Bitcoin legalization in El Salvador is no accident, Bitcoin Beach and Lightning Network are the key

Last week, the Congress of the Republic of El Salvador passed a bill legalizing Bitcoin. The leading cryptocurrency is now on par with the country's official currency, the U.S. dollar. As a result, all merchants in El Salvador will legally accept this payment method.

While the cryptocurrency community celebrated the news as confirmation that the tide was turning “against centralization,” there’s a problem. Bitcoin’s 5 transactions per second is incredibly slow, making it a terrible payment system.

Still, as Nicholas Burtey, co-founder and CEO of Galoy Money, points out, thanks to the Lightning Network, Bitcoin can be used as a payment system even in the most unlikely places.

Bitcoin + Lightning Network = Scalable Payments

The Lightning Network is a second layer or off-chain network that sits on top of the Bitcoin blockchain network. It enables individuals to conduct transactions without having to record every transaction on the Bitcoin main chain.

This brings some scalability benefits, including lower fees and small transactions, as well as a level of privacy that is useful in payment scenarios, such as hiding your Bitcoin wallet balance from other parties.

Gulas Berti said that during his trip to El Zonte in 2020, he used the Lightning Network to buy some basic necessities. "I spent some time in El Zonte, El Salvador, at the end of 2020. It's a village of 3,000 people. I was very excited when I arrived and saw the first store where you can buy things using the Lightning Network. I bought some milk, eggs, and vegetables for $4."

El Zonte is a coastal town in southern El Salvador with only 3,000 residents. It is known as a surfing paradise. Although the tourism industry is the main source of income for El Salvador, this beach town not only has scarce financial services, but most people do not even have bank accounts. However, the locals are self-reliant and have built a micro-financial system within the community through Bitcoin. It is also called "Bitcoin Beach" by people in the cryptocurrency community.

Gulas-Berti added that initiatives such as Bitcoin Beach mean Bitcoin is widely accepted throughout El Zonte and payments are instant. But he acknowledged that not all merchants are on board with the cryptocurrency revolution. Gulas-Berti has spent the past two years convincing these stores to accept Bitcoin payments on a peer-to-peer basis.

As mentioned above, most people in El Salvador do not have bank accounts, and local businesses are not eligible to have merchant accounts that accept bank card payments. Bitcoin Beach is a project to create a Bitcoin ecosystem on the coast of El Salvador, bypassing the traditional financial system.

Lightning Network is not a perfect solution

While some have described the Lightning Network as Bitcoin’s best chance for scalability, the network is not without its shortcomings.

An analysis of the Lightning Network by computer scientists Jonas Harris and Aviv Zohar shows that the network has certain vulnerabilities that could even lead to the loss of funds. The two highlighted Bitcoin's slow settlement time and the possibility that attackers could exploit the connection between the main chain and the Lightning Network as a problem.

“The resulting large volume of transactions on the blockchain would not allow for all transactions to be properly settled, and attackers could potentially get away with stealing some funds,” they said.

Furthermore, cryptocurrency purists point out that the Lightning Network will eventually tend toward centralized nodes. This is a natural consequence of the concentration of custodians and liquidity providers serving the network.

There is no doubt that the legal status of Bitcoin in El Salvador is a huge change for the cryptocurrency community. But perhaps shoehorning old technology to meet the high demands of a payment system is not the most efficient solution. Especially when considering the large number of dedicated payment tokens.

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