Will Lightning help Bitcoin become electronic cash at last?
Link copied to
Hear from the industry’s best and brightest about the latest news in crypto and blockchain from Australia and around the world with Jonathon Miller, managing director of Kraken Australia.
A ‘peer-to-peer electronic cash system’ was how Bitcoin was first pitched to the masses in the original whitepaper published by the anonymous Satoshi Nakamoto.
Its vision of fast, virtually-free payments utilising Blockchain technology was revolutionary.
According to the Block’s 2022 research survey, Bitcoin Knowledge and Perceptions, in some parts of the world such as lower income nations, Bitcoin is indeed seeing a rise in its use as an alternative payments mechanism.
However, for the western world, it’s safe to say Bitcoin is still primarily used as a way to store wealth instead of transact.
There are good reasons for this. Block space is limited, fees can be high (although still cheaper than traditional remittance systems), and difficult to predict (from a few dollars to over sixty).
Equally important, the speed of the transactions also hinders its adoption – approximately seven transactions can be made per second on Bitcoin’s blockchain.
Finally, the inherent transparency of all actions being recorded on the blockchain mean that interested parties could research a user’s address and get an insight into what goods and services they are buying.
Can Lightning strike?
The Lightning Network is an off-chain, Layer 2 solution that addresses some of these pitfalls. In layman’s terms, Lightning makes the original vision of using Bitcoin like you would cash far more appealing, by making it as fast and cheap as possible.
For Bitcoin, Lightning aims to solve the speed and fee limitations by providing instant and inexpensive transactions while achieving a throughput of approximately 1 million transactions per second.
That’s significantly more than Bitcoin’s comparatively meagre seven per second/420 per minute, but to give it some perspective: Paypal can handle 11,590 per minute and Visa 3.9 million transactions per minute.
1 Million transactions per second is more than enough bandwidth – and, even better, the fees are close to zero.
That seems fast… how does it work?
It does this by forming a direct channel between the buyer and seller. These two parties can then transact as they wish, and when they are done they can close the channel.
When closed, the Lightning network logs that a channel was opened and closed between the two parties on the blockchain.
This is far less data, which means that it is faster, cheaper and helps address the privacy issues at the same time.
It is much more difficult for outside observers of the Bitcoin network to track where you are spending your BTC, helping alleviate the privacy concerns of Bitcoin.
Currently, Lightning can be used for any type of transfer, but most find it useful for micropayments or smaller transfers that are typically uneconomical due to base layer fees.
But when those fees are near-zero, you can tip a dollar to a twitter profile without worrying about 90c being eaten away by fees.
This is kind of a big deal
What Lightning brings cannot be understated. It is in many ways a new utility to Bitcoin, and most importantly, it is being supported by some of the world’s most widely used platforms like Twitter (via Strike) and BitPay, as well as leading crypto exchanges like Kraken.
That’s just to name a key few as the list is growing. There is an increasing number of companies announcing plans to adopt Bitcoin payments for their goods and services, or even for paying their employees.
With Lightning, we are much closer to Bitcoin becoming the global medium of exchange and peer-to-peer cash system that was originally laid out in the seminal whitepaper Bitcoin: A Peer-to-Peer Electronic Cash System.
Its implementation is a major milestone towards greater cryptocurrency adoption as consumers can transact instantaneously with a global, borderless and permissionless money.
This article was developed in collaboration with Kraken Australia, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.