PayPal patented its own bitcoin Lightning Network system in 2016
PayPal filed a patent for a pre-funded off-chain cryptocurrency wallet system before it was cool.
PayPal has, unsurprisingly, been eyeing the digital currency space for a while and may have been anticipating some of the frictions to be overcome before bitcoin could be used as an effective payment system. This is revealed in a patent filed by PayPal in August 2016.
It lays out a system for expediting digital currency transfers in a way similar to bitcoin's Lightning Network, alongside a system for performing on-the-spot crypto-to-fiat exchanges.
The patent describes a "primary" wallet which is accompanied by a "plurality" of "secondary" wallets. These secondary wallets are temporary ones, created and pre-funded for transactions. Instead of making an on-chain transfer, users can simply transfer over the private key for the appropriate secondary wallet.
This is intended to essentially allow for instant off-chain payments, with the details later run along the main blockchain in a more leisurely way. This is similar to the plans for bitcoin's Lightning Network, which essentially involves a series of pre-funded multi-key wallets, shared but securely partitioned between users, allowing for near instant off-chain transactions and eventual settlement on the main bitcoin blockchain when required.
In this case, the system is envisioned as working mostly in the background without a user necessarily seeing how it all happens. It also mentions the possibility of financial institutions pre-funding the secondary user wallets where needed, secure in the knowledge that the user actually has the funds.
PayPal's system also includes a system for converting cryptocurrency to fiat currencies at the time of transfer, and a way for the one system to be used across multiple types of fiat currency.
The patent, filed in 2016, shows that PayPal has spent a fair amount of time looking very closely at the potential of cryptocurrency in payment systems and how to overcome its limitations.
"The electronic coin [the cryptocurrency] and virtual currency public ledger [the blockchain] discussed above provide a distributed virtual currency system in which payers and payees may participate in transactions with each other without the need for a centralized authority such as a bank. Each of those transactions is recorded in the virtual currency public ledger to ensure that the electronic coins may only be spent by a payer once," the patent reads.
"However, it has been discovered that the confirmation of those transactions via the proof-of-work system discussed above may unnecessarily delay the transaction, and that such transactions may be expedited by first allocating private keys to a payee, and then subsequently performing the transaction using those private keys and confirming the transaction."
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, SALT, BTC and NANO.