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The major player Fidelity has released an encouraging report on the Lightning Network, a system that facilitates instantaneous and virtually cost-free bitcoin transactions.
Understanding the Lightning Network
The Lightning Network serves as a secondary framework linked to the Bitcoin network, designed to enhance transaction capacity and protect payment privacy.
This network addresses the sluggishness and sometimes hefty charges associated with “on-chain” transactions. In technical terms, this relates to “Layer 1” and “Layer 2.” Here, Layer 1 refers to the Bitcoin blockchain, while Layer 2 corresponds to the Lightning Network.
The Bitcoin network is structured to create a transaction block every 10 minutes. Each of these blocks can accommodate up to 4 MB, which equals roughly 3,000 transactions. While this may seem limited, it was intentional. Increasing block sizes was an option, but it would have jeopardized decentralization.
The feasibility of enlarging block sizes has sparked extensive debate, leading to the BCH (Bitcoin Cash) fork in 2017. This endeavor was not successful, as one BCH is now valued at only 0.3% of a BTC. The consensus among the market is that a blockchain with limitless block sizes would weaken decentralization.
Decentralization is reliant on a plethora of nodes that form the Bitcoin network’s backbone. These nodes validate transactions and maintain adherence to the protocol, particularly the cap of 21 million BTCs.
However, the number of nodes correlates directly with their operational costs, which arise from the memory capacity needed to store the blockchain (currently standing at 630 GB). Rampant block size increases would inflate costs and threaten the decentralization essential for Bitcoin’s credibility.
To overcome these issues, developers such as Thaddeus Dryja put forth the Lightning Network, which facilitates transactions in mere seconds for minimal fees, all while safeguarding Bitcoin’s core characteristics, including decentralization.
Making a coffee purchase with the Lightning Network:
Important Statistics
Launched in 2017, the Lightning Network was created in response to the advocates of larger blocks who eventually established BCH through a hard fork.
Since its inception, numerous cryptocurrencies have been introduced, claiming to tackle Bitcoin’s perceived issues with low transaction throughput. However, that is misleading. The focus was on security, and enhanced transaction efficiency was achieved via the Lightning Network.
Nonetheless, the network’s expansion has been relatively slow. This is partly because Bitcoin is largely viewed as a reservoir of value. Consequently, people prefer to utilize their euros or dollars before their bitcoins. Additionally, capital gains tax (which may soon be eliminated in the U.S.) discourages spending.
Furthermore, utilizing the LN initially requires an on-chain transaction to transfer bitcoins to a designated Lightning network wallet (such as French Phoenix, Breez, Zeus, etc.). Therefore, sizeable top-ups during high fee periods on the Bitcoin network are advisable.
Following that initial transaction, subsequent transactions are nearly instantaneous and cost-ineffective. The Fidelity report states that fees average 0.02% for transactions between 100 and 1000 euros, while it’s 0.24% for those between 1 and 10 euros.
“Transactions exceeding a million satoshis (~ 1,000 €) incur costs ranging from $0.39 to $1.27. This fee-to-transaction ratio is indeed rare in the conventional sector,” the report notes.
The speed of transactions is also strikingly different from that of the Bitcoin network. Data from Voltage indicates that payments below 1000 euros are completed in under a second.
The Best is Yet to Come
Data from Voltage shows nearly a 200% rise in payment volumes from 2023 to 2024, translating to a staggering increase of 2,400% since 2022. While this is promising, it’s important to note that transactions via the LN still represent only a small fraction of global transactions conducted through Visa, Mastercard, etc.
Platforms for exchanges like Coinbase and Kraken have adopted this technology to reduce withdrawal fees for their users’ bitcoins. Additionally, the decentralized social network Nostr employs the LN, allowing its users to send tips referred to as “zaps.” Reports indicate that over 3.6 million zaps were sent in the previous six months.
Moreover, the LN’s growth may also stem from banks currently relying on the SWIFT network and various third-party players that considerably delay international transactions (clearing houses, correspondent banks, etc.), not to mention the associated costs.
Ultimately, the LN could evolve into an efficient technology for immediate and definitive international settlements among banks, particularly if Bitcoin establishes itself as a global reserve currency…
The report brings attention to another fascinating aspect of the Lightning Network: the “Taproot Assets” protocol. This protocol enhances the LN’s capability by allowing the transfer of any type of tokenized asset, such as stablecoins, gold, or corporate bonds.
“Thus, we expect ongoing expansion of the Lightning Network, despite Bitcoin’s perception as a store of value limiting its expenditure,” concludes Fidelity.
The Lightning Network still has much to offer. Its potential will undoubtedly increase when capital gains taxes are abolished globally…
In conclusion, no cryptocurrency can rival the Lightning Network’s ability to process transactions at such low costs.
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Journalist covering Bitcoin, geopolitics, economics, and energy.
DISCLAIMER
The perspectives, ideas, and opinions communicated in this article belong solely to the author and should not be interpreted as investment advice. Always conduct your own research before making any investment decisions.
