Bitcoin: Lightning used as a retail payment system

Lightning Network, Bitcoin’s second layer, is similar in some ways to fiat currency retail payment systems.

This is the conclusion reached in a long article by Galoy comparing some payment systems such as VISA and LN. 

According to this analysis, many US dollar payment networks, such as credit cards and ATMs, are considered as level 2 solutions based on Fedwire, the basic dollar exchange layer. 

Lightning Network, on the other hand, is the layer 2 solution based on Bitcoin’s blockchain. 

However, while USD payment networks are closed and permissioned systems, LN is open and permissionless, with a pace of innovation and adoption that could prove much faster. 

Among other things, a chart reveals that, for example, during 2019, the total volume of transactions made via Bitcoin’s layer 1 was already very close to that of the dollar’s layer 1 (Fedwire).

In other words, Bitcoin’s two-tier system seems in some ways very similar to that used for the US dollar. 

Lightning Network for retail payments

From this point of view, just like second layer-based dollar payment systems, LN could also be used for retail payments, especially as it is much better for this purpose than traditional onchain transactions. 

But the most interesting point is the comparison between the characteristics of the USD second layer and the BTC second layer, namely Lightning Network, because the latter is open and not closed, and this could make it better than the previous ones. 

It would therefore be a better system precisely because of the absence of the need to rely on a trusted counterpart, although the same analysis then points out that this element could be appreciated by very few people. 

In fact, it is argued that the use of custodial wallets, which require relying on trusted third parties despite the fact that in theory they may not be necessary, may in fact be unavoidable for most retail users. 

So, while the trustless nature of LN would make it a better system than traditional ones, most users could instead continue to entrust the custody of their BTC to a third party. 

The analysis suggests that it could take years, if not decades, before the peculiar features of LN clearly emerge on the retail market, which is a market populated by a huge number of ordinary citizens who are not really able to fully understand its technical functioning. 

In fact, so far it does not really seem that its use has taken off; on the contrary, its diffusion seems to be struggling to grow. But it could also be just a matter of time.