How can Bitcoin payments stage a comeback?
Bitcoin may not be the go-to digital currency for most of the world’s 8.1 billion population today due to scaling limitations, but there’s a hoard of developers out there hoping that one day it will.
When Satoshi Nakamoto invented Bitcoin, it was meant to be a peer-to-peer electronic cash system. For a few years, that worked pretty well. But as the network grew larger and more valuable, most hodlers, which now include firms like MicroStrategy and BlackRock, just seem to want to hoard it all away.
Bitcoin payment naysayers point to the network’s slow transaction speeds and sky-high fees during periods of demand and note that its overall uptrend and volatility mean holders are more likely to salivate over future gains than spend their BTC.
Bitcoin’s golden years for payments
In the early years, at least, there was an unmistakable movement toward Bitcoin payments. BitPay reported in 2012 that over 1,000 merchants accepted Bitcoin through their service. Just one year later, it had already balloned to 10,000 BTC-accepting merchants.
For a time, it seemed as if everyone was jumping on the Bitcoin payments bandwagon. I remember attending an online gambling conference in 2013 where one of the sponsors, a Bitcoin solutions company, moved $1 million worth of BTC to an attendee’s newly created Bitcoin wallet and back again in seconds. The crowd that had gathered around the phone gasped when they saw the enormous sum arrive — and for a negligible fee.
However, the wheels started to fall off around 2017 amid that year’s massive bull run. Bitcoin’s average transaction fee — the payment that incentivizes a Bitcoin miner to process and confirm a transaction — went from about $0.35 in January to nearly $55 in December 2017, according to data from BitInfoCharts.
A Bloomberg report around that time found that Bitcoin merchant acceptance was “low and getting lower,” with a Morgan Stanley analyst explaining that Bitcoin owners were “reluctant to use the cryptocurrency given its rate of appreciation” and that it was “way easier to trade speculatively than convince new merchants to accept the cryptocurrency.”
Attention shifted to an idea first proposed by Joseph Poon and Thaddeus Dryja in their 2015 white paper called the bitcoin lighting network, a Bitcoin layer-2 network focused on scaling for payments.
Lightning Network scales to millions of TXs
Many of the traditional arguments against Bitcoin payments were seemingly solved after the lighting network was launched in 2018. However, it has developed its own problems.
The network is a layer-2 solution for Bitcoin built on top of the Bitcoin blockchain to solve the scaling problem with lightning-fast transactions and low fees.
Similar to setting up a tab at your local bar, each small Bitcoin transaction is accounted for on the layer-2 network. The Bitcoin mainnet and its high fees only come into play when one party decides to “settle the bar tab,” so to speak.
To utilize the Lightning Network, a Bitcoin user must first deposit a certain amount of Bitcoin onto the network — though the process can be simpler through a centralized Lightning Wallet provider. After that, they can transact back and forth with other users as long as there are enough funds. Transactions are practically instant and cost cents, not dollars.
David Marcus, CEO and co-founder of Lightspark — an enterprise gateway provider for the Lightning Network — believes that Bitcoin could become the “TCP/IP” for real-time value transport on the internet.
“The opportunity to reinvent how trillions of dollars of value move every day and make it always-on, low-cost, open, and real-time is incredibly exciting.”
Lightning Network has millions of issues
But while Lightning is great in theory, it is not so great practice.
Some, including Bitcoin analyst and Ordinals proponent Eric Wall, argue that the complexity of the Lightning Network for ordinary users promotes the use of custodial wallets — particularly in a high-fee environment, which goes against the Bitcoin ethos of self-custody and decentralization.
Wall demonstrated exactly how difficult the Lightning Network could be in an excruciating thread over two days recently, in which Bitcoin evangelist Brad Mills, who’d lost a bet with Wall about ETH’s price, tried and failed numerous times to pay a simple Lightning invoice for $438.
The Lightning Network also suffers from a lack of merchant adoption and user awareness. Data from 1ML estimates there are currently 59,511 public payment channels and about 14,670 Lightning nodes on the network.
At present, there’s about $200 million in Bitcoin locked on the network (it hit an ATH of $234 million). In August 2023, prior to a big jump in the price of Bitcoin, just $78.2 million was publicly routed on the Lightning Network, according to financial services firm and Bitcoin tech company River. However, the 6.6 million transactions that month was a 1,212% increase over the same month in August 2021, so it is growing, albeit from a small base.
