History of the Lightning Network
In 2009, Satoshi Nakamoto published the whitepaper to one of the most disruptive – if not THE most disruptive – financial, technological breakthroughs of the modern era: Bitcoin. Six years later, February 2015, Thaddeus Dryja and Joseph Poon further improved the Bitcoin network’s scalability issue by publishing their co-authored paper known as “The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments.” Since the release of these two renowned, innovative and influential proofs of concept the world of finance has evolved from being skeptics to becoming active contributors & adopters of this technology! From Laszlo Hanyecz’s legendary “Bitcoin Pizza” to El Salvador becoming the first nation to make Bitcoin legal tender (establishing a national use-case for Lightning Network), it is safe to say that we are experiencing a global phenomenon that will disrupt the foundations of established remittance & global payment infrastructure(s).
Nevertheless, if this is to be the case, the question remains for most: What is Lightning Network?
Let’s go down the rabbit hole and find out.
What is The Lightning Network?
Bitcoin’s Lightning Network is an off-chain (Layer-2) protocol that is composed of multiple payment channels with an aim to minimize value-transfer congestion on Bitcoin’s mainnet – known as blockchain bloat. What does this mean? Well, to put it simply, the objective of Lightning Network is to enhance usability & scalability capacity through the implementation of peer-to-peer payment channels.
In order for these payment channels to exist, there must be at least two parties looking to transact with one another (e.g. customer and a McDonalds). To initiate the payment channel, the customer (‘payer’) would need to deposit some Bitcoin (measured in Satoshis or SATs) onto the network. A smart contract is subsequently created and encoded with agreed upon rules that both parties must abide by, eliminating the need for a third party facilitator and ensuring that both parties fulfill each end of the agreement. The receiver (in this case, McDonalds) will send an invoice to the customer’s wallet notifying them that they owe 2,112 Satoshis (~$1.29) for the McChicken sandwich that was purchased.
Now, for example’s sake, let’s assume that the payer is a loyal customer and genuinely enjoys buying McChicken sandwiches on a regular basis. Luckily for him, the established payment channel could remain open indefinitely between him and McDonalds, enabling him to purchase as many sandwiches as he pleases (as long as he has enough Satoshis to cover the bill). Since Lightning Network is a Layer-2 protocol, transactions between both parties will not be broadcast to Bitcoin’s main network until the channel is closed. Thus, in the event that both parties agree to close the payment channel, all transactions executed therein would be consolidated and broadcast to Bitcoin’s main network as a single transaction.
Lightning Network By The Numbers
Arcane Research recently published a report titled “The State of Lightning”, which details the exponential growth of Bitcoin’s lightning network from infancy to its current state of global adoption. Although officially launching in 2018, the Lightning Network did not experience much usage growth until it went parabolic in September 2021 – directly attributed to El Salvador’s inauguration of Bitcoin as legal tender. El Salvador’s President Nayib Bukele doubled down on his commitment to national Bitcoin adoption by launching the Chivo wallet, enabling today over 3 million onboarded Salvadorians to pay through the Lightning Network on their mobile smartphones.
This announcement alone sent shockwaves throughout the remittances industry, explicitly showcasing a major pivoting from traditional payment services to permissionless peer-to-peer networks. As the composition of payments continues to increase as new users obtain access to Lightning payment, it is inevitable to soon see the increased utilization of Lightning in daily tasks such as merchant payments, bill payments, household expenditures, and of course, remittances.
According to Arcane Research, Lightning adoption in El Salvador could reach approximately 90% of the population by 2026 – suggesting a monthly volume growth of ~$650 million and 20 million transactions towards household expenditures and remittance payments. On a global scale, all eyes are on the success of El Salvador’s approach. If so, other countries will most likely follow suit; especially those with hyperinflation stricken economies, high unbanked/under-banked populations, strong dependence on the U.S. dollar, and deep reliance on remittances.
With these economic conditions in mind, Arcane Research composed a list of countries that have such qualities. It is estimated that these countries have a combined population of 850 million people, 650 million of which are currently unbanked. If 10% of the estimated population were to adopt Bitcoin before 2030, there would be a conversion of 50 million new Lightning Network users by the end of the decade.
At the time of writing there are approximately:
- 17,434 Lightning Network Nodes
- 78,375 Lightning Channels
- An average Lightning Network Channel Size of 0.04035309 BTC
What’s Next For The Lightning Network?
As seen mentioned throughout this article, Bitcoin and Lightning are here to stay for the long haul. The question is no longer if but when will retail users be able to execute micropayments to purchase a gallon of milk at their local grocery store or pay their monthly phone bill. Visionaries such as Jack Mallers and Jack Dorsey are attempting to make this a reality through their respective companies: Strike and, of course, Twitter. Strike is putting lightning network utility directly in the hands of retail users (as seen in El Salvador). Now individuals have the fiat to lightning on-ramp needed to send money to loved ones abroad – without the need of an intermediary service like Western Union or MoneyGram!
To take this a step further, in the realm of social media, Twitter has implemented Strike’s services into a new tipping feature that allows Twitter users to send microtransactions of Bitcoin to one another! This single-handedly may very well revolutionize the way we view the remittance market. People, no matter where they’re located in the world, now have access to an open, private, tamper-proof, decentralized financial system where all one needs is a Bitcoin address (or a Twitter handle) and wifi connection!
The implementation of micropayments on a global scale will gradually transition from nascent use-case to a standard form of transactional practice. Furthermore, as Web3 ecosystems continue to develop these method of payments will further stimulate the creation of a robust gig, machine economy – enabling true pay-as-you-go capabilities no matter where you are in the world and really bringing the usage invoiced to a whole new and potentially very granular level!
Jeremy Guzmán has been an active contributor in the Crypto/DeFi space since 2016. Aside from being a Product Manager at Coinsource, Jeremy has worked along side countless DeFi teams in an effort to scale governance processes and educate & onboard newcomers. He has also been involved with Mass Adoption LLC.; a consultancy firm that aims to educate, onboard, and extend DeFi utility. You can connect with Jeremy on Twitter @Guz_MassAdopt.