Bitcoin's new milestone: the underrated Lightning Network

According to statistics from the 1ML website, the number of bitcoins locked in the Bitcoin Lightning Network has exceeded 5,000 (currently 5,015.23), worth approximately $93.66 million. In addition, the current number of lightning network nodes is 17,700 and the number of channels is 85,983.

As Bitcoin's effort to become a global payment network, although the Lightning Network has received less and less attention in the past two years, it is indeed expanding day by day, and the capacity of 5,000 bitcoins is also a new milestone.

01
Lightning Network: Bitcoin’s original intention of “payment”

It is necessary for us to review the original intention of the Lightning Network. As the earliest Layer 2 technology practice in the crypto world, its core mission is to promote the realization of Bitcoin's vision of "global payment".

Since 2017, with the continuous rise in Bitcoin prices and the dramatic increase in its usage, its transaction fees have been rising due to its limited block capacity, 10-minute block generation mechanism and packaged transaction design. At its highest, the single transaction fee was even as high as hundreds of US dollars, which was increasingly deviating from the original intention of "global payment" and the contradiction began to intensify.

Since then, Bitcoin has been no longer regarded as a "currency", but more as a commodity and gold analogy. This has also led to a topic of debate that has been reversed several times: Is Bitcoin more of a "global payment" attribute or more of a "digital gold"?

The unprecedented pace of institutional entry in 2020 has almost made the market accept the value positioning of Bitcoin as "digital gold". (Of course, it seems that the entire crypto market has become a follower of the Federal Reserve and the U.S. stock market.)

For Bitcoin, which can only process 7 transactions per second, how to achieve small, high-frequency, and fast instant payments in retail scenarios , and how to make it possible to buy a bottle of mineral water or order a cup of coffee with Bitcoin, once became the biggest pain point of its "global payment" vision.

Many attempts have been launched since then, including the Lightning Network, a path that has been controversial from the beginning. In other words, boosting Bitcoin's payment scenarios has become an important mission of Bitcoin Layer2, namely the Lightning Network.

So starting from the beta version in March 2018, the Lightning Network was officially launched, aiming to put transactions outside the Bitcoin main chain, allowing users to deposit and transfer Bitcoin at a lower cost and higher efficiency:

Outside the main chain, the Lightning Network allows payment channels to be opened between nodes. All payment channels remain active until any party voluntarily leaves the channel to close it. Theoretically, it can support more than millions of transactions per second, with transaction times measured in milliseconds and extremely low transaction fees, which is enough to support small-amount, high-frequency retail payments.

This makes application scenarios such as using Bitcoin to buy a bottle of mineral water economically feasible again (of course, because of this, the success rate will be greatly reduced if the single amount is too large), and it is naturally born to solve the problem of small and fast Bitcoin payments.

02
The tortuous development of the Lightning Network

However, due to many technical disputes such as security and the market's cognitive inertia, progress has been relatively slow. Technology is never limited to technology. As a solution that is inextricably linked to Blockstream, one of the most powerful companies in the blockchain world, the Lightning Network has always been subject to multiple confrontations:

In the "capacity expansion dispute" that was once a top priority for Bitcoin, the Core faction represented by Blockstream supported Segregated Witness + Lightning Network and did not support capacity expansion; while the "Big Block Faction" represented by Wu Jihan supported capacity expansion + isolation at the same time, which also made the Lightning Network the focus of criticism on the battlefield for a time.

After the number of bitcoins locked in the Lightning Network reached 1,000 in mid-2019, the increase in the second half of 2019 and the whole of 2020 almost stagnated.

It did not begin to recover until 2021, with the number of locked bitcoins increasing by 42% from the beginning of 2021 to over 1,500 in June 2021, and then surging by around 2,500 in the following year - as of June this year, the capacity of the Bitcoin Lightning Network exceeded 4,000 bitcoins.

Now, three months have passed, and the number has increased by another 1,000, setting a record for the fastest growth in history.

In general, for ordinary users, the technical principle of the Lightning Network can actually be regarded as a technical black box. After all, there is actually a public discussion in the industry that the Lightning Network currently only recommends small payments:

First, large payments are more likely to deplete channel funds than small payments;

Second, the Lightning Network is currently small in scale, and there are some problems with its security and usability, and there may be some unknown risks.

As the Lightning Network is still immature, it is recommended to avoid storing large amounts of funds in channels. Therefore, it is foreseeable that although the Lightning Network has begun to make gratifying breakthroughs in its own scale and supporting audiences such as exchanges, the larger and more distant future is still full of unknowns.

After all, for Bitcoin, which has been running spontaneously for more than a decade without any large-scale security incidents, the Lightning Network, which has only been implemented for four years, is still immature and needs time and the market to slowly respond.

03
2022: The Year of Visible Sparks

From a certain perspective, the development and implementation of the Lightning Network, which has been progressing slowly for many years, has gradually become a raging fire thanks to Kraken’s support and the intensive entry of capital this year.

Especially this year, the support from some unexpected leading exchanges and institutional giants has increased significantly, which has become a strong endorsement of its security and universality.

The most direct one was at the Bitcoin 2022 conference in April this year. The stock and cryptocurrency trading platform Robinhood stated at the Bitcoin 2022 conference that Robinhood’s cryptocurrency wallet will support the Bitcoin Lightning Network.

The crypto exchange Kraken has also supported the Bitcoin Lightning Network and opened it to all users . The Bitcoin Lightning Network development team Lightning Labs has completed a $70 million Series B financing round . It will also launch the stablecoin protocol Taro based on the Bitcoin Lightning Network.

In addition, Alyse Killeen's venture capital firm Stillmark plans to raise $500 million for its new fund "Stillmark Credit Fund", which will focus on supporting investments in Bitcoin Lightning Network infrastructure.

In addition, the number of Lightning Network-related investment and financing events is also increasing:

In April, Lightning Network payment platform Strike said at the Bitcoin 2022 conference that it had partnered with Shopify, payment provider Blackhawk Network, and point-of-sale provider NCR to build a new payment system that allows merchants to quickly receive U.S. dollar payments after customers pay with crypto assets.

In April, Impervious, a peer-to-peer network infrastructure based on the Lightning Network, announced the completion of its seed round of financing, with an undisclosed amount;

In May, Mexican Bitcoin exchange Tauros integrated the Lightning Network;

In May, Lightspark, a Bitcoin Lightning Network company founded by Meta Crypto Assets head David Marcus, completed a round of funding for an undisclosed amount;

In June, Mash, a payment platform based on Bitcoin and Lightning Network, announced the completion of a $6 million seed round of financing;

The most noteworthy is the Taro v0.1.0 test version released by Lightning Labs, the Bitcoin Lightning Network development team, last month, which will allow Bitcoin developers to create, send and receive assets on Bitcoin.

It is said that in the coming months, Taro will add more enhancements, including Universes to allow users and asset issuers to provide proof of asset origin, supply issuance, and interact with Taro asset data more easily, and once the on-chain functions are completed, the Lightning Network will be introduced.

This means that Bitcoin's asset attributes in the Lightning Network's Layer 2 will gradually become more prominent, thereby providing value support to other derivative assets as a core asset, such as issuing stablecoins, and transferring them through the Lightning Network. This will undoubtedly be a new positioning, and may even replicate a wave of Bitcoin DeFi craze based on the Lightning Network.

04
summary

A storm starts with a small ripple. The Lightning Network, which is advancing step by step and struggling forward amid controversy, will play a role in Bitcoin's ambition of "global payment" through its efforts in micropayments. Please wait and see.