A network aimed at transforming bitcoin into a mainstream form of payment has doubled in size over the last year, new data has revealed.
The Lightning Network – an additional layer added to bitcoin’s network to facilitate transactions – now has more than 10,000 nodes after major cryptocurrency exchanges and payment apps adopted the technology.
Bitcoin was originally conceived as a new form of currency, having been described as a “peer-to-peer electronic cash system” in the 2008 white paper written by the pseudonymous Satoshi Nakamoto.
However limitations to bitcoin’s underlying blockchain have led to significant inefficiencies within the network for processing transactions.
The bitcoin scalability problem, as it is known, means that the more the bitcoin network grows, the more cumbersome it becomes. Each new user makes it increasingly time consuming and costly to send and receive payments, to the point that buying something small like a coffee can come with a fee that is higher than the cost of the drink itself.
Various solutions have been proposed, including forking bitcoin’s blockchain to create a brand new cryptocurrency in the form of bitcoin cash.
None of bitcoin’s rivals match its mainstream recognition, however, which is why some people within the bitcoin industry have championed the use of the Lightning Network to make the cryptocurrency a viable form of payment.
It works by routing payments through a separate peer-to-peer system that is built on top of bitcoin’s blockchain, therefore reducing the burden on the main network. It decreases transaction times from minutes or hours, to just a fraction of a second, while simultaneously eliminating any fees.
One of the earliest adopters of the Lightning Network was the cryptocurrency exchange Bitfinex, which used it to enable fast deposits and withdrawals from its platform. Over the last year, crypto exchanges Kraken, CoinCorner and OKCoin have all integrated the Lightning Network into their systems.
“We are seeing genuine adoption of this amazing technology,” Paolo Ardoino, chief technology officer at Bitfinex, told The Independent.
“If you look back at 2017 the capacity of the network was nowhere near what it is now. Layering solutions are now boosting levels of scalability on both bitcoin and ethereum. Bitfinex processed 12,000 transactions on the Lightning Network in February alone.”
Data from Bitcoin Visuals shows that the number of Lightning Network nodes rose from 4,000 to 5,000 between April 2019 and April 2020, before shooting up to above 10,000 this month.
But scalability is only one obstacle preventing bitcoin from being used as a day-to-day currency – another is scarcity.
Nakamoto designed bitcoin so that only 21 million will ever exist, which avoids inflationary issues facing traditional fiat currencies. This in-built scarcity has attracted major investors in recent months, who refer to it as “digital gold”.
Massive investments from companies like Tesla and MicroStrategy have contributed to bitcoin’s remarkable rally over the last year, which has seen it rise in price from around $6,000 to $60,000.
The investments have effectively removed these bitcoin from circulation and created a liquidity crisis.
Figures from market intelligence firm Glassnode suggest there is only around 4.2 million bitcoins in constant circulation that are available for everyday use.
“Around 78 per cent of the circulating bitcoin supply is considered illiquid. Currently we are at a stage in which the illiquid supply is growing more than the total circulating supply,” a research note from December 2020 warned.
“As bitcoin continues to become more and more a store of value and investors increasingly… make use of it as a safe haven asset to store wealth, the actual ‘liquid’ bitcoin supply can be expected to be considerably lower.”