Bitcoin ATMs and Lightning Network: Fire on one side and seawater on the other

As of November 8, the number of Bitcoin ATMs deployed worldwide has reached 11,674, making it the most widely distributed and most used Bitcoin sales channel and payment method after exchanges and OTCs.

At the same time, the Lightning Network, which is also a means of payment, has been in a very awkward stage of development. The number of BTC staked in the network has been hovering around 1,000, far less than DeFi.

Bitcoin ATM and Lightning Network, fire on one side and sea water on the other.

So, as an important part of the Bitcoin ecosystem, why is the ATM machine developing so rapidly, while the Lightning Network, supported by Blockstream and many investors, is not so popular? What are the deep-seated reasons for this situation?

The number of Bitcoin ATMs has tripled in one year

The world's first Bitcoin ATM appeared in 2013 when a company called Robocoin placed a machine in a Vancouver coffee shop. Users could exchange Bitcoin for cash or exchange Bitcoin for cash, and the machine handled $10,000 in Bitcoin transactions on its first day.

This was just the beginning of the global deployment of Bitcoin ATMs. Since then, ATMs have grown explosively. As of November 8, the number of Bitcoin ATMs deployed worldwide has reached 11,674.

Data source: CoinATMRadar

CoinATMRadar data shows that by the end of 2020, the number of cryptocurrency ATM deployments increased by more than 80%, which is almost three times the number at the beginning of 2019, when the number of crypto ATMs was estimated to be 6,372. According to the CoinATMRadar survey, the number of crypto ATMs is increasing, with an average increase of 23 per day, or almost one new ATM per hour.

In terms of distribution, the United States is in the lead, with 79.2% of the world's Bitcoin ATMs growing from 4,213 to 9,242 in 2020. In addition, in the United States, the distribution of crypto ATMs is becoming more and more diverse, with small stores, shopping malls, transportation hubs, and even Tesla Gigafactory.

Canada ranks second with 880 ATMs, followed by the United Kingdom with 268 ATMs, and Colombia with 59 ATMs. Colombia has recently shown great interest in setting up crypto ATMs.

Data source: CoinATMRadar

In addition, the distribution of ATMs for cryptocurrencies such as Ethereum and BCH is much smaller than that of Bitcoin.

Among the companies that manufacture crypto ATMs, San Francisco-based Genesis Coin ranks first in the world, having built 4,000 crypto ATMs worldwide, followed by General Bytes with 3,442 ATMs.

The significant growth in the number of crypto ATMs in 2020 indicates a growing interest in crypto ATMs from both retail buyers and financial institutions, including financial giant Paypal.

The development of Bitcoin ATMs is advancing by leaps and bounds. In contrast, the Lightning Network, which is also an important infrastructure of the Bitcoin ecosystem, has a very poor development momentum.

The Lightning Network is stagnant

The Lightning Network is a second-layer expansion solution for Bitcoin. It was proposed by Joseph Poon and Thaddeus Dryja in 2015, and its white paper was written in 2016.

Two years after the release of the Lightning Network white paper, Lightning Labs was established in 2018 to officially launch the Lightning Network. Lightning Labs is mainly led by Blockstream and has received investments from many well-known institutions and investors, including Jack Dorsey, the founder of Twitter.

After that, the Lightning Network mainnet beta version was launched on March 15, 2018. In the more than two years since its launch, it has achieved certain development, but the overall data is not ideal.

As of November 7, 2020, the Bitcoin Lightning Network has a total of 14,381 nodes running (7,411 of which have opened active channels). A total of 35,000 channels have been opened, and 1,032 BTC have been locked.

The amount of BTC locked in the Bitcoin Lightning Network

The total amount of BTC staked (locked) in the Lightning Network is equivalent to 0.0056% of the current total circulation. However, the number of BTC locked in DeFi is as high as 167,721, which is 160 times the number of BTC staked in the Lightning Network.

Such data and current situation are particularly embarrassing compared with the attention and expectations that the Lightning Network has received.

Therefore, judging from the data, the Lightning Network has not been successful, and can even be said to have failed. So why did the Bitcoin ATM succeed but the Lightning Network failed?

Behind the Failure of Lightning Network

The two major drawbacks that the Bitcoin network has encountered during its development are slow confirmation speed and high miner fees.

The Lightning Network is designed to solve the above two problems. However, the Lightning Network has encountered two major flaws in actual use scenarios, namely design flaws and security vulnerabilities.

According to the construction principle of the Lightning Network, the prerequisite for using the Lightning Network is to open a channel and pledge, which makes the Lightning Network unsuitable for occasional needs.

What is occasional demand?

Let's take an example, for example, you pass by a coffee shop and want to buy a cup of coffee with Bitcoin. If there is no channel between you and the coffee shop and there is no other route, the Lightning Network is very unsuitable.

This is because if you use the Lightning Network, you will face two operations: opening and closing the channel, and each channel operation is to send a transaction to the Bitcoin main network, which requires a handling fee. If you do not use the Lightning Network, you only need to pay a handling fee once.

The above are also the design flaws of the Lightning Network. In addition, the Lightning Network has frequently exposed security vulnerabilities in its actual operation.

Just on November 1, as reported by Bitcoin.com, just as the price of Bitcoin hit a 2020 high, a large number of crypto supporters have been complaining about the backlog in the memory pool (mempool) and the high fees required to send transactions. The Bitcoin mempool (backlog transactions) shows 113,000 unconfirmed transactions, and the number of unconfirmed transactions has never been so high since 2017.

However, the Lightning Network, a second-layer protocol built on Bitcoin that aims to alleviate these problems, still has a large number of vulnerabilities.

For example, on June 2, 2020, Antoine Riard and Gleb Naumenko published another paper on a Lightning Network vulnerability called “Time Diffusion Attack.” Naumenko and Riard revealed a frightening fact about Time Diffusion Attacks, reporting that “it is currently possible to steal all channel funds by obscuring a node for just 2 hours.”

Shortly after this issue, Antoine Riard discussed another vulnerability known as the “PIN attack” (Pin is a tool for measuring network speed by sending icmp packets). Riard noted that “currently deployed Lightning Network servers are not secure against [certain PIN attack] scenarios.”

Due to the above defects, the Lightning Network is not suitable for transactions with occasional needs.

However, in comparison, there are not so many "thresholds" for using Bitcoin ATMs.

The reason for Bitcoin ATM’s success: Ease of use

Bitcoin ATMs support deposit and withdrawal processes, which are basically the same as the operating principles of ATMs in the real world.

For example, when a user wants to exchange Bitcoin for cash, he only needs to scan the ATM machine with the mobile app and enter the corresponding amount, and he can easily withdraw the corresponding legal currency.

If you want to buy Bitcoin, do the opposite.

Although Bitcoin ATMs have high fees, they have not become an obstacle to the rapid expansion of ATMs for small offline transactions. On the contrary, the Lightning Network, which has designed a whole set of complex mechanisms, has not been put into use after five years of development.

Of course, some people may think that ATM machines are just self-service offline transaction terminals, which cannot be compared with the design of the Lightning Network, which fundamentally transforms the structure of the Bitcoin network.

But at least the simple, convenient, fast and easy-to-use design concept of Bitcoin ATMs is worth learning from for the designers of the Lightning Network.