The Evolution and Impact of the Bitcoin Lightning Network
Private, scalable, cheap global payments
Introduction
The quote, "Scalability doesn't refer to how easy it is to climb over your computer's case," by Tom Webb, succinctly captures one of the fundamental challenges faced by Bitcoin in its early years. Bitcoin, while revolutionary in its concept, encountered scalability constraints that hindered its potential as a global payment system. In response to these limitations, Thaddeus Dryja and Joseph Poon conceived the Lightning Network, a layer 2 payment protocol, as a solution to Bitcoin's scaling challenges. This post traces the history of the Bitcoin Lightning Network, its functions, and its diverse use cases, highlighting its transformative impact on the world of cryptocurrency. Here’s a great video from Pacific Bitcoin 2023 that helps describe the scaling challenge and how Lightning developers are working on different solutions to solve that problem.
I. Inception of the Lightning Network
The Lightning Network's journey began in February 2015 when Dryja and Poon released the first draft of the original Lightning Network whitepaper, version 0.5. The whitepaper outlined concerns about Bitcoin's limited scalability, as it could only support approximately seven transactions per second. In contrast, payment giant Visa processed tens of thousands of transactions per second during peak periods. The Lightning Network aimed to address this scalability issue by enabling fast, off-chain transactions.
II. Early Development and Presentations
The first public presentation of the Lightning Network took place on February 23rd, 2015, during the SF Bitcoin Devs Seminar. During this presentation, Joseph Poon highlighted the growing concern of rising Bitcoin transaction fees, which has since become a significant issue within the crypto community.
In January 2016, an updated and more detailed version of the original whitepaper was published, marking a significant milestone in the network's development.
III. Milestones in the Lightning Network's Growth
March 15th, 2018, saw the announcement of the initial release of LND 0.4 by Lightning Labs. This beta version was designed for developers to test the network's capabilities and gained recognition when Twitter's CEO, Jack Dorsey, endorsed it.
January 19th, 2019, marked the creation of the "Lightning Torch," a symbolic demonstration of the Lightning Network's value and capabilities. Participants from around the world passed a payment along, adding 10,000 satoshis at each step. The torch was passed nearly 300 times in over 40 countries before being donated to a non-profit organization in Venezuela that promoted Bitcoin adoption.
The year 2020 proved to be a landmark year for the Lightning Network, as Lightning Labs continued to release new versions of LND with features such as Keysend, Wumbo Channels, and PSBT Support. The network witnessed significant growth, with various projects, including Voltage, launching Lightning nodes platforms. Russell Okung, an NFL star, even received his salary in Bitcoin, showcasing real-world use cases.
IV. Present State of the Lightning Network
As of February 2021, the Lightning Network had evolved into a robust ecosystem with over 300 companies, projects, and apps contributing to its growth. Merchants accepting Lightning Network payments exceeded 400 and continue to increase monthly. Below is a chart showing the significant growth in network capacity over time:
Here’s a few more charts showing network growth in terms of nodes and channels, the most commonly used public data that is available:
The growth of nodes and channels looks pretty flat, yet there has been plenty of anecdotal evidence that Lighting network adoption and payments are growing rapidly. The hard part is that much of the payment routing data which would tell you true levels of activity is private (between the parties who have opened a channel). This is illustrated in the chart below:
River (a Bitcoin only financial company) recently published a report using their own channel activity as well as other major Lightning providers making up 52% of the public network capacity. It doesn’t reflect all the volume (only routed transactions), as discussed in their executive summary below, but this at least establishes a lower bound. The results made a lot more sense as you can see in the chart below:
Executive Summary (From the River Report)
Based on data from the operators of nodes comprising 52% of the public capacity on the Lightning Network, we estimate a lower bound of 6.6 million routed Lightning transactions in August 2023. The upper bound could be a multiple of this number if there was data availability of direct and private transactions between participants.
This represents a 1,212% increase since the 503k Lightning payments estimate for August 2021 by K33 (formerly Arcane Research). This growth was despite a 44% Bitcoin price drop and a 45% decrease in search interest.
