Is the Lightning Network the future of money?

• Bitcoin's scaling issue
• How the Lightning Network provides a solution
• Achieving Network Effects
• Current state of adoption

Bitcoin is often described as the future of money, yet it is widely accepted that transactions are too slow and expensive for everyday purchases, where speed and convenience are critical. When confronted with that reality Bitcoiners confidently point to the Lightning Network as the solution, so what does adoption look like and can Lightning become the future of money?

Bitcoin's scaling limitation

According to Bitinfocharts.com the average time it currently takes a Bitcoin transaction to be confirmed, that is mined and added to the blockchain, is 11.4 minutes. Bear in mind that six confirmations are recommended to guarantee finality and you can quickly see the issue with on-chain bitcoin transactions for anything where speed is of the essence, which is the bulk of everyday transactions.

Not only are bitcoin transactions slow, the fee structure is regressive, meaning that it is less economical for smaller amounts. The average fee at the time of writing is around $3, which would mean that the fee for buying a cup of coffee with bitcoin would be equal to the price of the beverage - putting aside the fact it would be stone-cold by the time the transaction was confirmed.

This shouldn’t be regarded as a weakness in Satoshi’s blueprint because he (or she) never intended Bitcoin to be used for heavy throughput of low-value transactions. Scalability was sacrificed in favour of decentralisation and security. 

This trade-off is known as the blockchain trilemma, and is the largest point of contention within crypto. It resulted in the block size wars of 2017, saw Bitcoin forked and has spawned numerous different approaches to the crucial consensus process - Proof of Work - that the Bitcoin Protocol (it’s rule set) tries to ensure new blocks are added roughly every ten minutes.

How the Lighting Network solves the scaling issue

The genius of the Lightning Network as a solution to this problem, is that nothing changes in the way bitcoin works, there is no compromise in the focus on security and decentralisation, the issue of speed and convenience is solved in what is described as a second layer of activity.

Going back to the coffee shop, we can see how the Lighting Network enables you to transact with bitcoin as quickly as if you were tapping your visa debit card. The Lightning Network enables you to fund a ‘channel’ between you and the coffee shop - a bit like a pre-funded tab. You can then spend back and forth instantly within the limits of the funds committed, and with minimal fees.

Only when you want to settle-up, and cash-out whatever funds remain in the channel, does the Lightning Network send an on-chain transaction - communicating with the main Bitcoin blockchain - requiring the normal confirmation time and fee.

That explanation vastly simplifies the process; don’t worry, for example, about creating relationships with every vendor you interact with. The Lightning Network uses hubs that can route transactions, minimising the number of channels you need to directly connect to. As the Network Effect grows, six degrees of separation should enable you to interact with any Lightning Channel across the network via a large routing hub.

The initial period of Network growth is the hardest - who wants to download and fund a Lightning Wallet knowing there is nowhere to spend it; equally vendors will be reluctant to offer LN as a payment method if there aren’t many users.

So why isn’t everyone using the Lighting Network?

The Lightning Network is facing the same problems that any new payment rail faces when trying to grow - usability and network effect.

To use the Lightning Network you need a wallet that supports it and to understand some of the finer details. Over time, the usability of Lightning Wallets has been dramatically improving to smooth the process of opening channels, sending funds and requesting payments by creating what is known as an ‘Invoice’. Bottlepay, Breez, Zap & Eclair are just a few of the names worth checking out.

At the same time as usability is being addressed, more services and retailers need to offer LN, in order to provide the incentive for user adoption. This familiar catch-22 situation is what is described by the term Network Effect. An increase in new users translates into greater utility for existing users.

The initial period of Network growth is the hardest - who wants to download and fund a Lightning Wallet knowing there is nowhere to spend it; equally vendors will be reluctant to offer LN as a payment method if there aren’t many users.

The motorcar and email suffered the same challenges, but so long as the fundamental utility is strong, users and retailers will have good reason to adopt. So are they?

Lightning Growth - Gradually then suddenly

Though the LN has the power to enable bitcoin as a true medium of exchange, it has been growing quietly and without fanfare. Those within the community are paying close attention to adoption, but beyond that few were aware of the steady progress being made in terms of channels and users. That was, of course, until in June of this year, when El Salvador became the first country to make Bitcoin legal tender.

El Salvador’s economy is hugely reliant on remittance of dollars from those Salvadorians who work in the US; yet they face exorbitant fees and long wait times, often having to collect money in person, at considerable personal risk. Through Strike, El Salvador could become the biggest user base of Lightning.

Right now there are almost 13,000 nodes on the Lightning Network, and over 50,000 channels with $59 million of locked liquidity with an average capacity of $1,000 per channel. Though those numbers may seem pretty small compared to the Visa network, what is important is growth rate.

Bitcoin can only process between 2 -7 transactions per second. For context, Visa, the legacy payment network that powers your debit and credit cards you use for shopping, process up to 150 million transactions a day. In comparison, its network capacity is 24,000 transactions per second. 

In theory, the Lightning network could easily process transactions running in thousands or hundreds of thousands instantly, giving it a great use case in micropayment transactions,

The number of nodes has increased by over 110% in the last 12 months, almost four times the growth rate of the previous year. There were just 10,000 channels in 2018, which means a five times increase in under three years. The Network Effect is starting to kick in.

The Lightning Network has received a big shot-in-the-arm from El Salvador, with reports suggesting 25% of the country's 4.5million adult population are now using a Lightning Wallet. This may encourage a slew of other remittance-dependent countries hinting to follow suit.

Twitter's addition of a tipping service on September 24th, 2021, using the Lightning Network via Strike, provides another huge milestone, allowing its 200 million users to make instant micro-payments in Bitcoin to recognise quality content.

Alongside these big milestone events there are big strides being made with usability, so LN may yet prove to be bitcoin’s killer application in the struggle to fulfil its function as the future of money.