10 March 2023 16:13, UTC
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Amid all the controversies, hype and contentious debates around Bitcoin, it’s sometimes forgotten what its key purpose was originally intended to be. Neither a vehicle for speculation nor a place to park your wealth if gold just won’t cut it, Bitcoin was intended to enable peer-to-peer decentralized transactions. Or in other words, it’s supposed to be used as money, while cutting out the middlemen.
In the world imagined by Bitcoin maximalists (who eschew other cryptocurrencies, adamant that Bitcoin will consume all competition, both cryptographic and traditional), all your transactions can be finalized on-chain, from picking up a coffee to buying a house. And in fact, this isn’t quite as far-fetched as it might sound, as in El Salvador, BTC has been legal tender since 2021, and can be used for daily transactions.
However, an obvious obstacle to this kind of adoption (even if it is only partial, and runs parallel to existing, more familiar payment methods), is the problem of scaling. Put simply, the Bitcoin network isn’t configured to handle this volume of throughput, takes time to process transactions, and would struggle to deal with billions of micro-transactions, for coffee or anything else, on a constant basis. And, this is where the Lightning Network steps in.
What Is Lightning Network?
The Lightning Network, which first went into operation in 2018, is a second layer operating on top of the Bitcoin network. It takes transactions off the main blockchain, allowing channels to be opened between users, through which transactions can take place at speed and cheaply. When users are finished with their interactions and a channel is closed, all the transactions that have been made are then settled back on the main Bitcoin blockchain.
The result of this is simple but critical: instant payments, and Bitcoin as a usable method of everyday transactions, just as it was intended to become.
Xapo and Lightspark
This month, Xapo Bank, working in partnership with Lightning Network infrastructure builder Lightspark, integrated Lightning Network into its services, bringing two advantages. Firstly, customers can now pay for purchases up to a value of $100 directly in BTC, at merchants that themselves utilize Lightning Network.
Secondly, this development represents a meaningful step in altering the perception of Bitcoin, from a digital product that is exotic and on the fringes, to an asset with utility that links up with daily life. Xapo Bank, based in Gibraltar, may be focused on crypto, but it has obtained a banking license, principal membership of Visa and Mastercard, and SWIFT membership.
Buying a coffee and similar minor transactions might sound prosaic, but if Bitcoin is to fulfil its potential, then it will have to prove capable of carrying out all the mundane functions currently covered by traditional currencies.
Also, when it comes to the integration of crypto and traditional finance, Xapo Bank offers USD accounts that are integrated with support for the USDC stablecoin, allowing users to convert easily between crypto and fiat, and providing a seamless and self-contained crypto on/off ramp.
One of the most prominent backers of Lightning Network and its potential has been Jack Dorsey, the Co-Founder and former CEO of Twitter. Dorsey is now focused on fintech platform Block, which he founded in 2021 (when it was known as Square), and which recently launched a service provider called c=. In case you were wondering, c= refers to the speed of light part of E = mc2, and is pronounced C equals.
C= is being developed through a Block subsidiary called TBD, which aims to improve routing on the Lightning Network and address the problem of a lack of network liquidity, which can lead to failed transactions. These are critical issues to address but can be regarded as welcome problems since they reflect the kind of strain that is caused by network adoption.
In fact, a chart circulated last month by financial services firm Valkyrie Investments indicates impressive monthly growth in Lightning Network capacity, clearly marking key developments along the way, with several related to payments application Strike, which connects Bitcoin and traditional banking, expanding its services.
Further, Lightning-related news comes from the Swiss Bitcoin-only app Relai, which specializes in allowing users to easily buy and sell BTC, and hold their own assets in a non-custodial wallet. This week, the company announced that it had raised $4.5 million in a funding round led by Ego Death Capital, a Bitcoin venture fund co-founded by influential Bitcoin advocate Jeff Booth.
As well as upgrading to utilize the Lightning Network, Relai’s plans incorporate zero-fee trading services and the launch of a white-label product that will enable other fintech platforms to offer trading between fiat and bitcoin.
Relai is geared towards offering user-friendly, mobile services that encourage retail onboarding into Bitcoin without a requirement for extensive technical knowledge. This fits neatly with a core aim of the Lightning Network, to enable daily Bitcoin use, at scale. And, the aims of the Lightning Network, ultimately, loop back to the key purpose at the foundation of the entire Bitcoin enterprise: an improved iteration of money, in a digital format.
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