Bitcoin’s Lightning Network is Gaining Adoption
Happy Monday!
Bitcoin’s lightning network is doing for payments what the internet and cell phones did for messaging.
It used to be that to send a message, you would need to write a letter and give it to an intermediary like the Postal Service (or a well-trained pigeon). You would wait patiently while the intermediary ferried your message to its destination, and you would cross your fingers that the message isn’t lost or delayed. Public internet infrastructure, along with the cell phone, changed all that. Now it doesn’t matter where you are – you can plug into this infrastructure to send messages to anyone, anywhere in the world, so long as you have their unique phone number.
Bitcoin and the lightning network are doing the same thing. Rather than rely on banks or on Western Union, people anywhere in the world can plug into a public utility via the internet to send payments to anyone they want so long as they have their unique Bitcoin address. You don’t need a bank account or even an ID, you just need to download an app on your phone, connect it to the network, and you’re ready to go.
A current visualization of the Lightning Network
But, let’s back up a second, what actually is the lightning network?
The lightning network is a special payments infrastructure built on top of Bitcoin (also called a “layer 2 solution”). Its goal is to make Bitcoin cheaper, faster, and easier to use for everyone. To understand what I mean by “second-layer”, let’s first take a look at the first layer, or “base layer”.
Bitcoin’s base layer is the Bitcoin network we are all used to. If you want to send Bitcoin to your neighbor, you submit a transaction to the network which then needs to be processed in a “block” and added to the blockchain. Bitcoin blocks take (on average) around 10 minutes to confirm, but in many cases the transaction won’t be “set in stone” until three to four blocks later – that is when the transaction becomes truly impossible to reverse – and this can sometimes translate into wait times of up to an hour.
In addition to this, every transaction on the base layer needs to pay a network fee in Bitcoin, which usually costs a few dollars. This makes small transactions or payments in Bitcoin (for instance, buying a cup of coffee) mostly unfeasible.
Enter the Lightning Network. Lightning allows Bitcoin users to make transactions “off-chain”, this means transactions made through the lightning network don’t need to be recorded on the main blockchain (“on-chain”) and thus aren’t subject to the long wait times or high transaction costs.
How does this work? Well the cryptography involved gets pretty advanced, but the essential point is users can pay a one-time fee to deposit their coins into a “payment channel” by using a special cryptographic technique to “lock” their coins on the main blockchain. Once they’ve deposited coins to the channel, they can now use the lightning network – where transactions are nearly instant and cost a fraction of a cent. Also, because transactions in the lightning network don’t need to be recorded on the main blockchain (i.e., the public ledger), senders in the lightning network also enjoy increased privacy.
And the lightning network is decentralized. Anyone can run a lightning-compatible node to help relay transactions on the network, and anyone can set up a payment channel. Each of these actions serves to increase the reach, usability, and capacity of the network as a whole.
Networks like this don’t grow linearly, they grow exponentially.
Sure enough, growth in the lightning network has been rapidly increasing. The three main growth metrics to watch are capacity (total Bitcoin locked in payment channels), the number of channels (which are touchpoints in the network), and the number of relay nodes (which help facilitate transactions).
As reported by the free lightning network analysis engine 1ML, over the past 30 days nodes are up >8%, channels are up >13%, and capacity is up >17%.... once again this is just since last month! Here is what capacity growth looks like since the end of 2017.
The promise of an open, decentralized monetary network is hard to resist. Companies like Strike.me are innovating to help users of all types access this new public infrastructure quickly and easily. In a recent demo, founder Jack Mallers demonstrated sending $10 to a friend Nigeria – and converting to the local currency, NGN – in seconds. Compare that to legacy services like Western Union, which are clunky, slow, and expensive to use… it’s not even close.
I think this is a complete game changer.
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Have a great week!
Shahar
This newsletter is meant for informational purposes only. It is not meant to serve as financial advice. If you are interested in financial advice, please schedule a personal consultation with me, and be sure to read the accompanying disclaimer.
