Thanks for this! So I understand that it’s not possible with a standard channel. But what I’m more interested in is CAN it - the creation of paper sats through lightning - be done at all? My assumption here is that if it can be done, it will be, especially if and as “lightning channels trend towards centralization" as the common criticism goes. Thoughts? #plebchain #AskNostr
No paper sats with the standard lightning protocol. A channel will be funded by an on-chain funding transaction which is always claimable. There is something called 'hosted channels' that does not require that but it does not work out of the box. https://sbw.app/posts/scaling-ln-with-hosted-channels/
Discussion
So technicalIy with lightning its not possible, but with anything running on top of lightning it is possible. A custodial lightning wallet could 'make up' sats and be similar to fractional reserve banking. Nobody will notice until their is a run on the wallet.
How would those fiat sats make their way into wallets? Are you referring to a third layer like an ecash built on Lightning?
A custodial wallet could act just like a bank with fractional reserves. In other words the cumulative amount of sats showing in the app of all their users are more than the balance of their underlying lightning/onchain btc wallets. Only if there is a run on the wallet someone will notice.