Coinbase: What is the status of the BTC Lightning Network in a bear market?

In the 13 years since its birth, Bitcoin has risen from “obscurity” to a market value of $1 trillion, and the total transfer value on the chain has exceeded $60 trillion.

Despite this feat, the decentralized design of the Bitcoin network limits it to only 7 transactions per second. When the demand to use the network exceeds 7 transactions, users experience long wait times and fees can be as high as $60 per transaction. Even with recent fees hovering between $1-2, the Bitcoin network is still not suitable for just buying a cup of coffee in the real world.

But Bitcoin now has the Lightning Network: a layer 2 protocol built on top of the Bitcoin network that can theoretically handle millions of instant transactions per second for just a few cents in fees. If it can be widely recognized, it could even lower fees for payment service giants like Visa and Mastercard, as well as the global remittance market.

But will Lightning Network and Bitcoin really be recognized?

Like most Layer-2s, the Lightning Network was designed to increase transaction throughput and reduce costs, while maintaining sufficient decentralization by moving transaction activity to a second network. Once bitcoin is transferred to the Lightning Network, it can often be transferred instantly, for a fee of just a few cents.

Instead of sending expensive transfers through the Bitcoin network, users can choose to deposit BTC into the Lightning Network and then make cheap transactions through payment channels. As with most Layer-2s, the more people and companies use it, the more useful it becomes.

Obviously, Lightning Network transactions cost less than 1 cent, which is cheaper than using the Bitcoin network. More interestingly, however, the Lightning Network has the potential to replace existing payment service providers for fiat currency transactions without users knowing that BTC is being used as the underlying settlement layer Next we will explain.

Disrupting payment giants

Visa and Mastercard are the world’s major payment service providers. By charging a 2-3% transaction fee every time someone swipes a debit or credit card, they’re making $24 billion in 2021.

Payment service providers leveraging the Lightning Network could undercut this.

Say you want to pay a merchant $100. Using a debit or credit card will incur a $3 processing fee. Now, if you convert $100 to BTC, transfer it to a merchant via the Lightning Network for a fraction of a cent, and the merchant converts the BTC back to $100. A payment service called OpenNode leverages the Lightning Network to do just that, with users paying a 1% fee. Similar logic can be applied to the $40 billion global remittance fee market, where the average fee rate per cross-border transaction is 6.4%.

While it may be more appropriate for users to replace Visa/Mastercard and international money transfer companies with Lightning Network, it is easier said than done. These service providers already enjoy huge network effects, and like any young network, the Lightning Network faces a cold start problem.

So how has the Lightning Network been so far?

The current state of the Lightning Network

While the current adoption of Lightning Network by incumbents is still small (but growing!). Arcane Research estimates that in the first quarter of 2022, the Lightning Network facilitated $20-30 million in monthly payments, which is a 4x year-over-year growth.

The primary way to measure Lightning Network growth is “public node capacity” – essentially how much BTC is locked in public channels. However, an estimated 30% of channels are private, making it difficult to account for the true value in the network. What we can see, however, is that public access is growing.

When measured in U.S. dollars, the Lightning Network was hit by a drop in the price of BTC. Encouragingly, however, the total amount of Bitcoin in the network has hit an all-time high, already surpassing 4,500 BTC (~$100 million).

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What’s more, as adoption rises, so does the ecosystem around the Lightning Network.

Lightning Network Ecosystem

The Lightning Network sits on top of Bitcoin. On top of the Lightning Network is the core infrastructure. On top of the core infrastructure are a growing number of payments and financial services, as well as applications.

Core infrastructure includes Lightning Network solutions as well as node and liquidity services. Lightning Network solutions are software programs that individuals and businesses can run and connect to the Lightning Network – the largest of which is Lightning Labs’ LND, with 70% of the market (as of 2020). Node and liquidity services, which will provide a more user-friendly interface and help manage Lightning payment channels (running your own node independently is complicated).

