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- CoinShares' bitcoin lightning network report in July covered prospects for the fast, cheap, high-capacity channel.
- The company's investment strategist James Butterfill said it could do "more transactions than Visa".
- This could help bitcoin achieve its mainstream goals and facilitate global transactions.
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Cryptocurrencies are fast becoming part of the everyday language of financial markets. Major financial institutions are offering crypto to some of their richest clients, while digital banks and payment platforms will let users buy and sell them.
But there's always been one thing standing in the way of bitcoin becoming truly mainstream: the speed of the network it runs on.
The bitcoin network handles billions of transactions a day, but these have typically tended to be slow and costly. That has made it hard to use bitcoin for regular payments and instead made it more of an investment vehicle or store of value.
But since early 2018, the lightning network – a layer on top of the bitcoin network – has been speeding up transactions and bringing forward the day when anyone can make a payment in bitcoin easily and cheaply.
"Lightning enables users to amortize the cost of a bitcoin transaction across many payments over time. We see lightning as a critical technology that could evolve bitcoin's usefulness in payments beyond its stigma as an investment vehicle," digital asset manager CoinShares said in a recent report.
The network is the brainchild of US-based Lightning Labs, which landed $2.5 million in seed funding three years ago, backed by Twitter CEO Jack Dorsey and others.
"Lightning is much more secure than Visa, and could do more transactions than Visa," CoinShares investment strategist James Butterfill told Insider, referring to the leading payments card.
On the bitcoin network, users often have to wait hours for transactions to be settled, as these happen as a part of a block. The time between one block being processed and another can vary. Lightning, on the other hand, can send payments as instantaneously as an email is sent, the report said.
CoinShares compared use of the network to how credit-card providers Visa or Mastercard interact with the financial system overseen by the US Federal Reserve.
"Most transactions in the dollar economy never touch the systems of the Fed. They are processed by payment aggregators, who in turn use intermittent commercial banks, who then use the Fed for final settlement," CoinShares said. "Lightning does the same thing for bitcoin transactions, only using the bitcoin blockchain for final settlement."
Lightning enables users to open payment channels between two or multiple parties. Users on the lightning network can set up nodes - effectively pieces of software that send payments via the quickest routes between parties. A node operator will pick up a small fee for each transaction.
"At the time of writing, the base fee per transaction is 1 satoshi (0.00000001 btc), equivalent to 0.04 cents," CoinShares said.
On the standard blockchain, nodes must approve transactions. But nodes don't do this on the lightning network.
"Transactions are much faster, as parties can transact with each other without everything having to be approved by nodes," Coinmarketcap, a crypto data provider said in a post.
In June, Lightning Labs pushed their product's capacity further and launched the 0.13-beta, which meant the network could enable "larger and more reliable spontaneous payments," the company said in a blog.
"We're building the technology to bring bitcoin to the next billion people. Our goal is to make the easiest platform for anyone to integrate internet-native digital money using lightning," Lightning Labs said in another blog post in February.
And it looks like it might be working. Over 2020, the network's capacity rose by 22%, and active nodes, by 41%. By July this year, capacity had increased by another 90%, and active nodes, by another 52%, according to the CoinShares report.
"What we're seeing is the numbers of nodes are growing quite rapidly, which does suggest it's starting to be used as something other than just a store of value," Butterfill told Insider.