Now that Bitcoin is in a bear market it’s a good opportunity to work on new business opportunities in the crypto space. Once the next bull run starts the emphasis will be mainly on price again and it will be harder to focus on building out new ideas. One of the things we are focusing on at First Block Capital is the Lightning Network, a second layer solution on top of the Bitcoin blockchain (and several other blockchains) that will lead to super fast and super cheap transactions. Basically Lightning makes Bitcoin the perfect payment method. There are still a lot of hurdles to overcome before we are there but I am confident the teams working on it will get there.
I was relatively late to the Bitcoin game (I first started investing in early 2013), but I was early to the Lightning Network. Last year I invested a small amount in Lightning Labs‘ seed round (through AngelList) and have been closely following the technology since. After the initial beta for developers earlier this year I started looking for business models on top of Lightning (Lightning Apps (Lapps), basically 3rd layer solutions on top of a blockchain) but also realized we needed to set up a Lightning node at First Block.
We did set up a node and quickly became the 6th most connected node on the Lightning Network with over 200 open channels. This sounds easier than it is, the Lightning network is still very user unfriendly and opening up channels is a time consuming manual process. At one point we actually lost half of our channels and our in-house Lightning expert Chang Li had to set them up all over again.
However, the return on investment is huge. By trying and breaking things we learn a lot about Lightning, information that is not available online yet, and I believe we now know more about Lightning than most other companies in the crypto space. But even better, we also make money with it! I had seen theoretical models that predicted that well connected nodes can earn 60-80% per year in Bitcoin on the funds in its channels, but I thought that would only be the case once Lightning would be more mature.
Turns out I was wrong. After many of our channels had crashed Chang added up the money in our node to see if we lost anything and it turned out we had made about $125 in just one week on an investment of $2000 (spread over 200 channels). That is over 5% per week! We paid about $60 in transaction fees to set up all the nodes, so basically we earned that back in 3-4 days and all returns after that are profit (not taking the time to set up the nodes into account nor the cost of the server). We can always close our channels and get our $2000 investment back, plus all the fees we earned.
The ‘problem’ is that we don’t know how we made this money. Lightning is so new that you can’t easily see which (or even how many) transactions went through your node and how much you made per transaction. Our thinking is that Satoshi’s Place (an interesting Lightning ‘game’ based on the million dollar homepage) led to a large number of transactions through our node, but we don’t know for sure. We are now looking at how we can best record the number of transactions and the average fee per transaction (we believe gathering and analyzing Lightning data may be another angle to earn money).
We have a lot more ideas for Lightning that we may work on. My personal opinion is that if Lightning should take off it will change the Internet as we know it. Not only will Bitcoin go sky high, but it will likely change the business model of most of the top Internet companies. I believe the next generation of multi-billion dollar companies may be based on Lightning and now is the time to start thinking about them and build (or fund) them.