Built on top of the core infrastructure is a range of payments and financial services and applications. For example, Strike is built on an LND solution that allows users to buy and sell BTC, uses BTC to tip creators on Twitter, and allows merchants on the e-commerce platform Shopify to accept BTC.

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Also built on top of the core infrastructure are a growing number of emerging use cases. Mash, for example, aims to disrupt the creator subscription model with streaming micropayments — paying just a few cents in BTC for every minute you watch your favorite shows, rather than buying expensive, all-inclusive “subscriptions.” Zebedee uses the Lightning Network to implement a game economic model, rewarding players with a small amount of Bitcoin.

Growing Accessibility and Momentum

As the ecosystem steadily grows, so does the user usage of the Lightning Network. Between Cash App’s integration of Lightning and El Salvador’s launch of its Lightning-enabled Chivo Wallet, the number of users using Lightning surged from 10 million to 80 million (El Salvador launched a wallet with mixed success, according to a study) Only 5% of daily transactions in the country are in BTC).

There are 26 cryptocurrency exchanges that also support the Lightning Network, with Kraken, Bitfinex, and Bitstamp being the most prominent. Robinhood also recently announced the integration of the Lightning Network, which is used by the platform’s more than 20 million users; and Paxful, a peer-to-peer trading platform, which provides Lightning Network transactions to its more than 7 million users. Users of these exchanges can deposit and withdraw Bitcoin instantly and cheaply from any Lightning wallet, increasing speed and reducing costs compared to typical BTC transactions.

Funding is also on the rise, with OpenNode raising a Series A round at a $220 million valuation and Lightning Labs raising $70 million for its Series B round. Notably, Meta’s former head of crypto, David Marcus’ Lightspark, has raised a Series A for an undisclosed amount to develop Lightning Network infrastructure for companies, developers, and merchants.

Barriers to Adoption

Potential, funding, and momentum are visible to the naked eye, but significant hurdles remain. Mainly the lack of developer tools, the need for fast payments, technical barriers, and compliance/regulatory issues.

Developer tools still need to be built to add more applications. Since most people still only see BTC as an investment, we have yet to see widespread demand for it to be used for payments (using Lightning rails for fiat payments is still a compelling opportunity). Despite the progress made by infrastructure companies, the Lightning Network is still cumbersome for new users and merchants.

Finally, the lack of a compliance and regulatory framework limits the adoption of Bitcoin Lightning Network by existing payment service providers.

not very successful start

The Lightning Network was launched in 2018, and it is arguably still in its early stages. About $100 million of BTC is currently locked in the Lightning Network, which is dwarfed by the billions of dollars locked in Layer-2 ( Arbitrum Optimism, etc.) on Ethereum. However, payment activity on the Lightning Network is more reflective of real-world utility than the speculation that drives much of the growth of smart contract blockchains.

Aside from its not-so-successful beginnings, turning the most valuable asset on the Crypto market (BTC) into a true medium of exchange has the power to bring greater financial inclusion to anyone with a smartphone. Replacing fiat currency transactions with the more cost-effective Lightning Network without users knowing they are using Bitcoin could disrupt the $150 billion-plus annual payments industry.

Visa/Mastercard works with fiat currencies, and Lightning Network works with Bitcoin. Combining a universally accessible payment network on top of “the world’s first open source currency protocol” could help BTC develop into a truly global reserve currency. If this is to happen, it will be led by developing countries with high inflation and more smartphones than bank accounts.

Summarize

The growth shown by the Lightning Network is encouraging — especially over the past six months. Notably, this growth comes from a bear market, when fees are relatively low. In a future bull market, as fees on the Bitcoin network rise, we may see a surge in Lightning Network activity, prompting users to use Lightning Network as a cheaper way of transacting.

If the Lightning Network continues to develop, it will have a major impact on the future utility and value of the world’s oldest and most valuable cryptocurrency, BTC.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/coinbase-what-is-the-status-of-the-btc-lightning-network-in-a-bear-market/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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