Bitcoin Sucks, But Don’t Underestimate Bitcoin 2.0 (Lightning Network)

Lightning on top of Bitcoin will change the payments game

As a software product, I’m not a huge fan of Bitcoin. Fees are high, confirmation times are slow. Anonymity and privacy could be better. Smart contract capabilities are basically non-existent. In certain features, or even in as a whole, competing products like Ethereum, Litecoin, Monero, or other Bitcoin forks, are simply better at delivering utility to users.

Low Hanging Fruit Plucked by Competitors

There were quick fixes (not without tradeoffs) that may have made Bitcoin more usable in the short term. These were implemented by competing forks like Litecoin and Bitcoin Cash, and include changes like increased block size, SegWit2x, and reduced block confirmation times. It would appear as though Bitcoin developers sat idly while others picked up the slack, and let value flow out into these forks.

Here Come’s Lightning ⚡

The Lightning Network is a proposed system built on top of Bitcoin that would let people instantaneously send/receive payments and reduce transaction fees by keeping them off the main network. It helps Bitcoin be more useful as a day to day currency.

A video explaining how lightning works

I expect mining consortiums to be against Lightning, as it reduces fees and congestion from the main network, which is how they make their money. However, the best part about lightning is that it does not rely on the support of miners. Running a lightning node is a pure software play, and only requires capital in the form of “staking” Bitcoin to help facilitate transactions. Lightning nodes can collect fees for doing this. So we can expect that new players outside of mining pools will contribute capital and provide service to this network layer. This arguably helps take power away from miners and is a decentralizing force for Bitcoin, a positive side effect. If miners don’t like it, they can try to fork off and create a new cryptocurrency, but they will likely lose to a network that delivers improvements like Lightning does.

Bitcoin forks, your days are numbered…

The Lighting system can technically be adapted to any cryptocurrency since it’s just a layer built on blockchain. However, if lightning ends up delivering on its promises, then what purpose does Litecoin and Bitcoin Cash serve? Even if those forks implement their own lightning networks, Bitcoin has the most users and dollars behind it, and could absorb those ecosystems back into itself.

Litecoin founder Charlie Lee had this to say about Lightning:

But some people say LN [Lightning Network] on Bitcoin will kill any reason to use Litecoin. If people can do instantaneous transactions on Bitcoin, why would they use Litecoin? My gut feel is that this is not the case. Even with LN, Bitcoin still cannot service every person in the world. I think the calculation was that at 1MB blocks, LN and SegWit on Bitcoin can service 500M users. LN nodes will charge a fee for LN txns going through them and that fee will be relative to the Bitcoin network fee. So Bitcoin LN txns will be more expensive than Litecoin LN txns. It may make economic sense for a LN txn to go via Litecoin and back to Bitcoin to get the cheapest rate. Lightning makes this possible because it allows the two LN to be interoperable. I don’t know that this use case will be economical or not, but we won’t know until both LNs are built and running.“

In the near term, Charlie’s own conclusions are not a good sign. His affirmation of LN servicing 500m people sounds like Litecoin will be worthless until network capacity is reached and scale becomes a problem again. Keep in mind Charlie also sold all his Litecoin as a matter of solving personal conflict of interest. I think Charlie has good intentions, but it is somewhat concerning when a founder is no longer financially incentivized by the success of their product. I suspect Charlie’s knowledge of Lightning and its impending deployment, coupled with the recent price surge of Litecoin, may have influenced his decision to sell.

Conclusion

The deployment of Lightning will be the biggest change to Bitcoin ever. If it works, it reintroduces Bitcoin as a usable daily currency, unhindered by stuck transactions and high fees. This is exciting for the adoption of cryptocurrencies as puts it back on track as a replacement for fiat. Lightning is still in beta with no hard date for deadline, but it is expected to be ready in 2018. My prediction: Litecoin and Bitcoin Cash may have rough times ahead.