Robert Steinadler, a year ago

Federal Reserve Bank of Cleveland researched the Lightning Network

The Lightning Network is Bitcoin’s big hope and the solution to the biggest problem that each blockchain has to face which is decentralized and built with security in mind. It doesn’t scale very well. The more people like to use it and transact at the same time, the more expensive it becomes. Transactions are also slower since they have to wait in line until they are confirmed.

Recently, the Federal Reserve Bank of Cleveland published a paper on the Lightning Network and its impact.

Lightning is helping Bitcoin a lot

One of the findings of the research paper is that the Lightning Network helped Bitcoin to grow and handle the network’s load. This is achieved by settling transactions on a second-layer protocol. Meaning that each transaction is confirmed on the Lightning Network but has to settle at a later point in time as an on-chain transaction.

The idea is simple. You can send millions of transactions at the same time without writing them immediately on the blockchain. Since the Lightning protocol is based on Bitcoin users still enjoy the security of layer-1.

According to the paper, it is absolutely clear that Bitcoin can handle the stress better than in 2017 because of Lightning. The improvements cannot be explained by any other technology like SegWit which has been introduced around the same time.

Turning Bitcoin into money

Up until this day there is an academic dispute whether Bitcoin is to be considered money or a commodity. Another result of the Fed’s research is that Lightning is definitely brining Bitcoin closer to money. That being said, Lightning is not solving all the problems.

As the researchers also pointed out, the peak of transactions in April 2021 wasn’t fully compensated by Lightnings capacity. Meaning that there is still a lot of work ahead in establishing Lightning as Bitcoins payment network. While Lightning is available as a solution for scalability issues other problems remain. Such as the high volatility of BTC and the fact that there are still fees involved for routing transaction in the second-layer network.

The paper underlined that the Lightning Network is the most promising solution available to establish Bitcoin as a payment network. This is surprise since many other central banks remain highly sceptic towards Bitcoin in general. Christine Lagarde made clear at several occasions that Europe’s central bank is not fond of Bitcoin or crypto and warned investors that they could lose all their money on a highly speculative asset. It seems that at least the Federal Reserve Bank of Cleveland is more open to what Bitcoin has to offer.

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