Authors: Denis Scheller, Jonas Gross, Jonathan Knoll, Yannic Fraebel
The preceding articles in this series cover the basics of the Lightning Network and industrial use cases of Bitcoin Lightning. In this article, we focus on retail use cases for the end user. We will present use cases around payments in retail, hospitality, e-commerce, as well as donations, cross-border payments, streaming payments, and financial inclusion.
The advantages of payments via the Lightning Network are primarily the high transaction speed, direct confirmation and settlement of payments, as well as the marginal transaction fees (see Article 1). Since transactions are not processed via the Bitcoin blockchain, Lightning is not only cost-effective but also scalable. As a result, applications with very small payment amounts ("nano-payments") and a high number of transactions can be achieved in a technically efficient manner. Users can use the Lightning Network to make final transfers of value around the clock, completely independent of banks and other intermediaries. In the following, we present some of these applications as examples.
Payments in Retail and Hospitality
Payment methods used in retail and hospitality need to process a large number of transactions quickly and reliably, which is why scalable payments are essential. Payments via the Lightning Network meet these requirements and, in combination with low transaction fees, ensure that payments with Bitcoin are increasingly in demand by retailers, restaurateurs, and end users. Technically, the morning coffee or lunch at your favorite Italian restaurant can already be paid for efficiently and cost-effectively via Lightning. However, both the merchant and the consumer must use Lightning payments. This is not yet the case on a broad scale. However, news such as the introduction of Lightning payments in the CashApp with more than 40 million monthly active users and the acceptance of Lightning payments in all stores of South Africa's second-largest retailer Pick n Pay shows that the acceptance of Lightning payments is developing dynamically.
Today, the payment process in online stores is optimized to motivate customers to make a purchase. Available payment methods play an important role. Online stores have a great interest in offering a wide selection of payment alternatives. Payment with Bitcoin appeals to new - typically younger - customer groups who already own Bitcoin. Lightning payments are particularly noteworthy in this context, as Lightning payments already offer a comparable user experience to common payment methods (e.g., credit cards). In addition to the user experience, immediate payment confirmation is also an essential means of minimizing risk for merchants. Payments with fast payment confirmation reduce counterparty risk, ultimately resulting in low costs for the merchant and typically for the end users as well.
In addition to traditional e-commerce payments, some websites (e.g., substack) use a Lightning paywall. This Lightning paywall gives content providers the ability to have their content accessed in exchange for a Bitcoin Lightning payment. Such websites benefit from the monetization option from a growing number of content providers (e.g., independent writers and podcasters) who want to publish content on the website. The growing supply of content in turn leads to more traffic being directed to the website, which can be monetized.
Donation and Cross-Border Payments
The first international aid organizations see the acceptance of Lightning payments as a way to collect donations quickly and efficiently. Lightning is now used by Unicef, SOS Kinderdorf Liechtenstein and Child's Dream, among others, to collect online donations. In addition to this, Lightning also offers the possibility to send funds to remote regions or crisis areas directly and around the clock. Thus, Lightning has the potential to be used extensively for cross-border payments in the future. Today, cross-border payments cost on average over 6% of the transaction amount in fees, according to the World Bank. And in some corridors, the fees can be double or triple that amount. Furthermore, payments typically take several days to complete. On the other hand, payments via Lightning can be made in real-time at a cost of almost zero.
Bitcoin and the Lightning Network are open systems where anyone with a smartphone and a wallet (see Article 2) can participate. Barriers to entry due to tedious know-your-customer ("KYC") processes do not exist. Projects such as Bitcoin Beach in El Salvador or Bitcoin Ekasi in South Africa use Bitcoin to empower socially disadvantaged local people and provide access to an independent financial system.
