source: pixabay
Introduction
For the past year or two, Bitcoin’s lightning network has been one of the most closely watched developments in the crypto industry.
The Lightning Network is a layer-2 scaling solution built on top of the Bitcoin network. It bears similarities to the current settlement system used by companies like Visa and Mastercard. When you pay for something, it’s not instantly settled. Instead, there’s a quick verification of funds from the buyer and the request from the seller — giving the green light for a transaction to take place. The actual settlement of funds happens later — in some cases, days or weeks.
The Lightning Network is run by a network of nodes that process payments, and transactions are commonly made using QR codes. It’s capable of hundreds of thousands, or even million of transactions to take place instantly for a fraction of a penny.
In order to understand technology behind the Lightning Network, its current challenges and how it can overcome those in order to scale to billions of users globally, consider reading our previous article The Lightning Network - Technology Behind Bitcoin's Scaling Solution.
In this article, we’re going to analyze the adoption rate of the lightning network.
The World is Becoming Cashless & Digital
datareportal.com
Development of the Lightning Network couldn’t have come at a better time.
According to McKinsey global payments report, cash payments declined by 16% globally in 2020 and there is a major shift in consumer’s payment behavior: declining cash usage, migration from in-store to online commerce and adoption of instant digital payments.
Furthermore, some nation states are actively banning cash payments. Israel has announced that from 1st August, it will ban cash transactions above $4,400 and business transactions above $1,760 (or transactions involving the equivalent amount in shekels).
The world itself is turning digital. According to latest statistics in 2022 (Our World in Data) 66.2% of the world’s population are using internet, an increase of 1,355% since 2000.
There are approximately 4.48 Billion social media users, almost a double since 2016. At least 45% of people globally watch an hour or more of online content every day.
Lightning Network — Total Addressable Market
The Lightning Network allows almost instantaneous transactions between participants within the system for negligible fees.
For example, cross-border payments such as remittances are practically free and instantaneous via Lightning. Merchants have an excellent reason to adopt Lightning: it’s as fast as a credit card swipe with a tiny fraction of the fees.
These are two of the most practical use-cases where the Lightning Network could be used as a solution. As such, let’s consider the size of global remittance market as well as global card expenditure.
Remittance Market
Research and Markets, Dec 2021
Remittance is referred as sending of money by foreign migrant cross border to another person via electronic payments. In addition, majority of remittance services providers are focusing on digital remittance to enhance their business and provide customer with easier and quicker transferring services.
According to Research and Markets, the global inflow of remittances is expected to reach US$745.1 billion in 2025, growing at a CAGR of 1.20%, for the time period of 2021–2025.
Global Card Spending
RBR’s Global Payment Cards Data and Forecasts says global card expenditure will grow at an average of 10% per year to reach $45.2 trillion by 2023.
RBR Global Payment Cards Data & Forecasting to 2025
China’s UnionPay has been leading the global purchase volume and has the largest share of the global card expenditure, with 45% of the total market share.
However, despite technology advancing at an exponential rate with the growth of the Internet, payments and remittances have not benefited from this progress in the form of improved efficiency and lower costs, especially on an international level. The world is connected technologically but not financially.
Despite the fact that the Lightning Network has only been live since 2018, we have seen an explosion in usage throughout the world as people become aware of its advantages over the incumbent system.
Drawbacks of the Current Payment Networks
Fees
Average card processing fees range from 1.4% to 3.5% of each transaction, although the final percentage depends on a host of factors, such as the type of card used and the business’ merchant category code. Aside from payment processing fees, these will also include interchange fees and assessment fees.
For the international payments, the average cost of sending cross-border payment is 10.94% (World Bank, March 2022). These costs include SWIFT fees, transaction fees and foreign currency exchange fees.
Even when using money transfer organizations (MTOs), such as WesternUnion or Moneygram, fees are not much better.
World Bank — Remittance Prices Worldwide, 2022
According to the World Bank’s most recent data, the global average remittance payment cost per transaction for MTOs was recorded at 6.44% in Q1 2022, with a digital-only MTO recorded at 3.73%.
The smaller and more secluded the jurisdiction is, the more expensive the payment is, for example the Sub-Saharan Africa remains the most expensive region to send money to, where sending $200 costs an average of 7.84% in the first quarter of 2022.
Whereas, a single transaction using the Lightning network costs around one Satoshi, or $0.0002 pence, regardless where you are in the world.
