Any sound money satisfies three important conditions:

Preserve and store value over time.
Serves as a widely accepted unit of account in a given market
Works as a convenient medium of exchange for transfers of any size

Bitcoin’s predictable and disinflationary growth rate in supply continues to drive its usefulness as a store of value. As Bitcoin adoption grows around the world, the use of Bitcoin as a medium of exchange is beginning to gain traction, from funding everyday purchases to high-value auctions.

However, the Bitcoin protocol contains transactional limitations that make it possible to maintain a secure distributed ledger. If transaction limits were set too high, for example, only those with privileged access to expensive mining resources would be able to operate a node. The transactional restriction for on-chain transfers that keep Bitcoin’s Layer 1 (L1) monetary protocol secure also inhibits its functionality as a practical medium of exchange, particularly for lower-value transactions.

The Lightning Network, a layer 2 (L2) protocol protected by Bitcoin’s L1, breaks these limits, enabling the use of BTC for instant and profitable payments around the world.

In the latest Kraken Intelligence report, Lightning Network: the evolution of Bitcoin towards the medium of exchangethe team demystifies the technical design of the Lightning Network while discussing its current state and adoption to date.

Kraken now supports instant Lightning Network transactions; learn more here.

Make bitcoin globally accessible

The Lightning Network is a protocol that enables fast and profitable Bitcoin transactions without compromising custody risk or blockchain centralization. The same design choices that make BTC the most secure and decentralized currency in the world also limit Bitcoin’s transaction throughput to approximately seven transactions per second (TPS). Ledger updates are restricted to once every 10 minutes, on average. Lightning Network increases performance to an estimate 25 million TPS while offering instant transaction settlement, again, without compromising the security or decentralization of the Bitcoin protocol.

A convenient medium of exchange for everyone

Satoshi Nakamoto launched Bitcoin in 2009 with a concept of L2 payment channels. However, this first attempt to address Bitcoin’s scaling challenges was not secure, as miners soon realized they could cheat by broadcasting old versions of the channel. This meant that one party could collude with a miner to confirm a non-final version of a transaction. By doing so, they could claim more BTC than the channel balance should legitimately allow them to, thereby stealing funds from the other counterparty.

After learning from exploiting this shortcoming, innovative developers have improved the security and usability of payment channels in the Bitcoin protocol. In the process, they created the Lightning Network.

Though slowly gaining momentum after its launch in 2018, the Lightning Network is now showing remarkable growth in adoption that could further establish BTC as an easy, fast, and cheap medium of exchange for everyone.

Unbanked early adopters use BTC as money

The Lightning Network is already making BTC a practical medium of exchange and solving existing problems, especially for dozens of unbanked people in emerging markets like El Salvador. As the first country to recognize BTC as legal tender, El Salvador has further legitimized the use of BTC for anything from buying a cup of coffee to paying taxes.

If this growing trend in adoption continues, the Lightning Network could offer an effective option for people facing economic hardship in developing countries. In particular, Bitcoin could serve as a viable alternative to legacy payment systems and open up new economic opportunities for all.

Want to learn more? Download the Kraken Intelligence report Lightning Network: the evolution of Bitcoin towards the medium of exchange to understand what the Lightning Network is, its adoption status, and the future it enables.

These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell or hold any digital asset or to engage in any specific trading strategy. Some crypto products and markets are unregulated and you may not be protected by government compensation schemes and/or regulatory protection. The unpredictable nature of the crypto asset markets can lead to loss of funds. Taxes may be payable on any return and/or on any increase in value of your crypto assets and you should seek independent advice on your tax position.

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This post Lightning Network: the evolution of Bitcoin towards the medium of exchange

was published first on https://blog.kraken.com/post/14452/the-lightning-network-bitcoins-evolution-to-medium-of-exchange/

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