Rehashed #37 - Bitcoin Lightning Network Emerging as Effective Payment & Settlement Solution

Bitcoin as a robust settlements layer

Despite crypto’s steep price demise in 2018, Bitcoin continues to make positive inroads as a unit of account, store of value and medium of exchange. In 2018, Bitcoin’s base layer handled (USD) $1.3 trillion of transactions, double that of Paypal, and within an order of magnitude that of Visa ($8 trillion annual transaction volume). This boils down to around $1-2 billion of daily economic activity on the Bitcoin network- a non-trivial amount.

The large difference between Bitcoin and payments giant Visa is the rate of transactions. Bitcoin sceptics are quick to hone in on the fact that bitcoin’s throughput is relatively low compared to Visa (~7 transactions per second (tps) for bitcoin vs. 1700 tps for Visa). However, it’s comparing apples and oranges. Due to the network’s ability to encode multiple outputs per transaction,  bitcoin operates as an incredibly effective settlements layer.

Bitcoin’s base layer provides instant settlement for large value transactions. The average bitcoin transaction size currently sits at (USD) ~$6k, an enormous amount compared to credit card purchases of (USD) $66 and debit card purchases average (USD) $42. Functionally, bitcoin is used to settle huge transactions between large economic entities. This data would suggest that Bitcoin is currently operating an effective settlements layer but is not yet competing on a payments level where the average cash transaction is (USD) $17. Enter Lightning.

Bitcoin Lightning Network gains traction as a payments solution

The Bitcoin Lightning Network (LN) is a second layer payment protocol with multi-directional channels, enabling fast and ‘fee-less’ transactions using bitcoin. The basic premise is that not all transactions, particularly micropayments, are necessary to be written on the Bitcoin’s blockchain. The features of LN make it ideally suited for day-to-day microtransactions such as purchasing a cup of coffee. The LN achieves this by using payment channels to facilitate microtransactions “off-chain”, which settle on the Bitcoin blockchain once the channel is closed. Even if there were 1000 payments back and forth, the blockchain will only show two transactions – one for opening the payment channel and depositing money and one for closing it and settling the bill. Because the micropayments occur off-chain, all of the transactions in between are feeless and instant.

This year, we may see Lightning prompt broad adoption; Arjun Balaji notes that the Lightning Network has undergone a monumental infrastructure shift and is primed for accelerated product development and liquidity heading into 2019. Since Lightning Labs launched the main-net in March 2018, the metrics surrounding LN have continued to grow.

Source: ARK Invest

Although Bitcoin’s daily transaction count has been directionally positive, with number of transactions currently closing in on peak January 2018 levels, it’s rather futile to compare the rate of transactions between Bitcoin and an established payments entity such as Visa. Metrics such as number of transactions and number of transactions per second are likely to be far more applicable to LN. LN, coupled with bitcoin network as the base settlements layer, is increasingly likely to provide an alternate decentralised solution for value transfer in our everyday economy.

 

 

In the News

Last week, core Ethereum devs announced that the Constantinople hard fork would be delayed until late February after the discovery a security flaw that would have permitted malicious actors to steal individual user funds. The delay effectively killed the speculative momentum that had been building for ETH since late December.

Bitcoin volume in South America has recently been hitting all-time-highs.

Cryptopia has been the latest exchange to suffer from a major hack on January 14 resulting in losses of over $3 million. The incident is now under local police investigation and Cryptopia remains offline a week later. Exchange hacks currently total more than (USD) $1.1B.

There are at least six different business models for mining cryptocurrency, although only five appear to be profitable.

See who’s left, who’s joined, and who almost joined Coinbase, perhaps the most influential company in the industry, over the past 12 months.

 

As always, thanks for joining - see you next week for Rehashed.

Freddie Archibald

 

View previous issue: Rehashed #36 - Bitcoin Rolling Returns Grow with the Passage of Time


About the author:

Capital markets to crypto convert. From Christchurch →  Boston → New York, Freddie became intrigued by the potential of the digital asset economy after plucking a book on Bitcoin off a New York library bookshelf in 2016. Her parents are thrilled that she is chasing magic money on the internet.

 

Disclaimer:  The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.

Leave a comment

Subscribe to our Blog

We are Off now. Hide This

We are Off now.

Share This