Speed
One of the biggest challenges with payments is how long it takes for them to settle. An average card transaction takes 2–3 days to clear.
For the cross border payments it usually takes 3–5 business days to clear, but can take up to 10 days in certain jurisdictions.
Settlement times for lightning network transactions are in seconds and can even occur in milliseconds.
Lack of Accessibility
Arcane Research
Many people do not have access to the correspondent banking network or money transfer operators used for cross-border payments, and these solutions are especially unavailable in developing nations. It’s estimated that there are more than 1.7 billion unbanked adults worldwide, according to the Global Findex data from the World Bank.
bis.org
Steady decline in the number of correspondent banks over the past decade indicates that most banks can’t afford the high fixed costs of facilitating cross border payments and shut down, impacting accessibility for those who need it most.
Since the Lightning Network is entirely digital and transactions can be done on smartphones, it gives accessibility to 83.72% of the world’s population, who are smartphone owners according to Statista.
For example, the unbanked populations of Morocco and Vietnam are staggering 71% and 69% respectively (according to Statista), however smartphone owners in Morocco stands at 75.7% (ANRT, 2019) and in Vietnam it’s at 73.5% (MIC, 2022).
Lightning Network In Action
Let’s see how this CNBC reporter sends Bitcoin from Miami to a Ukrainian in Poland via the Lightning Network in seconds:
YouTube/Wheatstones — CNBC
Growth and Adoption of The Lightning Network
There has been a significant adoption occurring on the Lightning Network.
Recently, the Lightning Network hit a new record of 4,427 Bitcoin ($102 Million) capacity milestone, meaning $102 million in value is ready for peer-to-peer payments.
Glassnode.com
In order for the Lightning Network to compete with the major payment networks, it has to have a similar capacity. For example, VISA’s payments volume in 2021 was $10.4 Trillion. Currently, with over 4,400 BTC locked in, Lightning is only capable of processing just over $102 million across its network, which is infinitesimal in comparison to major networks such as VISA.
However, usage is growing rapidly, made possible by a whole ecosystem of companies and projects. In the last year alone total amount of capacity on the Lightning Network has increased by 130% and over 5,900% since July 2018.
Arcane Research
Data from Arcane Research indicates that the number of users with access to Lightning payments shows huge growth. It has been estimated that in August 2021 only around 150,000 users had access to Lightning payments globally and by March 2022 this has grown to over 80 million.
Furthermore, majority of transactions within lightning network have been used for true economic value, such as paying for goods and services and transferring money between individuals.
Arcane Research
Furthermore, payment volume across the Lightning Network, excluding any trading, deposit and withdrawals, have been going up.
Arcane Research
By using actual transaction data to estimate the use of the Lightning Network, we observe that adoption is rising quickly with the value of the payments increasing by around 480%, measured in US dollars.
As more and more nodes come online, the Lightning Network’s efficiency improves, liquidity increases, and more products and services will be built on top of it. As more products and services are built more and more users join the network. Let’s consider some user friendly applications that are developing on top of the Lightning Network.
The Lightning Network Ecosystem
Arcane Research
Neobanks
Neobanks are digital fintech firms which utilize Bitcoin’s lightning network in order to send and receive regular fiat currencies. These neobanks also give the user the option of holding their funds in bitcoin as well as fiat currency. In essence, this means that the users can send and receive fiat currencies over the lightning network without ever ‘seeing’ the Bitcoin. This would be done instantly and practically free.
Bottlepay — UK and EU
Bottlepay.com
Launched in 2021, Bottlepay is a UK based payment app that allows users to transact Bitcoin, pound sterling and Euro via the Lightning Network. Users can send and receive money across Europe and the UK without the fees. Furthermore, Bottlepay’s new app also enables seamless social payments with a single tweet, message, or social media post on platforms such as Twitter, Reddit, and Discord.
Strike App — Coming to 200+ countries
strike.me
Founded by Jack Mallers, Strike is a US based fintech, which allows users to send and receive money anywhere, instantly, with negligible fees. To reap the benefits, consumers and merchants don’t even need to touch Bitcoin, as Strike facilitates the settlement of value using the Lightning Network.
Strike has recently integrated with e-commerce giant Shopify’s global network of merchants to allow for payments across the Bitcoin Lightning network — for those merchants who want to opt in. Using Strike, merchants would be able to generate savings through low-cost payment processing.
