Tim Bukher


Is The Lightning Network A Return To Central Banking?

There are many ways to think about bitcoin — as a blockchain, a ledger, digital gold, or anonymized digital cash. But it’s so much greater than that: it’s a digital, financial and cultural revolution. By decentralizing record keeping, it ensures secure, anonymous financial transactions in what has become a centralized, public world. It’s an exciting new Wild West, full of speculation, quick fortunes, audacious robbery, and sometimes devastating losses.

With this increasing volume of activity, which has been further ignited by the entrance of institutional investors via the introduction of bitcoin futures on major financial exchanges, there’s been a push to speed up bitcoin processing. Because bitcoin technology depends on the downloading of full transaction histories and a system of cross validation in a decentralized computer network, it’s both expensive (transactional fees can be high) and slow. The US dollar equivalent transaction fee was $19.65 per transaction at the height of trading in December 2017.

So, as a solution for this chaos, we might be seeing a counter-revolution of sorts: the Lightning Network. Its “Layer Two” technology promises a faster and “lighter” transaction. The Lightning Network technology works by limiting decentralized transactional data and going off blockchain to store transactions in one central, validating location. In other words, instead of paying $19.65 and waiting up to an hour for the transaction confirmation each time Trader A wants to sell some amount of bitcoin to Trader B, and vice-versa, both Traders will deposit some amount of bitcoin to a “central” wallet, an off-the-block ledger, which will allow said Traders to trade back and forth to their hearts’ content, finally reconciling the net balance of those trades via a single transaction to the bitcoin block at some point later in the day.

Running counter to the philosophy of blockchain technologies, this makes the Lightning Network a centralized financial system, a virtual bank that manages transactions in a central location. As such, it also compromises security by creating a vulnerability to hacking — just as with any other repository of data. Think IRS or Equifax or JPMorgan Chase hacks, except with real money.

But because big banks and traders will love the speed and the resulting low fees of this technology, we’ll likely see an addition of a security element in the form of FDIC or the like to compensate for the hackability of such a system. This will also create a more consumer-friendly cryptocurrency option for neophytes. And so, naturally, this de-anonymized and de-encrypted financial banking system will likely become a regulated ecosystem, with overview from the banks and government agencies.

By its very nature, the Lightning Network is an unattractive technology to cryptocrats, who value the unregulated, secure and private nature of cryptocurrency. The allure of bitcoin’s security and independence of financial systems and government regulation stems from a general mistrust of these entities that have failed the average citizen or investor for the benefit big corporations (bank bailouts, tax laws). Anonymity, too, is essential for conducting personal transactions in a world where the idea of privacy is seen as either contemptuous or suspicious, and the practice of privacy is rapidly shrinking (note the meteoric rise of the Verge coin, a privacy-focused altcoin, when security entrepreneur John McAfee endorsed it with fellow privacy coins Monero and Zcash).

To the cryptocrat, bitcoin is freedom: it’s free of politics, government and special interests. It’s the ability to make and spend money on one’s own terms. The Lightning Network seems like a return to central banking and its inevitable regulatory oversights. Will the mainstreaming of bitcoin return it to the very system it was created to subvert? Time will tell.

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