The Bitcoin Lightning Network is the scaling solution put in place to help make Bitcoin (BTC) a peer-to-peer electronic cash system. This decentralized network makes it possible to send Bitcoin transactions instantly for next to nothing. Critics of Bitcoin often point out that the blockchain is slow and costly to send transactions, but the Lightning Network was designed to overcome these scalability challenges.
In the last 12 months, the Bitcoin Lightning Network has undergone significant growth as measured by the amount of Bitcoin locked within the network. There is now more than 3,900 BTC on the Lightning Network, which is a rough proxy for its growth and success. This figure is up more than 300% from mid-2021, indicating that the network is undergoing explosive growth.
Before we dive into who is using the Lightning Network, and what it means for Bitcoin’s future, we first need to cover a few definitions.
Conceptualizing the BTC Lightning Network
There are a few key concepts to cover in order to gain a functional understanding of the Bitcoin Lightning Network and how transactions take place.
A channel is like a bar tab between two parties. Instead of burdening the Bitcoin blockchain with a transaction every time a person wants to buy a drink, a lightning channel is set up between two nodes on the network. The person can buy as many drinks as they want within that channel, and settle the tab at the end of the night. When the tab is settled, the channel is closed and both parties receive their owed balance.
BTC on channels is free to flow through multiple nodes in order to reach its destination as long as every channel remains balanced along the way. This allows BTC to flow anywhere in the world, between any two parties. Channels overcome the need to make a transaction on the blockchain every time someone wants to send Bitcoin. Instead, a channel that can handle thousands of transactions requires just two on-chain transactions – one when the channel is opened, and one when the channel is closed.
Channels must be set up with a specific amount of Bitcoin within them. For example, let’s consider a channel that is opened between a patron and a bartender for 10 BTC, and each drink costs 1 BTC. A maximum of 10 drinks can be bought for 1 BTC each within this channel. If the patron wants more drinks, they will have to add more Bitcoin, or “liquidity,” to the channel.
Nodes on the Lightning Network are the nexus points through which Bitcoin can flow. Channels are set up between nodes creating a mesh of connections that facilitate payments between any two parties on the entire network. The Lightning Network functions best when there are many nodes, with lots of channels that are populated with Bitcoin.
Who is using the Lightning Network?
It is all well and good to say that the Lightning Network is growing, but if no one is using it, then what’s the point? We can reference a number of other statistics in order to confirm that usage is growing alongside its capacity.
El Salvador and the Lightning Network
The Lightning Network is currently in use in El Salvador and has been since as early as 2019. El Zonte, El Salvador, otherwise known as Bitcoin Beach, is the home base of the Bitcoin movement.
El Salvador is considered to be a dollarized country, meaning its economy inherits, and is dependent, on the US dollar as its primary currency. This dollarization makes it difficult and expensive for people working abroad to send money back home to their families in El Salvador. Since the network makes international payments nearly free and instant, it is an appealing solution to the issue of remittances.
Cryptocurrency exchanges integrate the Lightning Network
Cryptocurrency exchanges such as Kraken have now begun to integrate the Lightning Network into their deposit and withdrawal systems. This is a big deal since withdrawing Bitcoin from exchanges has historically been expensive, costing at least $5.00 worth of BTC per transaction. Now users will be able to withdraw Bitcoin to their lightning wallet instantly almost for free. Although Kraken may be leading the way here, Robinhood, Paxful and OKX have all begun integrating the Lightning Network.
What does the Lightning Network mean for Bitcoin?
The technology through which BTC can become a global peer-to-peer electronic cash system depends on the Lightning Network. The Bitcoin blockchain is too slow and takes too long to settle transactions for Bitcoin to ever be used at a point of sale. This is okay. The Bitcoin blockchain is better thought of as an ultra-secure, static and unchanging settlement layer. Fast and cheap transactions are free to take place on secondary platforms like exchanges, apps or the Lightning Network.
Bitcoin as a medium of exchange
If Bitcoin is on a trajectory to becoming a widespread currency, then it needs to eventually fulfill the three functions of money: be a store of value, be a medium of exchange and be a unit of account. As covered above, Bitcoin won’t be able to be a global medium of exchange unless millions of transactions per second are able to take place. The Lightning Network makes this possible, though there still needs to be an increase in nodes, liquidity and channels to make it viable on a global scale. But in the past year, the network has gained significant momentum in terms of its overall capacity to handle more and larger transactions.
Bitcoin is becoming common currency
The Lightning Network will help Bitcoin transition from being exclusively a store of value and into a medium of exchange. It is an essential infrastructure if Bitcoin ever wants to fulfill its destiny of being the “native currency of the Internet”, as Jack Dorsey puts it. The Lightning Network unlocks the next stage of Bitcoin’s growth by giving Bitcoin users a means of using it in day-to-day transactions. It helps Bitcoin become money. Without it, Bitcoin may just remain an obscure way to store value on the Internet.
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