Strike has also partnered with NCR, the world’s largest point-of-sale supplier, and payments firm Blackhawk.
Cash App — United States
altcoinbuzz.io
Cash App is a mobile payment service launched in 2013 developed by Jack Dorsey’s Block (formerly known as Square). Cash App announced integration of Lightning Network payments for its 40+ million users in February 2022. The company also announced Cash App users can choose to be paid in Bitcoin. Users with a Cash App Card are able to receive a portion of their recurring paycheck deposit in bitcoin with no transaction fee.
Bitnob — Africa
bitnob.com
Bitnob is a Nigerian startup, that offers Bitcoin payments solutions for African individuals and businesses. Bitnob’s mission is to make it easy for every African and African business to connect with the bitcoin blockchain.
Bitnob is a simple bitcoin app that bundles services such as Bitcoin savings from as little as $1, Bitcoin loans, Bitcoin payments and virtual cards. With an intuitive design, that makes it easy to navigate especially for beginners.
Bipa — Brazil
bipa.app
Bipa is the first Brazilian app to integrate the Lightning network. It allows users to create and pay invoices all at the speed of light.
Payment Infrastructure
Growth in infrastructure service providers, such as professional payment solutions that have enabled Lightning integration for merchants and businesses, have made it simpler for users to use the Lightning Network and for businesses to integrate Lightning into their products and services.
Here are some of the most prominent infrastructure solutions:
Openode
opennode.com
With OpenNode, businesses can choose automatic conversion to receive local currency, and always get instant (Lightning Network) final settlement. Businesses can accept Bitcoin and receive Bitcoin or local currencies like EUR, GBP, USD and more.
CoinCorner
coincorner.com
Bitcoin fintech firm founded in 2014, that makes it possible to pay via Lightning in person, on a website or on your phone using a physical card called ‘Bolt’. CoinCorner offers payment solutions for businesses as well.
IBEX
ibexmercado.com
IBEX, founded in 2019, is an infrastructure provider for Bitcoin’s Lightning Network offers:
IBEX Pay — easiest and fastest way for any business to receive instant Bitcoin payments via the Lightning Network;
IBEX Hub — adding the power of Lightning to your existing platforms.
In June 2022, IBEX has onboarded 85 new businesses in Miami enabling them to accept Bitcoin over Lightning.
Bitcoin Banking
Galoy
galoy.io
Galoy offers Bitcoin banking infrastructure solution. The team, which consists of world-class software developers, educators, designers and data scientists spanning across 10 countries, develops and supports open source software that lets communities of any type and size self-organize as a Bitcoin bank.
Recently Galoy announced ‘stablesats’, an alternative to stablecoins or fiat bank integration. Stablesats uses derivatives contracts to create a bitcoin-backed synthetic dollar pegged to USD. This allows people to use Bitcoin on Lightning for daily payments without being exposed to short-term exchange rate volatility.
Wallets
Wheatstones
Lightning wallets are software solutions connected to the Lightning Network that allow users to store, send, and receive BTC over the Lighting Network.
Lightning wallets are available as mobile apps for iOS and Android that lets you send and receive Lightning payments. Normally, these are custodial or non-custodial wallet with a focus on simplicity and the best possible user experience.
Custodial — wallet app that do not offer full control of the keys
Non-Custodial — wallet app that offer full custody of the keys
Some of the most popular wallets are BlueWallet, Simple Bitcoin Wallet, Muun, Wallet of Satoshi, all of which have 100k+ downloads on Google app store alone, and Electrum wallet with over 500k+ downloads.
P2P Marketplaces
Paxful
knowyourmobile.com
Peer-to-peer digital asset marketplace Paxful has integrated the Lightning Network. The global integration will serve over seven million Paxful users, allowing them to transfer bitcoin in a matter of seconds with much lower fees. The service will be available for transactions between individuals and to pay for goods and services.
Streaming, Apps, Podcasts, Games
Fountain App — Podcasts
bitcoinmagazine.com
Launched in 2021, Fountain, a podcast platform for creators and consumers that rewards both listeners and podcasters for the value they bring to the platform. All the transactions are done via Lightning Network.
Wavlake — Music Streaming
wavlake.com
Founded in July 2021, Wavlake is a music streaming platform that integrates Bitcoin’s lightning network with the aim of nurturing communities around music via a “direct funding model”. What this means for musicians and music fans is that tips can be sent directly from fan to musician during a livestream or, in the case of what Wavlake is trying to do, tipping sats whilst streaming that artists track.
