Bitcoin: Lightning on the cusp of breakout growth.
Tags: Lightning Network, Bitcoin, Lightning, Fintech, Bitcoin News

Bitcoin: Lightning on the cusp of breakout growth. Ankur Follow Aug 23 · 6 min read

TL;DR From Nassim Taleb’s black paper to Peter Schiff’s tweets, scaling has been a major criticism of Bitcoin. Because of the growth of the Lightning network, which is going parabolic since January this year — the skeptics might be in for a surprise.

Context

The Bitcoin “block space” is a free market. The fee required to send a Bitcoin transaction varies and depends on the supply and demand for the block space. Bitcoin has a “maximum block size” (4 MB) that limits the maximum amount of transaction data added to the block. The Bitcoin network targets that a new block is being mined every ten minutes. It makes Bitcoin’s block space a scarce resource, and with ever-increasing demand, more expensive. Evidently, it is impractical to use Bitcoin’s base layer to pay for your coffee. To the people who are new to the community and weren’t there to experience the days of Bitcoin civil war, the most obvious solution to this problem would seem as easy as increasing the Bitcoin’s block size to meet demand, as Elon Musk recently suggested:

There’s a fundamental flaw in this approach. Censorship resistance is one of the main properties that make Bitcoin special. Bigger blocks would increase the cost of verification, making running a full Bitcoin node expensive and dissuade people from verifying the Bitcoin transactions. The Bitcoin network would then become less decentralized in the long run as in a peer-to-peer network, more geographically dispersed nodes (or peers) are directly proportional to the network’s robustness against censorship. It is thus incumbent upon us that we work towards keeping the cost of running a full node as low as possible. Luke Dash Jr, a Bitcoin core developer, has even proposed to shrink the Bitcoin blocksize further down to 300kb.

For Bitcoin to be used as a medium of exchange for billions of users — it needs to scale. It was clear that increasing the blocksize is not an acceptable solution, and the community needed to look further. Various scalability solutions have been proposed over the years. The lightning network got the most traction and has long been touted as a solution to Bitcoin’s scaling problem, with the entire “small block” community rallying behind it. Right from the days of blocksize war, it has had its fair share of criticisms. Roger Ver and the BCash proponents have dismissed it as too complex and hard to use. Others have often ridiculed it as an impractical solution with slow progress. The recent stats, however, tells a different story. The total value locked (TLV) in Bitcoin’s publically advertised lightning channels has doubled since January this year and crossed 2300 Bitcoin ($115m) as depicted below:

Bitcoin locked in public lightning channels

From its inception, the lightning network is architectured with privacy-preserving ethos. So we don’t have any quantitative way to find out the total capacity of private lightning channels. Nevertheless, the public channel capacity is a good proxy to gauge the growth of the lightning network. As depicted, the numbers look promising, indicating that the double-side network effect is starting to get established and is poised for breakout growth.

Custodial Exchanges

Many factors contributed to the unprecedented growth of the network in the past few months. Major Bitcoin exchanges like Bitfinex, OkCoin, and Kraken have all already integrated or are in the process of integrating lightning-powered deposits and withdrawals. The resulting increase in efficiency also helps the network and bootstraps the liquidity for the users of lightning. Speculative use-cases of these exchanges will result in the protocol maturing and hitting a critical mass of liquidity, which would improve the protocol’s user experience. This feature also helps a regular user as cheap and instantaneous, deposit and withdrawal mitigate the custodial risk of keeping the funds on an exchange wallet.

LNMarkets Total aggregated. trading volume

LNMarkets, a Bitfinex funded Bitcoin derivative platform, was the first to bring this feature to the market. It has now pulled over $200m in aggregated trading volume since its launch in Q1 of 2020. As the protocol matures more, we will see other large-scale derivative exchanges like FTX, Binance, and ByBit integrate lightning as well — which will work as a catalyst for user adoption by helping the network hit a critical mass of second-layer liquidity. It will also make Bitcoin arbitrage faster and less capital intensive, making the market more efficient in the process.

Remittances — Strike

Strike is operating as a Bitcoin-lightning-native neo-bank. Within six months of public beta, they have five-figure registered users and millions of dollars in volume per month. Strike is operational in the US, with Strike Global soon to be launched. They have partnered with crypto exchange Bittrex, and plan to onboard 1M+ Bittrex users onto Strike and the lightning network. They also plan to issue Strike VISA cards in the US. Unlike Cashapp or Venmo, which curates a walled garden and only allows for intra-network transactions among its users, Strike’s use of an open lightning network makes it interoperable will all lightning nodes and wallets in existence by default. On the other hand, Strike also “talks with the user’s bank” — making fiat onboarding seamless. Stripe leverages globally ubiquitous Bitcoin “the network” to settle fiat denominated transactions fast and make remittances cheap.

The lightning backend — Galoy

Galoy is the official technology and wallet provider for the pilot Bitcoin beach project in El Salvador. Bitcoin Beach is an initiative designed to create a sustainable Bitcoin economy — utilizing the Lightning Network. The project is based in El Zonte, a town of roughly 3,000 residents on the Pacific Coast of El Salvador. Galoy is currently in the proof of concept stage and has > 6000 registered users. In the US, merchants accept card payments, which have an interchange rate, a fee that a merchant must pay with every credit card and debit card transaction. Financial service firms charge this fee in return for accepting the credit risks and handling charges inherent in credit card transactions. We believe that lightning provides a better alternative to the merchants, with fewer inherent fees. B2B services like Galoy can become a “Stripe for the lightning economy” — by providing developer toolings to SMEs. Galoy is entirely open source, and we are very excited about the prospects here.

Closing Thoughts

The various node implementations of the lightning network are under active development, and the protocol is maturing with every passing day. Many challenges are yet to be tackled, like better user experience, higher liquidity, more robust security, and even a favorable regulatory landscape. Optimism doesn’t wait on facts, it deals on prospects, and we have a lot of it. Twitter and Square (Cashapp) have hinted at the plans to integrate the lightning network. Jack Dorsey recently said that it is “only a matter of time” before Twitter launches their Lightning network integration. Many prominent podcasters are already accepting Bitcoin streamed to them per second on the apps like Breez and Spinx. El Salvador will soon airdrop $30 on lightning bitcoin to all of its 6 million citizens. We at HCM Capital are excited about the prospects here and believe that the network will continue to grow orders of magnitude in the coming years, ushering in the new era of financial sovereignty and freedom for the world.