- The increase in adoption and integration has resulted in the Lightning Network’s public channel capacity reaching 3,624 bitcoins or $143 million, a 198% year-to-date increase.
- The growth of infrastructure service providers, including node cloud hosting and node management software companies, has made it easier for users and enterprises to integrate Lightning into their products and services using the Lightning Network.
- Users who can use Lightning Payments increased from 10 million in October 2021 to over 80 million in March 2022.
- Taro is a new Taproot-backed protocol from Lighting Labs that aims to bring stablecoins and other assets to Bitcoin and the Lightning Network.
Most people in the crypto space are aware that Bitcoin’s base layer has scalability issues. The Lightning Network (LN) was first launched in 2015 to solve scaling problems by using a network of layer 2 payment channels anchored to the underlying protocol. Over time, the Lightning Network scaling method has grown in popularity and is now considered the de facto scaling solution for Bitcoin.
Launched in 2018, the Lightning Network had a lackluster first three years of adoption. At the beginning of 2021, the public capacity of the Lightning Network (that is, the total value locked) is only about $40 million, and it is estimated that fewer than 100,000 users can pay with the Lightning Network. The network appears to lack the necessary incentives to channel liquidity in payment channels to facilitate transactions. Additionally, the network is not capital efficient as it has to pre-fund channels with Bitcoin, which adds another barrier to adoption.
Despite the slow growth of the Lightning Network in its first few years, things will change in mid-2021 as the network gains meaningful adoption. However, despite all the development and integration that has happened over the past year, Lightning Network development has been left behind as alternative Layer-1 platforms with more flexible use cases have captured the market’s attention.
Lightning Network Adoption
Before 2021, there will be little adoption of the Lightning Network, due in part to the complexity and lack of infrastructure associated with setting up nodes and utilizing the network. However, in 2021, the technical foundation of the Lightning Network has matured. The major Lightning Network implementations (Eclair, Core Lightning, and LND) add a number of features to make things easier for developers. Additionally, many node cloud hosting and node management software companies come online to support the ecosystem. These developments make it easier for users to adopt the Lightning Network and enable businesses to integrate the Lightning Network into their products and services.
The Lightning Network debuted on the world’s main stage in mid-2021 when El Salvador announced the adoption of Bitcoin as legal tender and the release of Chivo, a state-backed wallet based on the Lightning Network. Soon after, Twitter incorporated the Lightning Network into their tipping feature.
There has been no Bitcoin upgrade for a while since SegWit in 2017, and Taproot was activated in November 2021. Taproot allows signature aggregation, providing greater privacy and scalability for Lightning transactions, resulting in lower fees when settled at the base layer.
In early 2022, Cash App will integrate Lightning Network-enabled payments and money transfers into their app. This important milestone helped increase the number of users paying with the Lightning Network from 10 million in October 2021 to over 80 million in March 2022. Soon after, Kraken integrated Lightning Network deposits and withdrawals into their service, and within a month, their node became the sixth largest on the Lightning Network.
At the Bitcoin 2022 conference, Strike announced key partnerships with Shopify, NCR (the world’s largest PoS provider), and payments company Blackhawk. Strike is an application on the Lightning Network that separates Bitcoin assets from the Bitcoin network. Their goal is to use the Lightning Network as a payment rail to disrupt global transactions and remittances by sending fiat-to-bitcoin-to-fiat payments. Users can pay in Bitcoin without being subject to price volatility, tax liability, custody challenges, and node/channel management. If these integrations materialize, Strike could provide merchants with an experience superior to traditional card networks by offering near-zero fees for instant global settlement payments.
As more traditional payment processors, fintech applications, and exchanges integrate the Lightning Network, the network effects surrounding its low-fee alternative payment rail should continue to strengthen. This is exactly what happened in early April 2022, as BitPay and Robinhood announced that they would also integrate with the Lightning Network.
BTC capacity held in public channels hit a new high of 3,624 bitcoins or $143 million. The combination of increased adoption and integration has resulted in a massive 198% increase in the Lightning Network’s public channel capacity over the past year. In terms of total value locked (TVL), the Lightning Network ranks 37th. By comparison, 339,172 bitcoins were encapsulated and bridged to ethereum, indicating that the Lightning Network is still relatively small.