Shocknet — Lightning Web Apps
shockwallet.app
A framework for permissionless Lightning WebApps, such as Lightning Video.
Decentralized Social Media Messaging
Wheatstones.com
Social media messaging apps are end-to-end encrypted, onion routed, censorship-resistant, peer-to-peer messaging and payments. They actually send data (texts or video streaming) through the Lightning Network as well as payments. End to end encrypted chat messages can be sent using the Lightning network with no central server meaning users can take control of their own data without it being stored in an interpretable way at an intermediary.
Zebedee — Games on Lightning
zebedee.io
Founded in 2019, Zebedee is an infrastructure for developers to integrate real-time Bitcoin transactions into their games and the tools gamers need to interact with the system, which runs on the Bitcoin’s Lightning Network. In 2021 Zebedee has raised $11.5 million for the development for the development of its tech.
With Zebedee, nano-transactions as low as $0.0005 are both technically possible and economically viable due to extremely low fees. With the rise of the digital economy and the new financial paradigm offered by Bitcoin, there is an opportunity for game developers to integrate the currency of the Internet into their games as a new method of monetization.
For example, players of Counter-Strike: Global Offensive (CS:GO) use Zebedee Infuse and Zebedee Wallet to compete for Bitcoin in one of the world’s most popular online games. It has also demonstrated the viability of integrating Zebedee’s offering more widely across games of all genres, as numerous developers are now integrating Zebedee’s API.
Zebedee has over 100k downloads on Google Play store.
Layer 3
Impervious Browser
impervious.ai
Impervious API is a programmatic layer that sits on top of the Bitcoin Lightning Network, i.e. “Layer 3.” Developers can leverage the Impervious API to easily build secure p2p data transmissions and payments into their applications and services.
By interlacing Lightning, Decentralized Identifiers (DIDs), IPFS and more into a familiar application, the Impervious Browser is able to provide an entire suite of easy to use P2P capabilities, such as:
P2P communication between browsers and DIDs and secure P2P file transfer.
P2P audio and video calls
An anonymous, publicly accessible, decentralized data store
Create pay-to-play links, prompting peers to fulfill a key exchange or Lightning Invoice to view premium content
RGB
Bitcoin reddit
There are also a number of projects attempting to bring back expressive smart contract functionality to Bitcoin in a safe and responsible way. One such project is RGB.
RGB was based on research by Peter Todd and envisioned in 2016 by Giacomo Zucco as a better asset protocol for Bitcoin and the Lightning Network. Further evolution of these ideas led to the development of RGB into a fully-fledged smart contract system by Dr. Maxim Orlovsky, who is leading its implementation since 2019 with community participation.
RGB as a set of open-source protocols that allows us to execute complex smart contracts in a scalable and confidential way. With RGB it’s possible to create complex and highly efficient smart contract systems.
Earning Yield On Bitcoin Natively
The Lightning Network allows Bitcoin holders to generate passive income while maintaining custody and without any counterparty risk, making Bitcoin a productive asset.
One such way is routing fees, i.e. fees earned by node operators for forwarding payments. According to Messari, a top 100 ranked node averaged a 2.5% APR in the first half of this year from routing transactions on the Lightning Network and 4% APR during the month of June.
messari.io
Considering that there’s over $10 Billion of Bitcoin held by public/private companies and governments, with majority of the Bitcoin being held idly in cold storage, it’s likely that institutions will look to take advantage of its low risk yield. This can facilitate further institutional adoption, especially since BlackRock’s recent partnership with Coinbase, which will allow BlackRock’s clients, such as pension and sovereign wealth funds, to invest in bitcoin directly.
This way the Lightning Network establishes a framework for calculating Bitcoin’s risk-free rate, a necessary step for Bitcoin to develop a mature capital market and potentially reach reserve currency status.
Summary
explorer.acinq.co
Lightning has only been operational since 2018 with users and liquidity rapidly growing. As Lightning Network adoption increases, node and liquidity setup will become more streamlined. This will allow the providers of solutions for these users to utilize economics of scale better.
The enthusiasm surrounding Bitcoin and the Lightning Network is mostly due to the radical improvements it can bring to the world, such as immediate, censorship-resistant, practically free payments for over a billion unbanked or underbanked individuals.
If Bitcoin and the Lightning Network can accelerate financial inclusion, the potential for long-term effect is hard to ignore.
DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.