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Lightning network update
“The Lightning Network will allow anyone – individuals, SMBs, institutions, etc. – to send payments of any size, domestic or international, with unlimited frequency, without bank intermediaries, almost instantly and essentially free.” — “On Impossible Things Before Breakfast”, NYDIG
For readers unfamiliar with Lightning, the Lightning Network is an open Layer 2 payment protocol built on top of Bitcoin that uses peer-to-peer channels to transfer value without relaying each transaction to the entire network and on top of the Bitcoin bill blockchain.
Opening channels between peers allows payments to scale beyond the maximum throughput of the Bitcoin blockchain. This process is often compared to opening a bar tab where, in theory, an unlimited number of transactions can be passed between parties before being settled at the end of the night by closing your tab, which is then processed as one transaction, the statement the user.
Similarly, when using Lightning, only channel openings and closings are recorded on the blockchain, while nodes in the system verify with cryptographic security that ownership status is known and unique by being routed back to the Bitcoin UTXO immutable set.
We last reported on the growth of the Lightning Network in our March 17 issue, which readers can find here. Since our last coverage, Bitcoin’s Layer 2 scaling solution has continued its rapid rise with increasing commercial and individual user adoption. Exciting new potential applications have also emerged, including the release of Taro, a protocol that runs on the Lightning Network and would bring new features and scalability to the network, including the ability to use stablecoins.
While Lightning Labs’ release of Taro (made possible by Taproot’s soft fork) is still a proposal that requires multiple BIPs (Bitcoin Improvement Proposal) via soft forks to activate, it’s exciting to see how many have come before it unforeseen applications are being developed across the Bitcoin open source ecosystem.
Public channel capacity is approaching 4,000 BTC
Public channel capacity on the Lightning Network is approaching 4,000 BTC, with a current real-time count of 3,996 BTC, a 5.41% growth over the past 30 days.
It is worth noting that the recent growth of the lighting network has come at a time when on-chain bitcoin fees have been extremely low, partially reducing the economic incentive to use the Layer 2 solution to save costs. That makes the growth in public channel capacity over the course of 2022 (as shown by 90-day annualized growth rates) all the more impressive.
The average on-chain transaction fee over the last 30 days is around $0.73 versus a Lightning fee of around 1 satoshi or $0.000301142. Even when average on-chain fees have reached nearly $34 at peak times, Lightning fees have remained near zero due to the many fee-free routing nodes and liquidity providers operating across the network.
But even with the current level of transaction fees on the Bitcoin base layer, the settlement speed on Lightning is much faster, with near-instant settlement between peers being possible, serving as an incentive for entrepreneurs and developers alike to build on the technology.
State of lightning research
Arcane Research has been instrumental in releasing in-depth Lightning Network reports, with the most recent being “State of Lightning Network Volume 2” released in April. In collaboration with several ecosystem participants, the report highlights private data inputs and estimates for total payment volume that cannot be tracked in public data. Public capacity growth, channel sizes, and node counts can give us some insight into ongoing Lightning adoption, but there isn’t as much insight into usage (i.e. payment volume growth, withdrawal and deposit activity, or distribution of payments).
One of the more interesting conclusions that Arcane highlights in the report is the inevitable comparison to Visa as a competing payment network.
“Lightning Network usage is growing rapidly. However, comparing the numbers with other payment networks like Visa shows that there is still a lot to conquer. In 2021, Visa processed more than $1 trillion in payments and processed nearly 20 billion transactions per month.10 By comparison, we estimate that the Lightning Network will handle around $20 million in payments in February 2022 and a little more processed more than 800,000 transactions. But the prospect of increasing Lightning Network adoption looks very promising.”
Like any emerging technology, Lightning has seen (and will continue to see) exceptional growth as Bitcoin’s dominant medium of scaling solution for exchanges, but it’s still in its infancy as new companies flock to the ecosystem to seek solutions and develop use cases at the top of the protocol. These solutions include wallets, liquidity, payment solutions, social media, gaming, banking, rewards and more.
The estimate of $20 million for monthly payments volume, $240 million annualized, pales in comparison to Bitcoin’s monthly on-chain volume of $963 billion in February 2022, $11.56 trillion dollars on an annual basis. This is more of a rough comparison for the context of where Lightning payment volume stands today, as sending value via Lightning is used for vastly different purposes compared to on-chain, with a much larger acceptance gap between the two.