Thanks to Bitcoin’s Lightning Network, it is now possible to buy a cup of coffee with Bitcoin by scanning a QR code. It comes pretty close to Satoshi's vision from 2008: after all, in his whitepaper he called Bitcoin A peer-to-peer electronic cash system. The Lightning Network is on the rise in 2021. What has happened and what does it mean for Bitcoin?
Different from normal payments
The Lightning Network makes Bitcoin scalable: in other words, it enables fast and cheap Bitcoin payments. Within seconds and with transaction fees of a fraction of a penny. You might think: surely I can do the same with my credit card or regular banking app? Yet it's not the same. When a bank transaction is transferred, the bank approves the transaction but can, in principle, later withdraw it. The payment is not a so-called final settlement. Whereas on the Lightning Network, Bitcoin actually exchanges hands. Also, your traditional money is held by a bank: you do not have full ownership of it. Compare this to the Bitcoin in your Lightning wallet, which you own by virtue of the private keys you hold. So a Lightning payment is a digital form of cash in several ways: the payment is (almost) immediate and private between two owners and without the mediation of a central institution.
Difference with Bitcoin Payments
One difference between Lightning and a Bitcoin payment on the blockchain is that a Lightning payment is a Bitcoin payment through smart contracts. The Lightning payment does not take place on the Bitcoin blockchain. As a result, the payments are not public. Yet another respect in which a Lightning payment is similar to a cash payment.
Important developments in recent months
How is the growth of users going? The number of transactions on Lightning increased by about a factor of six between January 2021 and September 2021. Currently, the network's capacity is growing by about 5% per month.
Major stumbling blocks for Lightning were liquidity and usability. In the last year, those problems have been mostly solved.
- User-friendly software such as Umbrel makes it very easy to set up a Bitcoin Lightning node yourself.
- Wallets are becoming more user-friendly: on wallets like Phoenix Wallet and Blue Wallet, you don't need to open a channel first. Instead, you just move Bitcoin to your wallet and you're good to go.
- In September 2021, El Salvador introduced Bitcoin as legal tender. Ever since, millions of Salvadorians make payments on wallets based on Lightning.
- On Twitter, since the fall of 2021 users have been able to send each other tips, a functionality that Twitter built on Lightning.
What does this mean for Bitcoin?
It is important for Bitcoin to not only have the function of a store of value but also to have the application of a payment tool. One of the big criticisms of Bitcoin was that payments are slow and expensive. So in order for Bitcoin to actually be used, the Lightning network is a crucial application. This is not to say that Bitcoin depends solely on Lightning for fast payments. There are many financial service providers that enable transactions in Bitcoin and thus support the adoption of Bitcoin as a payment network. Still, these payments are often derivatives: you are not actually sending Bitcoin but a token that represents Bitcoin. Not the real deal.