| Kraken Intelligence

The Lightning Network: Bitcoin’s Evolution to Medium of Exchange

Any sound money satisfies three important conditions: 

  1. Preserves and stores value over time
  2. Serves as a widely accepted unit of account in a given market
  3. Functions as a practical medium of exchange for transfers of any size

Bitcoin’s predictable, disinflationary supply growth rate continues to drive its utility as a store of value. As Bitcoin’s adoption grows around the world, the use of bitcoin as a medium of exchange is starting 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 costly mining resources could operate a node. The transactional constraint 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 secured by Bitcoin’s L1, lifts these limits, enabling the use of BTC for instant, cost-efficient payments worldwide.

In Kraken Intelligence’s latest report, The Lightning Network: Bitcoin’s Evolution to Medium of Exchange, the team demystifies the Lightning Network’s technical design while analyzing its current state and adoption to date.

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

Making bitcoin globally accessible 

The Lightning Network is a protocol that enables quick, cost-effective Bitcoin transactions without making custodial risk or blockchain centralization trade-offs. The same design choices that make BTC the most secure and decentralized currency in the world also limit Bitcoin transaction throughput to roughly seven transactions per second (TPS). Ledger updates are constrained to once every 10 minutes, on average. The Lightning Network increases throughput to an estimated 25 million TPS while offering instant transaction settlement — again, without compromising security or decentralization of the Bitcoin protocol.

A practical medium of exchange for all

Satoshi Nakamoto launched Bitcoin in 2009 with an L2 payment channels concept. However, this early 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 one party could conspire 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 rightfully allow them to, thereby stealing funds from the other counterparty.

After learning from the exploitation of this shortcoming, innovative developers improved the security and utility of payment channels on the Bitcoin protocol. In the process, they created the Lightning Network. 

Though it was slow to gain momentum after its launch in 2018, the Lightning Network is now showing notable growth in adoption that could further establish BTC as an easy, fast and inexpensive medium of exchange for all.

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 scores of unbanked individuals 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 any transaction, from buying a cup of coffee to paying taxes.

Should this growing trend in adoption continue, the Lightning Network could deliver 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 new economic opportunities for all.

Want to learn more? Download the Kraken Intelligence report The Lightning Network: Bitcoin’s Evolution to Medium of Exchange to understand what the Lightning Network is, its state of adoption and the future it enables.


Read the full report
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 and/or regulatory protection schemes. The unpredictable nature of the cryptoasset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets and you should seek independent advice on your taxation position.