Bitcoin-related projects are an integral part of the pipeline and the portfolio of Greenfield. For instance, Sovryn and Foundation Devices. Over the last months, I have extensively looked into the Lightning Network space. Bitcoin’s resilience, institutional adoption, and status as the most adopted cryptocurrency for payments and store of value make it a significant and differentiated player in the industry. The Lightning Network, built on top of Bitcoin, has emerged as a superior crypto payment system, offering horizontal scalability, low fees, and enhanced privacy. Recent developments in liquidity, connectivity, and user experience have fueled renewed interest and adoption of  LN. However, challenges such as reliability, non-custodial scaling and easier ways to provide routing liquidity still need to be addressed.

The original publication can be found at Greenfield Publications.

Bitcoin, a different category

Bitcoin was created in the turmoil of the banking crisis in 2009. Satoshi inscribed the message “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” into the first block, referencing these turbulent times. Back then, the US bank Washington Mutual Bank failed with $307B in assets. From then until now, 14 years later, we’re seeing US bank failures again with Silicon Valley Bank with $209B in assets. And the following failure of Signature Bank with $110.

In the meantime, Bitcoin gained strength in an antifragile manner from various regulatory attacks such as straight-out explicit bans e.g. China, Qatar, Saudi Arabia, and various implicit bans, to mining bans in e.g. China, to exchange bans, and technical attacks such as forking the chain, e.g. Bitcoin Cash in 2017 and others. This young asset has proven to be resilient over the last 14 years with a 100% uptime, a higher hash rate than ever before, countries adopting it as legal tender e.g. El Salvador in 2021, Central African Republic in 2022, and more and more people holding bitcoin for the long-term, see Total Amount of Holders Chart. With it came institutional adoption such as companies and funds taking Bitcoin onto their balance sheet e.g. MicroStrategy, Tesla, Block Inc. and many others. And just this month BlackRock filed for a spot Bitcoin ETF, and Fidelity is planning to do the same.

Some interesting advancements

At Greenfield we're excited about recent developments regarding ZK rollups, space chains, discreet log contracts (DLCs), Ark  and Fedimint – see Fig.2. A good way to stay updated with these advancements is the Bitcoin Optech newsletter. One of the areas the team at Greenfield is particularly interested in is the Lightning Network (LN) and major advancements, like Taproot Assets, among others, building on top of it.

Lightning Network

In 2015, Joseph Poon and Thaddeus Dryja proposed the Bitcoin Lightning Network (LN): Scalable Off-Chain Instant Payments. This layer is built on top of Bitcoin to allow for instantaneous, private off-chain settlement in a decentralized way while leveraging Bitcoin’s security and asset. It is horizontally scalable since it’s not using a ledger, but rather a P2P network in which payments are routed. Instant settlement, low fees (<$0.01) and its privacy traits make it attractive for (micro) payments and for companies in the payment space to build on top of to compete with e.g. Visa and Mastercard, the world’s biggest payment processing networks. In a world of IoT and smart grids, the LN can be leveraged as a machine-to-machine payment system. For an analysis of its viability as a substitution for traditional global payment networks, I'd like to refer to Lyn Alden’s A Look at the Lightning Network.

Enablers and catalysts

In the period from the year 2015 of the inception of the idea until 2021, LN was only used by enthusiastic early adopters. The biggest obstacles were running an own Bitcoin full node, running a LN implementation, finding peers in the network to manually connect to and manually balancing lightning channels including finding a source for inbound liquidity. That’s a lot of friction considering almost nobody was accepting LN payments. With this in mind, let’s have a look at what has changed and led to the explosion of renewed interest in the LN:

1. Massive reduction of payment failure and an increase in connectivity:
   River Financial states in its latest report that in the early days of Lightning in 2018, due to limited liquidity needed for routing payments through channels, people had failed $5 transactions around ~48% of the time. In 2021 however, the network grew to 1,000 BTC of liquidity. By now, this has increased to even more than 5,500 BTC, a rough 5x growth within two years. River states that nowadays payment failure has dropped below 2%. Other growth metrics besides total channel capacity include channel count (but important to keep in mind channel quality over quantity) and. For total capacity and channel count, Coinmetric’s dashboard provides live data.

2. Advancements in UX and developer experience:
   On the user side next generation non-custodial wallets such as Phoenix and Breez (also a PoS solution) allow for frictionless user onboarding to Lightning by leveraging Lightning Service Providers (LSPs) for both automatic and instant (zero-confirmation) LN channel opening. The fundamental problem of inbound liquidity to receive funds has only been partially solved however, see the challenges below. Custodial wallets, such as Wallet of Satoshi (predominantly used in El Salvador), and CashApp and Strike are other important catalysts for the usability of LN (while the use of custodial wallets is debatable). On the developer side, SDKs such as BDK and LDK, Breez SDK, River Financials’ API accelerate the development of nodes, wallets, and services sending/receiving lightning payments. Other UX improvements include new transaction types such as the BOLT12 offer type allowing users to receive (instead of sending) payments by scanning a QR code among others.

3. Renewed interest in Bitcoin through experimentation and Taproot assets:
   This year the so-called Ordinal Theory enabled the issuance of inscriptions (think of it as NFTs + on-chain content, more than >13M) on the Bitcoin base chain. It is a standard on how to interpret the existing blockchain data, without any modification, and attribute a new meaning off-chain to individually tracked on-chain satoshis. Another idea, the BRC-20 concept, leveraged inscriptions to enable fungible asset transactions on top of Bitcoin. Its market cap is by now >$100M. Both approaches are more of a hack, an experiment, rather than a serious proposal to extend Bitcoin but they proliferated new interest in Bitcoin. An upcoming and serious proposal to extend Bitcoin to support custom assets is Taproot Assets (formerly known as Taro). These custom assets enable issuance on the Bitcoin blockchain and the use of them in  LN (while using the critical mass of liquidity of bitcoin locked in the network). A similar effort is RGB. Both enable centrally-issued stablecoins on Bitcoin and LN, which currently is a large chunk of liquidity settled on e.g. Ethereum. The ability to have stablecoins on Bitcoin/LN is another controversial topic for the community.

Bitcoin’s resilience, institutional adoption, and status as the most adopted cryptocurrency for payments and store of value make it a significant and differentiated player in the industry. The Lightning Network, built on top of Bitcoin, has emerged as a superior crypto payment system, offering horizontal scalability, low fees, and enhanced privacy. Recent developments in liquidity, connectivity, and user experience have fueled renewed interest and adoption of LN. However, challenges such as reliability, non-custodial scaling and easier ways to provide routing liquidity still need to be addressed.

Overall, Bitcoin’s unique attributes and the growth of the Lightning Network position them as transformative forces that might become, if challenges are accordingly addressed, in a couple of years time a viable alternative to upcoming centralized digital currency payment systems worldwide.