Why Bitcoin needs a scaling layer, and the possibilities the Lightning network opens up. This article is part of Payments Week.Read MoreFeedzy
Like the Internet before it, Bitcoin is built for a world in transition from centralized and tribal to decentralized and global.
As a monetary system, the Bitcoin layer 1 (or base) blockchain provides global interoperability, transparency and settlement finality without intermediaries or central authority. In more than a decade, the network has demonstrated unparalleled security and reliability, with proven immutability, 99%+ uptime and zero hacks.
This piece is part of CoinDesk’s “Payments Week.” Julie Landrum runs international strategy and growth at OpenNode.
However, it takes time for the decentralized network to reach consensus about new transactions and add them to the blockchain. As a result, base blockchain transaction speeds and throughput are not sufficient to support global payments.
In late 2017, an upgrade to Bitcoin’s protocol paved the way for development of the Lightning Network, Bitcoin’s leading second-level scaling system. The Lightning Network uses off-chain payment channels to route and execute bilateral transactions at higher throughput and minimal cost. Transactions are only recorded on-chain once a payment channel closes.
The interoperability inherent in Bitcoin and Lighting open protocols provide accessibility and universal compatibility that has sparked unmatched network effects. In the Lightning Network’s growing ecosystem, hundreds of thousands of transactions can process per second at almost no cost. Payments benefit from instant and final settlement, zero fraud, zero chargebacks and the security of Bitcoin’s base chain.
See also: What Is Bitcoin’s Lightning Network?
Built on decentralized, peer-to-peer, open source foundations, the Lightning Network enables Bitcoin payments at scale.
Traditional payment processing costs are imposed by dominant providers, and systemic flaws expose businesses and people to chargebacks and fraud. Businesses across the world forgo significant revenue to be able to accept payments. We are all too familiar with bank wire fees, issues and delays. In 2021, the tax on global commerce and money movement topped $1.9 trillion, according to McKinsey.
Losses related to fraud and the cost of fraud protection are also material. Card fraud alone is expected to reach about $40 billion per year for the next decade, according to the Nilson Report. In the same report, Nilson also calls out the problem of Personally Identifiable Information (PII) available for sale on the dark web. Native to the internet and designed for the future of transactions, Bitcoin payments are a transfer value – not personal information – at lowest cost.
Bitcoin payments radically simplify processing and improve user experience because they eliminate the intermediaries, complexities and delays inherent in the structure of traditional payments. Unlike centralized payments dominated by few powerful players, Bitcoin payments are accessible, borderless and require only an internet connection and software to work.
Free from the limitations of geography, walled gardens and antiquated technology, Bitcoin and Lightning protocol-level innovations deliver efficiency and foster participation, offering lower processing costs to a thriving global ecosystem.
Bitcoin is a base settlement layer reset made possible by revolutionary technology, and the Lightning Network enables Bitcoin payments to scale. Simple APIs offered by managed payment providers power Bitcoin payment rails for both new and traditional businesses, processors, exchanges, digital wallets, software providers, platforms, ATMs, point-of-service (POS) devices and more.
Competitive exchange markets for on- and off-ramps to every major world currency are in place. These fiat bridges make it possible for users to completely control and even negate exposure to bitcoin’s (BTC) price volatility.
As with other paradigm shifts, bitcoin and Bitcoin blockchain-powered payments adoption will not come without education, and growth will not be without resistance. But Bitcoin’s foundations are stable, secure and maturing; its value proposition is strengthening. Trust and acceptance are broadening beyond enthusiasts and early adopters, and the backing of respected visionaries and forward-thinking institutions is helping the cause.
Bitcoin is truly the beginning of something extraordinary and will empower businesses, platforms and people everywhere to benefit from better payments for better money.
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How and why those original digital payments projects are no longer with us today can give us an idea of what needs to be done to do it right. This piece is part of CoinDesk’s Payments Week.
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