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Jack Dorsey is among backers of blockchain start-up Lightning Labs

Key Points
  • Lightning Labs announces it has raised seed financing of $2.5 million.
  • Backers include Jack Dorsey, CEO of Square and Twitter, David Sacks, former COO of PayPal, and Bill Lee, angel investor in Tesla and SpaceX.
  • "If bitcoin is like a decentralized savings account, Lightning is a decentralized checking account where users can send money instantly," the Lightning CEO tells CNBC.
Jack Dorsey
David Paul Morris | Bloomberg | Getty Images

Some Silicon Valley power players are putting their money behind blockchain start-up Lightning Labs.

Lightning Labs, which specializes in a technology that can potentially make bitcoin cheaper and faster to use for transactions, announced it has raised seed financing of $2.5 million. The investors include Jack Dorsey, CEO of Square and Twitter; David Sacks, former COO of PayPal; Bill Lee, angel investor in Tesla and SpaceX; Jacqueline Reses, head of Square Capital; and Charlie Lee, creator of litecoin.

Lightning Labs CEO Elizabeth Stark says Lightning functions as a software layer that sits on top of the bitcoin network.

"If bitcoin is like a decentralized savings account, Lightning is a decentralized checking account where users can send money instantly," Stark told CNBC.

This week was the first Lightning beta release on the bitcoin network. "Lightning will be rolled out first to advanced users and developers … and then broader users," Stark said.

Bitcoin bull Dan Ciotoli of Bespoke Investment Group said earlier this year his bitcoin target of $20,000 to $30,000 was contingent on a number factors, including the integration of the Lightning network. Ciotoli told CNBC in January that bitcoin's high transaction cost is one of its main flaws.

Slow processing times is one reason the bitcoin community issued a software fork that resulted in the creation of bitcoin cash, seen by many as bitcoin's cousin.

A number of bitcoin holders told CNBC that the bitcoin network is not only slow but expensive.

"One thing we've learned is that it can be hard to predict bitcoin fees in advance, and there may be large swings, so having a solution like Lightning with very low fees on the network is key," said Stark. "You still pay on-chain bitcoin fees when getting on or off of Lightning, but that may happen infrequently, like once a month or year."

"Further, Lightning can allow users to take advantage of low bitcoin fees when they are cheap, while often avoiding fees when they're high, thus actually helping to stabilize on-chain bitcoin fees in the future," Stark said.