The Lightning Network’s public metrics are not ideal for measuring network adoption. Since private Lightning Network channels are not considered in any public metrics, this one metric ends up being lower than true. To get an idea of how much hidden volume there is, BitMEX Research estimated in January 2020 that 27.8% of all channels are private. Based on that percentage (which is now estimated to be higher), the total BTC capacity is around 4,600 bitcoins or $183 million.
Unlike most other public blockchains, the Lightning Network is designed as a black box. To understand the volume of payments on the network, Arcane Research collects private data on ecosystem participants. Estimates of payment volumes include payments for goods or services, payments/transfers between individuals, and deposits/withdrawals for financial services. Their findings show that over the past year, payment volume has grown by more than 400%, with the number of payments roughly doubling.
Source: Arcane Research
Arcane Research also used data from the first two months of 2022 to separate payment volumes into different categories. They found that 48% of payment volume was transacted directly between individuals, including remittances and peer-to-peer transactions to friends. Deposits/withdrawals from transaction services accounted for 32% and purchases of goods or services through payment processors or gift cards accounted for 19%. The remaining 1% comes from other types of payments, mostly micropayments and rewards. Interestingly, this 1% accounts for more than 60% of the transactions sent by the Lightning Network. This phenomenon shows that gaming, streaming and social applications built on the Lightning Network are gaining traction as they use micropayments to send messages, access content or support creators such as Sphinx or Fountain.
The number of nodes and channels can be used to gain insight into the overall growth of the network. Of course, they’re not a perfect indicator of network adoption, as most new users don’t actually set up self-hosted solutions to take advantage of the Lightning Network. Warnings aside, the number of Lightning channels and nodes has experienced exponential growth recently, up 58% and 92% year-to-date, respectively.
Overall, the LN ecosystem appears to be thriving. The technical base layer associated with node infrastructure has matured, wallet support has increased, financial services and payment processor integrations continue to grow, and more entertainment applications are being built on the Lightning Network. Additionally, many companies are building the tools and services needed for Bitcoin and LN to reach mainstream adoption. For example, Voltage provides hosting services for Bitcoin and Lightning nodes on the cloud, which take about 5 minutes to set up. Infrastructure companies like Voltage are needed to take adoption to a new level.
Source: Arcane Research
Lightning Network and the Future of Bitcoin
Stablecoins with a market cap of over $186 billion have undoubtedly become the killer app for cryptocurrencies. Taro is a new Taproot protocol from Lightning Labs that aims to bring stablecoins and other assets to Bitcoin and the Lightning Network. If successful, Taro will enable users to send stablecoins and other digital assets through LN at almost zero cost. This could potentially bring more users to the network, driving more transaction volume and liquidity for Bitcoin, and higher routing fees for node operators. The challenge is getting users to switch from an established protocol with strong network effects.
Bitcoin miners are rewarded for securing the network by receiving on-chain transaction fees and block subsidies. Since the Lightning Network is designed to shift most of Bitcoin’s network activity away from the underlying protocol, there has been intense debate over whether Bitcoin’s security model will remain sustainable once the block subsidy approaches zero. Olaoluwa Osuntokun, CTO of Lightning Labs, believes that increasing Lightning Network activity and adoption will benefit Bitcoin by increasing demand for base layer block space. The Lightning Network will do this by increasing the number of on-chain transactions from channels being opened/closed as well as from operators rebalancing channels and optimizing connectivity and capacity. This ensures that miners remain sustainable, but once the block subsidy dries up over the next century, time will tell.
The Lightning Network has historically struggled to gain mass adoption, but it has recently started to gain traction as more payment processors, exchanges, and fintech products have begun adopting it. This adoption trend is likely to continue as the ecosystem matures with more Lightning infrastructure and service businesses make it easier to set up nodes and utilize the network.
The Lightning Network is still in its early stages, and only time will tell if scaling solutions will work as planned when more than 100 million daily users start using them. However, if the Lightning Network can effectively scale and gain adoption, and if Taro is successful, Bitcoin could soon find itself positioned for mainstream adoption.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/q1-2022-lightning-network-report-network-channel-capacity-up-198-ytd/
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