Bitcoin Scaling & Properties as a Medium of Exchange

A common criticism of Bitcoin before 2017 was that fees were too high and Bitcoin wouldn’t scale. This led to dissension among the Bitcoin community over the size of each block on the blockchain. If you want to learn a lot more, check out The Blocksize War, and if you want to learn a bit less, here’s a good book review.

The dissenters created new coins such as Bitcoin Cash. They were largely unaware of Bitcoin scaling technologies like Lightning.

Bitcoin’s Lightning Network is a layer-two payment protocol built on top of the Bitcoin blockchain. It enables virtually free and instant payments. 

Originally devised by Satoshi Nakamoto, perpetuated by Joseph Poon and Thaddeus Dryja in February 2015, then taken to the next level by Elizabeth Stark and Olaoluwa “Laolu” Osuntokun in January 2016 (with Lightning Labs), Lightning opens up channels that allow people to make private off-chain payments. Eventually, these channels are closed, or settled, on the main Bitcoin blockchain. 

Since 2017, Lightning has exploded in size and capabilities. Today, Bitcoin’s Lightning Network holds 2,200+ bitcoins, and 6,500 channels. To witness these capabilities, look no further than what’s happening in El Salvador, here, here, here, & here

(Frankly, I’m skeptical of El Salvador mandating Bitcoin. I think Bitcoin should be opt-in. Nevertheless, it’s a unique proving ground for Bitcoin used as a medium of exchange.) 

Since Lightning allows for easy settlement on smaller transactions, far fewer transactions need to take place on the baselayer. This means the mempools on the main blockchain have been freed up for larger transactions.  

To show a couple examples, on September 14th, 2021, one block contained $50,000,000,000 of value with fees of only $5,784, or 0.00001134%. The day before, someone sent $2,000,000,000 and paid a transaction fee of $0.80, or ~0.0000000389%. That’s the same protocol that was so widely criticized in 2017 for lacking the ability to scale.

Here’s another reminder that there are nine steps and six parties involved in every Visa transaction. Major credit card companies take 1.5%-3.5% of every transaction, and take at minimum, 30 days to settle

Lightning has, in effect, solved Bitcoin’s payment scaling problem. Lightning isn’t the only outer-layer of Bitcoin to keep an eye on. If (legal) tokenized securities and non-fungible tokens are your cup of tea, Bitcoin’s Liquid layer enables these capabilities on Bitcoin as well. 

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