The Game-Changing Network Transforming Bitcoin

The giant Fidelity has published an optimistic report on the Lightning Network, a network that enables instant and nearly free bitcoin transactions.

What is the Lightning Network?

It is a secondary network anchored to the Bitcoin network that increases transaction throughput and payment privacy.

The Lightning Network compensates for the slowness and sometimes high fees of “on-chain” transactions. In jargon, this is referred to as “Layer 1” and “Layer 2.” Layer 1 is the Bitcoin blockchain, while Layer 2 is the Lightning network.

The Bitcoin network is designed to generate a transaction block every 10 minutes. Each block can weigh up to 4 MB, or about 3,000 transactions. This is little, but by design. It would have been very easy to increase the size of the blocks, but at the cost of decentralization.

The possibility of increasing block size has long been debated and led in 2017 to the BCH (Bitcoin Cash) fork. It was unsuccessful as one BCH is now worth 0.3% of one BTC. The market deemed that a blockchain with unlimited block sizes would undermine decentralization.

Decentralization relies on the existence of numerous nodes that form the backbone of the Bitcoin network. They validate transactions and ensure that the protocol is strictly followed, especially the limit of 21 million BTC.

However, the number of nodes is directly proportional to their cost, which depends on the memory required to store the blockchain (currently 630 GB). Increasing block size would increase this cost and ruin the decentralization without which bitcoin would be worthless.

Developers like Thaddeus Dryja thus proposed the Lightning Network where transactions take a fraction of a second for negligible fees. All of this without compromising the fundamental properties of Bitcoin (decentralization).

Payment for a coffee with the Lightning Network:

Some Key Figures

The Lightning Network was launched in 2017 to counter the proponents of large blocks who eventually created BCH via a hard fork.

Since then, thousands of cryptocurrencies have been launched claiming to solve the “problem” of Bitcoin’s low transaction throughput. This is obviously not the case. Security was prioritized, and increased transaction throughput was obtained thanks to the Lightning Network.

That said, its growth remains modest. The reason is that bitcoin is primarily perceived as a store of value. It is indeed preferable to spend your euros or dollars before your bitcoins. Not to mention the capital gains tax (which could soon disappear in the United States).

Moreover, note that using the LN first requires performing an on-chain transaction to transfer bitcoins to a wallet specifically dedicated to the Lightning network (French Phoenix , Breez, Zeus, etc.). So there’s no need to hesitate to make significant top-ups to endure during times of high fees on the Bitcoin network.

Once this initial transaction is made, transactions become instantaneous and nearly free. The Fidelity report states that fees average 0.02% for transactions between 100 and 1000 euros. It’s 0.24% for transactions between 1 and 10 euros.

“Transactions exceeding a million satoshis (~ 1,000 €) cost between 0.39 $ and 1.27 $. This fee/transaction ratio is rare in the traditional sector”, it can be read.

The transaction speed is also nothing like that of the Bitcoin network. Voltage’s figures indicate that payments of less than 1000 euros occur in less than a second.

The Best is Yet to Come

Data from Voltage shows an increase of nearly 200% in payment volumes between 2023 and 2024. That’s 2,400% since 2022. Encouraging, but payments via the LN remain a drop in the ocean of global transactions via Visa, Mastercard, etc.

Notably, exchange platforms such as Coinbase and Kraken have implemented it to reduce withdrawal fees for bitcoins by their clients. The decentralized social network Nostr also uses the LN so its users can send tips in the form of “zaps.” They sent more than 3.6 million over the past six months according to the report.

The growth of the LN could also come from banks that currently use the SWIFT network and multiple third parties that significantly slow down international transfers (clearing houses, correspondent banks, etc.). Not to mention the costs.

The LN could become a technology for immediate and definitive international settlement between banks. Especially if bitcoin establishes itself as the international reserve currency…

The report also highlights another interesting aspect of the Lightning Network: the “Taproot Assets” protocol. Taproot assets extend the functionality of LN beyond simple bitcoin transfers. It allows transferring any type of tokenized asset. For example, stablecoins, gold, or corporate bonds, etc.

“Therefore, we anticipate continued growth of the Lightning Network, despite the perception of bitcoin as a store of value that discourages its spending”, concludes Fidelity.

The Lightning Network has not finished astonishing. It will certainly take off when the capital gains tax is abolished everywhere in the world…

Let’s conclude by stating that no cryptocurrency can claim to execute transactions cheaper than with the Lightning Network.