It is the equivalent of 2.5 transactions per second, compared to Bitcoin’s on-chain average of 4.4 TPS and K33’s August 2021 benchmark of 0.2 TPS.
Due to the architecture of the network, it is not possible to estimate an upper bound, as direct transactions between only two participants, and private transactions can not be estimated.
The primary use cases driving transaction growth that we identified are gaming, social media tipping, and streaming, driving 27% of all growth.
In August 2023, we estimate that around $78.2 million was publicly routed using 5,000 BTC in capacity.
This is a 546% increase since K33’s August 2021 estimate of $12.1M.
On an annual basis, this translates to $936 million in volume using $133 million in capacity, at a ratio of 7:1. This ratio outpaces Bitcoin’s on-chain velocity of 5.2:1, indicating growth in the medium of exchange use case.
The average Lightning transaction size on the public network was around 44.7k satoshis, or $11.84 in August 2023. Size distribution shows that nearly all Lightning payments are unaffordable on the Bitcoin blockchain. Lightning is effectively extending Bitcoin’s utility by enabling low-value payments over the Internet.
We estimate that there are between 279k and 1.116 million monthly active Lightning users as of September 2023, with an estimated ratio of 18 non-custodial to custodial Lightning users.
Between 1.8-3.7 million Lightning wallets were downloaded to use Lightning, with at least 122 million wallets downloaded that have access to Lightning.
Routing data shows us that Lightning activity has become much more global, with more equally distributed activity 24/7 than last year.
The number of Lightning nodes, channels, and capacity have remained steady over the past year. Bitcoin adoption has slowed down due to the bear market, and nodes are professionalizing by becoming more efficient with their capacity.
We mapped out 173 companies in the Lightning industry across 28 categories and have gathered them in an industry market map on page 20 of this report.
$530.93 million was raised by 39 Lightning companies between 2018 and the end of 2022. 19% of all Lightning companies received funding.
$428.46 million of this funding was raised in 2022, an outstanding year for Lightning funding relative to global VC funding, which dropped by 34%.
River’s Lightning payment success rate was 99.7% in August 2023 across 308k transactions.
The primary reasons for failure are when no payment route can be found that has enough liquidity, and when a non-custodial wallet user is offline.
We see companies across 9 different verticals showing strong interest in Lightning.
Important drivers of future Lightning growth are more exchange adoption, select technical upgrades, as well as non-Bitcoin businesses adopting Lightning.
V. Functions and Use Cases of the Lightning Network
Microtransactions: The Lightning Network allows for micropayments, enabling transactions smaller than a satoshi, the smallest unit on the Bitcoin base layer. This granularity is crucial for various applications, including content monetization and pay-as-you-go services. AI may be a huge potential growth area for pay-as-you-go.
Privacy: Lightning Network transactions are not publicly recorded on the blockchain, enhancing user privacy. Payments can be routed through multiple channels, preventing the source and destination from being easily traceable.
Speed: Lightning Network transactions settle in under a minute, compared to the average ten-minute confirmation time on the Bitcoin blockchain. This speed is essential for real-time payments and instant settlement.
Transaction Throughput: The Lightning Network offers limitless scalability for payments, limited only by the capacity and speed of each node. This scalability addresses Bitcoin's initial scalability constraints.
Conclusion
In just over half a decade, the Bitcoin Lightning Network has come a long way from its inception as a solution to Bitcoin's scalability challenges. It has grown into a thriving ecosystem with real-world use cases, providing solutions for microtransactions, privacy, speed, and transaction throughput. As it continues to evolve and expand, the Lightning Network plays a pivotal role in the future of Bitcoin, promising a more scalable and efficient payment system for the world.
Not financial or legal advice, for entertainment only, do your own homework. I hope you find this post useful as you chart your personal financial course and Build a Bitcoin Fortress in 2023.  Â
Thanks for following my work. Always remember: freedom, health and positivity! Â
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