El Salvador's great experiment + Taproot upgrade: Can Bitcoin's dying payment attribute be revived?

Wu said the author | a poplar tree

Editor of this issue | Colin Wu

Whether Bitcoin is more of a "global currency" or more of a "digital gold" has always been a topic of endless debate. However, the unprecedented pace of institutional entry in 2020 has almost made the market tacitly accept the value positioning of Bitcoin as "digital gold".

However, El Salvador decided to officially designate Bitcoin as legal tender starting September 7. The specific content includes the launch of the electronic wallet Chivo and the pre-deposit of $30 in Bitcoin for each resident who downloads the wallet. To some extent, this is a shot in the arm, bringing Bitcoin's payment attribute as a dying "global currency" back into everyone's attention.

1. El Salvador’s “Bitcoin Currency Experiment”

El Salvador's current total population is about 6.4 million, of which 63% are aged between 15 and 64, or about 4 million people. If everyone downloads and uses the Chivo wallet, the total amount of Bitcoin deposited will be as high as US$120 million. Based on the real-time market price on June 26 (US$32,000), it means a total deposit of about 3,750 Bitcoins.

This means that if El Salvador's "Bitcoin currency experiment" is realized as scheduled, there will be at least 4 million new users and 3,000 bitcoins entering the world of bitcoin payments, which is undoubtedly a considerable increase. The 4 million Salvadoran residents are expected to become the backbone of bitcoin daily payment scenarios in the short and medium term, greatly improving the coverage and promotion of bitcoin payments in daily payment consumption scenarios. At the same time, in addition to domestic bitcoin payment scenarios, El Salvador also has a large number of overseas workers, so using bitcoin to remit money back home may also be one of the potential scenarios.

At present, a large number of Bitcoin ATMs have been shipped to El Salvador to build the corresponding "payment infrastructure", which is the most exciting beginning. As the Securities Times said, El Salvador's granting of Bitcoin the status of legal tender can be regarded as a perfect "off-island payment experiment" for Bitcoin's "global currency" attribute. If this experiment is successful, Bitcoin will most likely achieve huge development in one go.

But at the same time, in this unprecedented Bitcoin national currency experiment, two key issues cannot be ignored: the drastic price fluctuations of Bitcoin itself and the transaction fees required for Bitcoin payments.

First, the drastic price fluctuations of Bitcoin itself make it difficult to have a stable reference for payment settlement. However, the Salvadoran government announced that it would provide an exchange mechanism to "convert Bitcoin into US dollars in real time" and create a $150 million trust fund managed by a state-owned bank. In theory, the real-time exchange mechanism can indeed better solve the problem of drastic fluctuations in Bitcoin prices, but specific practices remain to be confirmed.

Secondly, the transaction fees required for Bitcoin payment are the biggest obstacle for users to use Bitcoin payment. In the field of cross-border and large-value transfer transactions, Bitcoin has obvious advantages over traditional payment systems, but in the daily life scenarios of residents' small and timely payments, it is almost impossible to use it.

I believe that many old users still remember the transaction fees of Bitcoin, which were as high as tens or even hundreds of dollars during the big market at the end of 2017. Roger Ver, the "Bitcoin Jesus", once spoke frankly about the pain point of abnormally high transaction fees: Bitcoin is no longer a "currency".

In this context, the Lightning Network, a seemingly forgotten Bitcoin layer 2 expansion solution, is expected to gradually return to the center of the stage and play an important role as Bitcoin’s payment attribute as a “global currency” gradually awakens.

2 Bitcoin Lightning Network - The Difficult March of "Payment Attributes"

Since 2017, the relatively high transaction costs of Bitcoin payments have gradually unbalanced the original balance between "digital gold" and "payment currency", with the voice of the former gradually overshadowing the latter, while the payment attribute of "global currency" that once triggered heated debate in the industry and even "BCH fork" has become increasingly muted.

How can Bitcoin, which can only process 7 transactions per second, make it possible to buy a bottle of mineral water or order a cup of coffee with Bitcoin? How can small, high-frequency, and fast instant payments be achieved in retail scenarios? This has become the biggest pain point in its vision of a "global payment currency".

