Metadoro: On Bitcoin’s Lightning Network Taking Off

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Bitcoin’s Lightning Network has expanded over time, but this expansion can be easily overstated and is currently unlikely to replace remittance and small business payments. The network, which has been in the works for years, is still struggling to become a core transaction system in the crypto space.

The Lightning Network seems to aim to replace existing payment networks such as Visa or Mastercard. Crypto enthusiasts believe Bitcoin can replace the existing financial system, with their most vocal advocate, Michael Saylor, leading the business intelligence firm to accumulate 130,000 BTC. Enthusiasts believe that BTC may take over Central Bank Digital Currencies (CBDCs) in the future.

So what are the advantages of Bitcoin over CBDCs and the traditional financial system? Scarcity, time and energy. While a decentralized system has its advantages and may one day become a secondary, yet small layer of the global payment system, fiat currencies have yet to exhaust their advantages.

Money has a rather philosophical nature and can be linked to the social structure of civilization. So far, centralized governments rely on monetary authorities with the right to direct monetary policy to control the money supply in an economy.

In the real world, salaries are paid in fiat currency that is backed by a central bank and relies on notes and coins that are considered legal tender by the government. Goods and services are bought and paid for in these currencies because wages and taxes are also paid in them.

Without these controls, the state itself could cease to exist. The same applies to remittance systems. Even with fiat currency transaction fees extremely high, the cryptocurrency world has stablecoins that will require users to first exchange them into fiat currency before using them.

This means that it is a very inconvenient way of transferring money, which is poorly understood by most of the population. The lightning network can help, but it is still far from perfect and far from taking over the traditional economic system.

Bitcoin’s Lightning Network is vulnerable to security breaches and disputed money transfers can be frozen for a long time, while banks often allow these disputes to be resolved quickly. The volatility of the underlying cryptocurrency, Bitcoin, is another major concern, as businesses need to ensure they can cover upcoming costs and make money to maintain sustainability.

That said, cryptocurrencies may still take a significant portion of remittances in some regions in the future. These are likely to be regions where current financial systems are unable to serve the majority of the population, and as such, testing new decentralized financial technologies is not seen as such a risky move.

However, it will take considerable time and social development for such a financial system to take off. This future is not certain from this point forward.

Iván Marchena, Head of Analytical Department Metadoro

Featured image via Pixabay.