Authors: Yannic Fraebel, Jonas Gross, Denis Scheller, Philipp Sandner
Summary
Bitcoin will not become a common means of payment overnight, especially since there are still few places where it is accepted. The proper infrastructure is needed, which is currently being developed based on the Bitcoin Lightning Network. Lightning makes Bitcoin suitable for everyday transactions. The Lightning Network has been growing continuously. In the last part of our series on the Lightning Network, we take a look at the status quo of the network in charts, statistics, and visualizations using publicly available data. Where does Lightning stand today and how is the network developing?
Lightning Nodes, Payment Channels and Capacities
Building a New Infrastructure
As a payment network, Lightning has already achieved a critical mass in terms of liquidity and usability. The basic elements of the network can be described by three elements: Lightning Nodes, payment channels, and capacity.
Lightning Nodes are the infrastructure operators and are each assigned their own unique identity within the network. Only nodes are capable of processing transactions. Their number has grown steadily since the early days of the network, albeit at different rates. After a period of slow growth between 2019 and 2021, growth began to accelerate in the spring of 2021. In March 2022, the number of Lightning Nodes reached an interim peak of over 20,000 nodes worldwide (see Figure 1); today, there are about 17,000 nodes, roughly doubling in number over the past year. Because the network is a very dynamic construct, their numbers vary daily. The reason is that node owners - wherever they are physically located - turn their nodes on and off for various reasons.
Figure 1: The growth of Lightning Nodes from 2018 to 2022.
Source: Bitcoin Visuals
80,000 Payment Connections in a Global Network
Payment channels are established between nodes using a Bitcoin on-chain transaction (see Article 2). On average, each node has ten payment channels with other nodes (as of 11/14/2022). A similar development can also be observed at the network level: More than 80,000 connections have already been opened between recurring transaction partners (Nodes). Each channel is capable of processing an unlimited number of payments. Only the liquidity in the payment channels limits the capability to execute payments as often as desired. The Lightning payment channels worldwide are visualized in Figure 2.
Figure 2: The interconnectivity of the global Lightning network
Source: Mempool.space
Average Capacities and their Limitations
For Bitcoin users to also be able to conduct their everyday payments via Lightning, sufficient liquidity is necessary on the network. This is expressed on an individual level by the capacity of a payment channel. It indicates the maximum size of payment volume that can be handled. Currently, a payment channel has a global average size of approx. 6.5 million satoshis, i.e., approximately 1,000 EUR (as of 11/14/22, Amboss.space). It is important to note that particularly active and most professionally operated Lightning nodes maintain several hundred to thousands of channels. In contrast, nodes of private individuals usually have only a few channels. This creates a network topology with powerful and "satellite nodes." This extreme difference also becomes evident in numbers: The smallest payment channel is only 1,100 satoshis (~0.21 EUR) in size, while the largest has a volume of around 14 bitcoin (~224,000 EUR). Adding all active payment channels, the network currently reaches a capacity of about 5,200 Bitcoin (~90 million EUR). The development of capacity is shown in Figure 3.
Figure 3: The increase in the number of Bitcoin on the Lightning network.
Source: LookIntoBitcoin
The number of bitcoins that are currently on the Lightning Network is relatively small, considering that billions of dollars in payments are processed daily on the Bitcoin blockchain. However, substantial growth is expected. In principle, Lightning allows to significantly increase the velocity of money in the Bitcoin system.
Profiting from the Growth of the Network
It is well-known that the Bitcoin ecosystem is an open monetary network. Of course, the same applies to the Bitcoin payment network. Only a Lightning wallet has to be chosen, downloaded, and set up to enable participation (see Article 2).
Less widely recognized is that private individuals can also actively contribute to expanding the infrastructure. If one sets up a node and opens a few payment channels, then one can earn fees by routing payments. For example, routing payments from El Salvador to Nigeria generates income for liquidity provision - without being aware of who the parties involved are.
The fact that liquidity allocation activities are becoming increasingly professional is also reflected in marketplaces such as MAGMA: The Lightning marketplace makes it possible to buy liquidity from well-connected Lightning nodes. On average, sellers receive an interest rate of 3.3 to 3.6 percent. The remarkable thing is that such a market incentive, driven by the behavior of individual participants, contributes to the organic growth of the network and concentrates liquidity where it is needed most. All this works without the respective parties knowing each other.
Investments in Lightning Companies Gain Momentum
Lightning Labs, famous for developing the most widely used Lightning implementation, recently raised $70 million in a Series B funding round. Voltage, a Lightning infrastructure-as-a-service provider, also raised about $6 million in a seed funding round that included backing from Google Ventures.
The fact that venture capital funds are betting on Lightning technology - and backing infrastructure companies with millions of dollars - supports the assumption that a crypto winter will give the industry a chance to build, focus, and deliver successful projects.
Growing Importance of Infrastructure
Lighting Labs recently announced a proposal to develop the Taro protocol, which would enable people without bank accounts to send and receive money via mobile apps in the form of stablecoins that correspond to their home fiat currency. Pandora Core's RGB is another project working on a similar use case.
It is also of particular importance because the Lightning Network is thus increasingly becoming an infrastructure network. In the future, users will not even notice when a fiat transaction is actually processed through the Bitcoin ecosystem.
However, the Lightning Network is also being used in less innovative use cases. While Lightning Labs is focused on optimizing global payments, trading platform Robinhood has discovered Lighting as a solution to reduce fees for its new crypto offering. Increasingly, firms are finding benefits in leveraging the technology and network as infrastructure.
Conclusion
What started as an interconnection of a few nodes has evolved from a small network to a global network for value exchange. An increasing number of Lightning Nodes are being put into operation, which are better connected with one-another every day through payment channels. Away from hobbyists and early adopters, the first companies are latching onto the network - whether from the user side or the infrastructure side. It can be assumed that the organic development of the network will result in a high level of resilience - exactly as is the case with the antifragile Bitcoin network. In this respect, it can be expected that the Lightning Network will continue to grow rapidly in the coming years in terms of nodes, interconnectivity and liquidity - and facilitate an unlimited exchange of value for more and more people and companies.
About the authors
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 yannic@app-learning.com.
Dr. Jonas Groß is Head of Digital Assets and Currencies at etonec GmbH. Jonas holds a PhD in Economics from the University of Bayreuth and his main areas of interest are digital central bank currencies, stablecoins, cryptocurrencies and monetary policy. In addition, Jonas is chairman of the Digital Euro Association (DEA), co-host of the podcast "Bitcoin, Fiat, & Rock 'n' Roll", and a member of the Expert Panel of the European Blockchain Observatory and Forum. You can reach Jonas at jonas@etonec.com.
Denis Scheller is senior manager Bitcoin Suisse Pay at Bitcoin Suisse. Denis holds a degree in International Business Administration from Duale Hochschule Mannheim (Germany) and has been working in payments and e-commerce for many years. At Bitcoin Suisse Pay, Denis helps build crypto payment infrastructure. He is interested in macroeconomics and how Bitcoin and Lightning technology can enable a more equitable society. You can reach Denis at denis.scheller@bitcoinsuisse.com.
Prof. Dr. Philipp Sandner founded the Frankfurt School Blockchain Center (FSBC). From 2018 to 2021, he was named one of the "Top 30" economists by the Frankfurter Allgemeine Zeitung (FAZ). He was a member of the FinTechRat and the Digital Finance Forum of the German Federal Ministry of Finance. He is also on the Board of Directors at FiveT Fintech Funds, 21e6 Capital and Blockchain Founders Group - companies active in venture capital for blockchain startups and asset management of crypto assets.
This article does not constitute financial advice, advertising, or the like.