software.

That outside help enabled Lightning to, starting today, roll out a beta version that’s open to anyone.

It’s only truly developer friendly at this point. (You have to write command code to use it. Stark says a much friendlier user interface will be available down the road.) Stark also suggests that because the beta version is just being released that people only transact with the amount of money they might carry in their wallet. In fact, there are limits on how much you can transact using its software, which Stark says is less to protect users from theft than from them “putting their life savings in bitcoin on Lightning.” (The presumption: that people will actually start using bitcoin as a currency instead of a commodity to hang onto, thanks to the Lightning protocol.)

Finally, Lightning Labs’s technology — which is enabling people to transact with bitcoin and litecoin for now — is available on desktops only, though a mobile version is coming.

We asked Stark yesterday about the origin of the company. A former lecturer at Stanford and Yale who taught about digital copyrights, she said she realized in 2016 that if bitcoin was going to be “used by the entire world, it couldn’t happen on blockchain.” Like a lot of people, too, Stark says she got excited by the prospect of micropayments, including for artists and musicians.

When she separately edited a paper about the Lightning protocol and realized it might be possible to send high volumes of small payments — for there to be a genuine currency of the web — she suggests she jumped in with both feet with co-founder and CTO Olaoluwa Osuntokun.

“He’s the genius behind our software,” she says of Osuntokun, who has two computer science degrees from UC Santa Barbara and who graduated in 2016.

To learn more, you might check out this talk that Stark gave on the seeming importance of the layers that Lightning Labs and others are building atop the blockchain.