Lightning Network - From One High to Another

The Lightning Network, a second-layer scalability solution for Bitcoin, has experienced significant growth in the past two years, despite critics' focus on plateaued network metrics such as node count, channels, and capacity.

In the October 2023 River Research report, the firm highlighted how the network has grown in terms of number of users, transactions, and volume during 2023.

Transactions and Volume Soar

The number of routed Lightning transactions reached a lower bound of 6.6 million in August 2023, representing a remarkable 1,212% increase from the 503,000 transactions in August 2021. The top use cases driving transaction increase were gaming, social media tipping, and streaming, which drove 27% of all growth.

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Estimated Growth in Routed LN Transactions

The growth of routed Lightning Network transactions from August 2021 to August 2023 — Source

This growth occurred despite a 44% decline in Bitcoin's price and a 45% drop in search interest. The average transaction size on the public network was around 44.7k satoshis, or $11.84 in August 2023, demonstrating the network's ability to handle low-value payments.

“It is the equivalent of 2.5 transactions per second, compared to Bitcoin’s

on-chain average of 4.4 TPS and K33’s August 2021 benchmark of 0.2 TPS.” - River

It is important to underline that, given the architecture of the network, it is not possible to estimate an upper bound. It is also impossible to estimate direct transactions between only two users, and private transactions.

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Bitcoin Transactions per Day Including LN

Chart of daily transactions and transactions per second on mainchain and Lightning Netwrok — Source

The report also estimates that around $78.2 million was publicly routed using 5K BTC in capacity in August 2023, a 546% jump from the $12.1 million estimated by K33 in August 2021. This translates to an annual volume of $936 million using $133 million in capacity, indicating the network's growing role as a medium of exchange.

Lightning activity has become increasingly global, with more evenly distributed activity 24/7 compared to last year. The number of nodes, channels, and capacity has remained steady over the past year, reflecting the professionalization of nodes as they become more efficient with their resources.

“The average Lightning transaction size on the public network was around 44.7k satoshis, or $11.84 in August 2023. Size distribution shows that nearly all Lightning payments are unaffordable on the Bitcoin blockchain. Lightning is effectively extending Bitcoin’s utility by enabling low-value payments over the Internet.” - River

The report estimates 279K to 1.116M monthly active users, with a 1:8 ratio of non-custodial vs custodial wallets.

Strong Interest from Businesses

The report identifies 179 companies active in the Lightning ecosystem across 28 categories, with a notable surge in funding in 2022. $530.93 million was raised by 39 Lightning companies, surpassing the global VC funding decline of 34%.

These encouraging numbers stem from the strong technical performance of the network: The payment success rate with Lightning was 99.7%, calculated on over 300K transactions.

The main reasons for the few payment failures were the absence of the necessary liquidity in the channels, and the circumstances in which users using non-custodial wallets were offline.

One of the biggest UX imperfections in using non-custodial lightning wallets is that the user must be online in order to receive a payment. From this point of view, custodial solutions such as Wallet of Satoshi and Alby (which allow a non-custodial setup) are decidedly more user friendly.

Despite these gaps in user experience, many companies have expressed their willingness to adopt lightning network as a solution for instant bitcoin payments.

Key Drivers for Future Growth

The report highlights several key drivers for future Lightning growth:

• Increased exchange adoption: As more exchanges integrate Lightning, it will become more accessible to the general public.
• Technical upgrades: Ongoing development of the Lightning protocol will enhance its performance and features.
• Adoption by non-Bitcoin businesses: The network's potential for micropayments and cross-chain transactions makes it attractive to businesses beyond the digital asset industry.

Exchanges Using LN for Cross-Border Payments

Lightning Network is being used for Cross-Border payments — Source

Conclusion

Despite critics' concerns, the Lightning Network is experiencing robust growth in terms of transactions, volume, and business adoption. 

“The underlying trend of activity is crystal clear: Over the past two years, Lightning has been growing tremendously in transaction count 1,212%, volume 546%, and solutions built on top of it. The “nobody is using Lightning” meme is dead.” - River

While challenges remain in attracting non-custodial users and improving the overall user experience, the network's trajectory indicates a promising future as a scalable and secure solution for Bitcoin transactions.

The report addresses the ongoing debate about custodial versus non-custodial Lightning usage. While custodial wallets offer convenience, non-custodial wallets provide greater control and privacy. Making non-custodial wallets more appealing is a challenge that requires further development, investment, and user education.

The Lightning Network is a work in progress, but its recent growth and strong interest from businesses suggest that it could play a significant role in the future of Bitcoin. As the network continues to develop, it is likely to become more user-friendly and accessible, attracting a wider range of users and further solidifying its position as a critical scaling solution for Bitcoin.

“New solutions may emerge, and until then, Bitcoin can be used non-custodially by those who want self-sovereignty, and it can be a more transparent alternative to the opaque traditional financial industry for custodial users.” - River