Streaming Payment Applications
Streaming payments are another application of Lightning. These are payments that are not made once but on a recurring basis, for example, during using a service. These include payments for music or video usage billed “per consumption" as opposed to monthly flat rates such as a Netflix, Apple Music or Kindle subscription. Under the heading of "Podcasting 2.0," Lightning payments can already be used to support podcasts. "Value-for-Value" micro-payments are made per minute while listening to the podcast. The user only pays for the exact amount of time they listen to the podcast. This is possible because micro- and nano-payments can be made efficiently via Lightning, which is not possible with current payment methods.
The Bitcoin network is continuously being developed to enable new functionalities and applications. Pandora Core's "RGB" project aims to enable scalable smart contracts for Bitcoin and Lightning. Bitcoin-based smart contract functionality enables decentralized financial applications. Through Lightning, this allows versatile financial services to be developed based on Bitcoin.
Furthermore the Lightning Labs' "Taro" project is working to tokenize digital goods on the Bitcoin blockchain that can subsequently be transferred via the Lightning Network. For example, stablecoins - e.g., a digital euro on the blockchain - could be transferred as a digital good via Lightning in the future. Here, sender and receiver can benefit from the stability of the familiar (fiat) currency, the security of the Bitcoin network, as well as instant settlement and low transaction fees of Lighthing. In this case, rapid adoption for payment applications would be expected.
Payments over the Lightning Network today offer low-cost and finalized payments that can be made to anywhere worldwide within milliseconds. Consequently, they offer an added value for daily use. The use of the Lightning Network differs regionally. While Lightning is already used extensively in some countries for remittances to developing countries (e.g., cross-border payments), Lightning is only gradually finding its way into the daily payment process in stores or online retail outlets in Europe.
Adoption is happening in two ways today. First, innovative companies recognize the potential of the technology and offer Lightning payments to their customers without a middleman based on freely available open-source solutions. Second, there are professional payment processors (so-called acquirers, such as Worldline Global) that already enable fully integrated Lightning payments as a payment method for their merchants.
We believe that the adoption of the Lightning Network will continue to increase in the coming years as soon as a broader audience becomes aware of the added value and beneficial applications. And similar to the development of the Internet, we expect the technical complexity will be fully abstracted and entry barriers will be reduced through intuitive user experience design.
About the authors
Denis Scheller is Senior Manager Bitcoin Suisse Pay at Bitcoin Suisse. Denis holds a degree in International Business Administration from Cooperative State University Mannheim (Germany) and has worked many years in payments and e-commerce. At Bitcoin Suisse Pay, Denis helps build crypto payment infrastructure. He is interested in macroeconomics and how bitcoin and lightning technology can enable a fairer society. You can reach Denis via email@example.com.
Dr. Jonas Gross is Head of Digital Assets and Currencies at etonec GmbH. Jonas holds a Ph.D. in economics from the University of Bayreuth (Germany), and his main fields of interest are central bank digital currencies, stablecoins, cryptocurrencies, and monetary policy. Further, Jonas is Chairman of the Digital Euro Association (DEA), co-host of the German podcast "Bitcoin, Fiat, & Rock'n' Roll," and member of the Expert Panel of the European Blockchain Observatory and Forum. You can reach Jonas via firstname.lastname@example.org.
Jonathan Knoll is Founder and Managing Director at etonec GmbH. He has more than 25 years of experience in the payment & banking and blockchain industry working for innovative companies such as Sun Microsystems, PayPal/eBay, and the Libra/Diem Association, where he was Head of Strategic Partnerships. At etonec, he is excited about building solutions at the intersection of blockchain, payments & banking, and regulation. You can reach Jonathan via email@example.com.
Yannic Fraebel is the managing director of App-Learning GmbH. He holds a Master's degree in Business Informatics from the University of Applied Sciences in Munich. His focus is on bitcoin, cybersecurity and economics. Furthermore, Yannic is an Advisor at Blockchain Founders Group AG (BFG) and a former mentor of the DeFi Talents Program. You can reach Yannic at firstname.lastname@example.org.
This article does not represent any financial advice, advertisement or similar.