Bitcoin Standard
Nov 21, 2023

The Lightning Network's Path to a Global Bitcoin Standard: Are we on the right track?

Assessing the Lightning Network's Path to a Global Currency Standard in 20 Years

The Lightning Network's Path to a Global Bitcoin Standard: Are we on the right track?

The Lightning Network seems to possess the traits necessary for scaling Bitcoin into a global currency capable of handling the world's financial transactions. It has seemingly established a positive feedback loop where a critical mass of nodes and well-funded routes attract developers to create applications, which in turn entice users who pay fees. This process further encourages the establishment of more nodes and channels, continually reinforcing the network's growth and expansion.

Currently, the network boasts a capacity of 5,457.32 BTC, or approximately $165 million, which means it currently has 50% year-on-year growth.

This all begs the question, how much Bitcoin do we need to sit on the lightning network and is this growth sufficient to support a global Bitcoin standard?

Lightning Network Capacity

By estimating the Lightning Network's equilibrium capacity under a Bitcoin standard scenario, we can determine whether we are progressing at the right pace. And exploring the Lightning Network capacity needed to enable a global Bitcoin standard also offers insights into Bitcoin's viability as a worldwide currency over the next few decades. It's possible the world is on a bitcoin standard next century but I'm personally interested in knowing what happens in my life time.

By estimating the Lightning Network's equilibrium capacity under a Bitcoin standard scenario, we can determine whether we are progressing at the right pace for this happen.

The analysis is complex due to unpredictable factors like transaction volumes, liquidity demands, user behavior, and technological advancements. However, educated assumptions allow us to assess if the Lightning Network's current growth aligns with the goal of achieving a global Bitcoin standard.

Assumptions

To create a projection of the Bitcoin Standard's future, let's assume the following:

Timeframe: 20 years from now

Global GDP: Starting at $103.9 trillion in 2022, with an assumed 2.5% annual growth rate, reaching $169.6 trillion in 20 years.

Bitcoin's market share: Accounting for 50% of global GDP transactions, amounting to an annual transaction volume of $84.8 trillion.

Lightning Network usage: Handling 80% of Bitcoin transactions, or $67.84 trillion per year, with the remaining 20% involving larger on-chain transactions and investments.

Velocity of Bitcoin: Each Bitcoin changes hands twice per year on average (velocity = 2).

Bitcoin price: $10 million per BTC (in 2022 dollars)

Total Bitcoin supply: Accounting for 3 million lost Bitcoin, leaving a total supply of 18 million Bitcoin.

Calculations

To determine the amount of Bitcoin needed on the Lightning Network, we can divide the annual transaction volume by Bitcoin's velocity:

$67.84 trillion / 2 = $33.92 trillion

Next, we'll calculate how much Bitcoin must reside on the Lightning Network:

$33.92 trillion / $10 million per BTC = 3.392 million BTC

Lastly, we'll determine the percentage of total Bitcoin supply on the Lightning Network by dividing the number of Bitcoin on the network by the total available supply of Bitcoin (18 million):

3.392 million BTC / 18 million BTC = 18.84%

To achieve 3.392 million Bitcoin on the Lightning Network in 20 years, the network capacity must grow at a compounded annual rate of 62.3%.

Analysis

The calculations suggest that, to support a global Bitcoin standard in 20 years, the Lightning Network needs to hold approximately 19% of all Bitcoin and maintain a 62% compounded annual growth rate.

Clearly there are many caveats to this. Even at a basic level, we know the Lightning Network's capacity is only one aspect of measuring its overall efficiency (and saying nothing of its decentralization). This analysis primarily aims to determine if we are generally headed in the right direction and given that the current rate of growth is 50% year on year (in a bear market) it appears that is the case.

Adjusting the model's assumptions (Bitcoin Price, Market Share, Bitcoin Velocity, etc.) could yield different results. Moreover, several factors beyond the model could impact the estimates and influence the actual requirements for establishing a global Bitcoin standard.

To list a few these would be:

Technological improvements: Evolving technology could increase the Lightning Network's capacity and efficiency. Advancements in channel capacity, routing algorithms, and cross-chain interoperability might significantly reduce the Bitcoin locked in the network, making it more effective for high transaction volumes.

Layer 3 solutions and sidechains: Layer 3 solutions and sidechains could offload transactions from the Lightning Network, lowering the required network capacity. 

Market-driven factors: Global Bitcoin adoption, price fluctuations, and Bitcoin holdings distribution among users could influence the amount of Bitcoin locked in the Lightning Network. If a significant portion of Bitcoin's total supply is held by long-term investors or "hodlers," the actual Bitcoin amount needed on the Lightning Network might be less than our estimate.

Regulatory environment: If regulations are introduced which make running a lightning node impractical this might slow network expansion.

Alternative scaling solutions: While the Lightning Network is currently the top scaling solution for Bitcoin, other solutions could emerge, potentially complementing or replacing it. The development of such solutions could affect the Bitcoin amount required on the Lightning Network to achieve a global Bitcoin standard.

Conclusion

The Lightning Network demonstrates significant potential as a key component in scaling Bitcoin to become a global currency capable of managing the world's financial transactions. The point of this exercise is to take a look at its current growth rate and attempt to assess whether it's on a path supporting a global Bitcoin Standard in a reasonable timeframe (20 years). 

Through a series of assumptions and calculations, the analysis suggests that the Lightning Network needs to hold around 19% of all Bitcoin and maintain a 62% compounded annual growth rate to achieve this goal in 20 years. While its debatable, I'd say given the current growth rate we're approximately on the right path.

It's important to note that these estimates are based on various assumptions and caveats, and could be influenced by factors such as technological advancements, Layer 3 solutions and sidechains, market-driven factors, the regulatory environment, and the emergence of alternative scaling solutions.

While the analysis may not offer definitive answers, it serves as an instrument for understanding the general direction we are moving in and hopefully, provides some context as to the distance we have to travel to get there.

If you find this type of analysis interesting and are eager to learn more about the ways the Lightning Network is revolutionizing industries, consider subscribing to Apollo's weekly newsletter. Our focus is on Bitcoin, Lightning, and breaking down the latest news and trends in the industry.