Are You Finally About To Buy Your Morning Bagel With Bitcoin?

Are You Finally About To Buy Your Morning Bagel With Bitcoin?
Stéphane Renevier, CFA

over 2 years ago3 mins

  • The Lightning Network could well be the missing piece for bitcoin to be more widely accepted as a means of payment.

  • By adding another layer on top of the bitcoin blockchain, the lightning network makes transactions faster, cheaper, and more efficient.

  • But while it has the potential to be a true game-changer for bitcoin, the next few months might determine whether it lives up to its expectations.

The Lightning Network could well be the missing piece for bitcoin to be more widely accepted as a means of payment.

By adding another layer on top of the bitcoin blockchain, the lightning network makes transactions faster, cheaper, and more efficient.

But while it has the potential to be a true game-changer for bitcoin, the next few months might determine whether it lives up to its expectations.

Mentioned in story

Odds are you hold at least a bit of bitcoin. But here’s a question for you: have you used the OG cryptocurrency – which, let’s not forget, was designed to “make payments cheaper and faster” – to ever actually buy anything? Nope? The Lightning Network might be about to change all that, and if it does, bitcoin’s price could hit a new level…

What is the Lightning Network?

The main reason bitcoin isn’t more widely adopted as a form of payment is that it’s nowhere near as fast as systems like Visa for everyday transactions, from buying your morning coffee to paying your bus fare.

That’s because miners have to validate every transaction that happens on the blockchain, which means a high volume of activity can quickly bog down the system. When that happens, processing times can become excessively slow and transaction fees prohibitively high. And of course, the more people use the network, the worse these issues become.

The Lightning Network changes everything: it makes transactions faster and cheaper, facilitating payments between users and allowing bitcoin to become a fully-fledged alternative to existing payment systems.

How does the Lightning Network work?

Since keeping a record of every single transaction on the blockchain is so time-consuming, the Lightning Network adds a second layer on top of the bitcoin’s blockchain and effectively moves some of those transactions off-chain. That enables users to create private payment channels between themselves.

This has two benefits. First, those off-chain transactions can be carried out faster and cheaper, and can be divided into smaller amounts. That could make buying a cup of coffee using bitcoin a reality. Second, they “free up” space on the blockchain, which makes the whole process more efficient for the other, larger transactions that require on-chain security.

It’s important to understand that while the bitcoin network and the Lightning Network are two distinct networks, they’re still linked. The Lightning Network is essentially like an open tab at a bar, which keeps track of all your purchases. It’s only when you close the tab at the end of the night that the total is calculated and transmitted to the bitcoin blockchain, where the actual payment is made and recorded.

What’s the opportunity here?

Given the main argument for buying bitcoin up to now has been that it’s a strong store of value, bitcoin’s transition into a means of payment could take the cryptocurrency to a whole new level. It could also provide some significant positive benefits to anyone excluded from traditional payment systems, or those living in countries suffering from hyperinflation. That would bring bitcoin closer to actually rebuilding the current system in a fairer and more accessible way.

So if the Lightning Network can fulfil its promise, the price of bitcoin should arguably be trading at a much higher level than it is today.

But while it has the potential to be a game-changer, the Lightning Network isn’t the finished product yet, and many factors risk hampering its developments. For starters, use of the network requires high technological know-how, even by developers’ standards. Second, transactions happen outside the safety of the blockchain, which means they’re more at risk of a malicious attack. Third, it’s not the only solution to the scaling problem, and a competitor in the fast-moving world of crypto could quickly steal Lightning Network’s top spot.

The technology still has a lot to prove, so it’s important to not sell the bear’s skin before killing the beast. So far, however, it’s been truly impressive: from lightning-focused Strike’s partnership with the government of El Salvador, to rumours that Twitter is about to accept Lightning transactions. It all suggests that the Lightning Network is on the right track to gain wider acceptance.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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