Lightning Network, Bitcoin’s second layer, is similar in some ways to fiat currency retail payment systems.

9. November 2020 0 Comments

This is the conclusion reached in a long article by Galoy that compares some payment systems such as Visa to LN.

According to this analysis the many payment networks in US dollars, such as credit cards and ATMs, are considered as level 2 solutions based on Fedwire, the basic dollar exchange layer.

Lightning Network instead is the level 2 solution based on Bitcoin blockchain.

However, while payment networks in USD are closed and permissioned systems, LN is open and permissionless, with a pace of innovation and adoption that could prove much faster.

Among other things, a graph reveals how, for example, during 2019 the total volume of transactions made on Bitcoin Machine level has already come very close to that on the dollar level 1 (Fedwire).

In other words, the two-level Bitcoin system seems in some ways very similar to the one used for the US dollar.

Lightning Network for retail payments

From this point of view, as well as payment systems in dollars based on second layer, LN could also be used for retail payments, also because for this purpose is much better than traditional onchain transactions.

But the most interesting point is the comparison between the characteristics of the second layer in USD and the one in BTC, or Lightning Network, because the latter is open and not closed, and this could make it better than the previous ones.

It would therefore be a better system precisely because of the absence of the need to rely on a trusted counterpart, although the same analysis then points out that this element could be really appreciated by only a few people.

In fact, it is argued that wallet custodians, who require their funds to be entrusted to a trusted third party, although in theory they may not be necessary, may in fact be inevitable for most retail users.

So, while the trustless nature of LN would make it a better system than traditional ones, most users could instead continue to entrust the custody of their BTCs to a third party.

However, the analysis suggests that it could take years, if not decades, before the unique features of LN clearly emerge on the retail market, a market populated by a huge number of ordinary citizens who are not really able to fully understand its technical functioning.

In fact, so far it does not really seem that its use has taken off, indeed its diffusion seems to be struggling to grow. But it could also be just a matter of time.