Many attempts have been made since then, including the Lightning Network, which has been controversial from the beginning. Everyone knows that Ethereum's Layer 2 concept ushered in its own spring in 2020, and the Lightning Network, which began to be implemented in beta in March 2018, is Bitcoin's Layer 2 expansion solution, but few people pay attention to it now.

The main principle of the Lightning Network is to put transactions outside the Bitcoin main chain, allowing users to deposit, withdraw 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, and all payment channels remain active until any party voluntarily leaves the channel and closes it. In theory, it can support more than millions of transactions per second, with transaction times measured in milliseconds. The transaction fees are extremely low, which is enough to support small-amount, high-frequency retail payments, which meets the needs of El Salvador.

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, and did not begin to recover until 2021. By mid-June, the number of bitcoins locked had increased by 42% compared to the beginning of 2021, especially in the past two months, and has now exceeded 1,500, setting a record high.

The data also confirms the advantages of the Lightning Network in small payment settlement. In the previous week, about 20,000 Salvadoran residents used Bitcoin to conduct transactions through the Lightning Network, paying a total of only 13,879 sats (equivalent to US$4.98) in transaction fees.

This is almost the best advertisement for the Lightning Network: the transaction fees paid by so many users are negligible. In the eyes of El Salvador and more countries that intend to adopt Bitcoin as one of the payment currency options in the future, the Lightning Network will undoubtedly be a suitable Bitcoin payment adoption option.

3 Lightning Network + Taproot Upgrade, Can Bitcoin Payment Usher in a Turning Point?

At the same time, during the period when Bitcoin payment attributes declined, stablecoin payment and "ERC20 Bitcoin" payment, which can be regarded as alternatives, emerged:

• At present, the total market value of stablecoins on the entire network has exceeded 110 billion US dollars, while it was only 11.6 billion US dollars in the same period last year, a surge of nearly 10 times in one year. In particular, the market value of compliant stablecoins, represented by USDC, has increased from 6.6% a year ago to about 23.1% at present, with a significant increase in both volume and user coverage;

• Since 2020, the total issuance of "ERC20 Bitcoin" has started from 0 and has now exceeded 252,000. However, after years of hard promotion of Bitcoin Lightning Network, it cannot even match a fraction of "ERC20 Bitcoin";

Stablecoins benefit from the relative stability of their own value, especially the advantages of low cost, fast payment and even privacy payment obtained by relying on high-performance public chains and Layer 2. In the field of cryptocurrency payments, they have become a powerful alternative to Bitcoin's "global currency" positioning.

In addition to the Lightning Network, Bitcoin has recently had another powerful response plan: on June 13, the computing power of the mining pools that support the Taproot upgrade exceeded 90% of the entire Bitcoin network, reaching the minimum requirement for locking the upgrade, which also means that the Taproot upgrade will be officially activated in November this year.

Regarded as the "most ambitious upgrade" of Bitcoin in recent years, Taproot does represent extraordinary significance in the industry, especially in the eyes of Bitcoin enthusiasts. It is even "the most important Bitcoin protocol upgrade proposal so far", playing a key role in Bitcoin's payment expansion and privacy payment:

1. Payment expansion. Taproot based on Schnorr signature can contain complex transaction conditions and fund usage details, and then provide all of these contents as a new fund usage condition (new aggregate signature lock) for external use. This reduces the amount of data transmitted and stored on the blockchain, allowing a single block to contain more transactions, thereby reducing transaction costs and achieving an effect similar to Rollup expansion.

2. Private payments. Although Schnorr signatures will not make individual Bitcoin addresses on the public blockchain more anonymous, they will make simple transactions difficult to distinguish from more complex transactions consisting of multiple signatures. At the same time, they will also allow users to mask complex smart contracts as ordinary Bitcoin transactions, bringing greater privacy to users and enhancing the privacy options of the Bitcoin network.

Based on the Taproot upgrade, the Lightning Network will also achieve further improvements in performance, and will also provide privacy for Bitcoin payments within the Lightning Network, thereby further enhancing the competitiveness of Bitcoin payment attributes.

The year 2020 has left a deep imprint of "digital gold" on Bitcoin. Now, under El Salvador's "first-of-its-kind" currency experiment, combined with the Lightning Network and the upcoming Taproot upgrade, whether Bitcoin's payment attribute as a "global currency" can make a comeback in 2021 may become a "critical moment" in the history of Bitcoin's development.