One of the largest Bitcoin Lightning Network (LN) node operators, River Financial, recently published a report on this second-layer payment solution. Previously conceived as an experiment used by savvy BTC holders, the LN is fast becoming a key component in this blockchain ecosystem and its potential ticket to the mainstream.
The report defines LN as a second-layer Bitcoin solution that allows users to send and receive transactions off-chain, “without the need to wait for on-chain settlement.” This solution was created to improve the scalability of BTC payments by allowing entities to quickly transact small amounts of the cryptocurrency without relying on block settlement.
The LN operates with entities called the Lightning Channel, the nodes that support the network and allow two users to execute a transaction. As seen in the graph below, the spread of LN channels has been on the rise since the end of 2018.
The following year, the second layer Bitcoin payment solution saw a massive increase in its exclusive channels. These stood at 25,000 followed by a long consolidation period and slower adoption.
However, in 2021, adoption began to increase once again, allowing unique LN channels to reach over 90,000 with an upward trend pointing to 100,000. In less than a year, these entities went from about 50,000 at its current levels.
This growth was likely supported by the COVID-19 pandemic and people’s demand for fast, low-cost payment methods with global reach.
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At the same time, as Bitcoin LN channels increase, their ability to pay follows a similar trajectory. In 2019, the second layer solution had less than $50 million in capacity or less than 1,000 BTC.
This capacity was also consolidated between then and 2021. In this year, the capacity of LN skyrocketed to over $200 million at its peak, when the price of Bitcoin reached an all-time high of $69,000, with 3,500 BTC in its capacity.
As the chart below shows, capacity in BTC continues its upward trajectory despite the bearish trajectory of the price of the underlying asset. The bear market has failed to dissuade people from adopting the LN. Rio noted:
Since the launch of the Lightning Network in 2018, the total capacity has increased to almost 5,000 BTC. Capacity represents the amount of bitcoin that can be transacted with on Lightning and is a decent metric for measuring network adoption.
As Bitcoinist reported, LN could enable Bitcoin to bridge the gap between early adopters and ordinary people looking for a specific use case to improve their lives. River Financial believes the solution can go beyond payment and unlock “exciting new opportunities” from a business perspective. The report noted:
Tomorrow, Lightning may enable the full financialization of Bitcoin, as node operators can put their bitcoin to productive use by properly capitalizing on Lightning nodes. This can allow node operators to generate a passive return on bitcoin with very low counterparty risk.
The River Financial report also found that most of the activity in LN is supported by activity originating from US time zones. The network sees fewer transactions during American sleep hours and vice versa.
The report states that the area’s influence is “not surprising given that we have many US-based Lightning channels.” Additionally, El Salvador made Bitcoin legal tender based on the high adoption of the Lightning Network.