More Efficient Than MasterCard: The State Of The Lightning Network
Comparing Bitcoin’s Lightning Network to legacy credit card processing makes it clear that Lightning settles payments much more efficiently and affordably, even at such an early stage.
More Efficient Than MasterCard
With much of the news focusing on macro, the legacy financial system and central banks’ heavy-handed interest rates, our coverage has spent time analyzing the ever-changing Federal Reserve policy and unwinding of the everything bubble. Bitcoin-native metrics have looked promising, as many onlookers can surmise by looking at bitcoin’s year-to-date price performance.
In today’s article, we want to focus on the Lightning Network and some data we found interesting in relation to credit card processing and settlement efficiency when compared to traditional financial services.
For starters, it’s worth noting that the traditional use of the Bitcoin network for on-chain settlement is extremely efficient by settling transactions approximately every 10 minutes. Bitcoin might be most closely related to the Fedwire Funds Service which only settles about 200 million transactions per year compared to Bitcoin’s trailing 1-year figure of 98.5 million transactions.
As it stands today, the Bitcoin network is on pace to settle $3.5 trillion worth of change-adjusted value over the course of 2023, for costs of just $198 million, an equivalent fee rate of 0.006% for the average transaction. While average transaction costs are obviously skewed by the largest transfers in the data set, we can look at the median transaction settlement value and account for the median transaction fee, and still see that on-chain bitcoin transactions are a tremendously efficient way to send and receive value in a trustless manner over the internet.
Despite bitcoin’s extreme efficiencies as a global immutable settlement network, it remained unideal for minuscule and instantaneous transfers, as the 10-minute block interval target adds a latency to the settlement of transactions. This is okay for large sums of money, evidenced by the incumbent financial system, where net settlement of funds between financial intermediaries often don’t finalize for days or weeks on end — think MasterCard or Visa settling their books on a net basis with a banking institution like JPMorgan.
However, the need for a sound internet money that could settle instantaneously for nearly no cost was still there. With the advent of the Lightning Network, the latency involved with sending a bitcoin transaction, particularly for micropayment settlements, has all but vanished. This has brought about a whole new use case for bitcoin, as the monetary medium is now finding itself being inserted into the tech stacks of web applications and services across the globe.
As a refresher and overly simplified description, the Lightning Network works by node runners doing an on-chain transaction to open up payment channels with other nodes. This adds liquidity to the network and creates a network of channels when enough users open channels to one another. Lightning payments are sent from one node and hop across other nodes who have enough liquidity in their channels until the payment reaches its intended destination.
By doing one on-chain payment to open a channel, funds on the Lightning Network are able to move with less friction and settle without waiting for 10-minute periods between blocks for each transaction, until the channel gets closed with another on-chain transaction. These channels allow for lower fees as payments only pay to hop across nodes that have liquidity in their channels.
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Comparing Lightning’s efficiency to credit card processing. 💳
Lightning Network channel growth. 📈
How the Lightning Network looks like the early days of the internet. 🖥️
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