How Generic Keystone Will Drive Bitcoin’s Lightning Network Adoption

This is an opinion editorial from Jesse Schrader, co-founder and CEO of Emboss, a Lightning Network explorer and analytics tool.

For years, you could basically only do two things on the bitcoin network: you could save BTC or you could spend it. Then, Privacy upgrade in late 2021 The unintended consequence of allowing data storage on the bitcoin blockchain resulted in NFT-like fiat and BRC-20 tokens, both of which apply ordinal theory to asset tracking.

The popularity of NFT-like ordinal tokens and the experimental BRC-20 token standard have increased transaction costs in the bitcoin network. Frothy demand for “stamping” limited block space with new data drove up transaction costs so much that in May 2023, Binance doubled BTC withdrawals had to be stopped, a risky and undesirable move for global exchanges. To help manage transaction costs, Binance announced that it will start using the Lightning Network – A decentralized, Layer 2 network designed for fast transactions bypassing the underlying bitcoin blockchain – To process BTC withdrawals.

While some argue that bitcoin should remain digital gold, I don’t see it that way.

As a store of value, bitcoin will continue to provide a trustworthy alternative to central banking; Other uses of its immutable blockchain do not reduce this function. In contrast, emergent use of the bitcoin blockchain would lead to more efficient use of limited block space, leading to widespread adoption of the Lightning Network as a scaling solution for bitcoin as a global currency. The growth of the Lightning Network will provide a trusted alternative to centralized payment processors, expanding the utility of bitcoin.

Challenges facing the BRC-20 token

The BRC-20 token standard is very new – Created in March 2023, If its name sounds familiar, it’s because it’s somewhat similar ERC-20 token Such as Shiba Inu and MakerDAO which run on top of the Ethereum network. While bitcoin has traditionally been about storing and transmitting value, BRC-20 allows other assets to be “shielded” into a common ledger. Now, a lot of BRC-20 has surfaced for trading and speculation, many in the form of meme tokens. pizza To Meme, As of June 26, 2023, the BRC-20 token had a market capitalization of over $260 million, according to coingeco,

But all this mining is driving up the cost of bitcoin transactions. This isn’t necessarily bad for bitcoin miners, who earn BTC by processing transactions. coindesk informed of As early as May 2023 it was discovered that some BTC miners were earning more by collecting transaction fees than by creating new BTC. This is quite high, considering that each block reward currently gives miners 6.25 BTC (worth around $188,000 at the time of writing).

Whether this is good for users or not is debatable. The average bitcoin transaction fee recently hit a two-year high, peaked at $30.91 Despite the bear market on May 8, 2023; Those avoiding BRC-20 are complaining about the possibly inflated fees. On the other hand, the introduction of the BRC-20 token standard has prompted intense conversations about network scaling for bitcoin.

already making an impact

At the moment, BRC-20 lacks some of the utility of their ERC-20 counterparts. For example, they don’t use smart contracts, and their utility is mostly the same. PFP NFTleading many to argue that they are not worth the cost.

It remains to be seen whether demand for bitcoin-based tokens is sustainable or whether such activity will be redirected to other, more permissioned or centralized networks.

In one scenario, high fees could drive traditional users of bitcoin away from the network. This is unlikely. Bitcoin’s irreversible and conservative monetary policy remains the primary attraction; The network has no real competition in this regard to hedge against monetary fragility.

But assuming Ordinal Inscription and BRC-20 tokens show the same staying power as Memecoin and NFTs on other networks – remember, Shiba Inu has a market capitalization of $5 billion And Bored Apps is literally a household name – they’ll keep transaction fees well above their historical average.

This could have long-term effects on bitcoin users.

Specifically, higher transaction costs create a demand for more efficient transactions. While some of this can be done at the protocol level (for example, SegWit, the controversial 2017 upgrade to bitcoin that enabled lower transaction sizes by separating signature data from transaction data), most of it comes from scaling technologies at the second layer. Could.

Enter: the Lightning Network, which batches transactions via long-term smart contracts and uses bitcoin’s built-in security to allow for fast and cheap payments.

future solutions

Lightning Network fees are extremely nominal compared to their on-chain counterparts. Although fees fluctuate, overall network fees have not increased as a result of BRC-20 or the inscriptions. The network currently charges a fee to reward network node operators. According to data available through Emboss’s Bitcoin Lightning Network analytics platform, Average fee remains 0.002%, Compare this to traditional payment networks, which charge 2% to 3% of payment amount every time you swipe your credit card.

The bitcoin community is currently subsidizing the construction of the payments network, which makes Lightning fees extremely low. Despite increasing demand over time, the fixed fee rate for Lightning should increase to around 0.03%, based on less lenient operator behavior.

Set to become the default global payment processor

The combination of Bitcoin monetary policy and Lightning’s transaction network is a powerful one. Bitcoin has long presented itself as an alternative to the broken central banking system. But through competitive use of its extremely tight blockchain, the efficiency achieved through Lightning transactions is more precise than ever.

Although the Lightning Network is several years in the making, it is maturing at the right time – poised to enable billions of transactions across the network – and has become the global de facto payment processor.

This is a guest post by Jesse Schrader. The opinions expressed are solely his own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.