Lyn Alden Analysis: A Look at the Lightening Network

Lyn Alden | August 2022

This article examines the relationship between a monetary asset being a store of value vs being a medium of exchange.  Specifically, it focuses on the scaling method of the Bitcoin network as its main example, but also takes a broad look at the history of trade-offs in the cryptocurrency space as well to see why a layered approach makes the most sense.

The primary goal of this article is to examine the topic of how bitcoin has evolved as a medium of exchange, and more broadly to analyze the order in which new monetary assets can be accepted as a store of value and a medium of exchange.  As a big part of that, I’ll include an analysis of the Lightning network, which is a small but fast-growing payments layer that is interwoven into the Bitcoin network.  Here are the sections of this article:

• Summary Points
• Store of Value vs Medium of Exchange
• Bitcoin and Lightning: Scaling in Layers
• How the Lightning Network Works
• Lightning Network Critiques
• Concluding Thoughts

Intro

This article is long, so I’ll summarize the main points up front here, and then spend the rest of the article diving into the details.

-A truly decentralized and permissionless payment network requires its own underlying self-custodial digital bearer asset. If instead it runs on top of the fiat currency system or relies on external custodial arrangements at its foundation, then it is neither decentralized nor permissionless.

See:  The Most Efficient Payment System In The World: Bitcoin And The Lightning Network

-In order to create a truly new digital bearer asset that is useful for payments in the long run, it must also be an attractive store of value, so that a meaningful percentage of the population begins to persistently hold it as some percentage of their liquid net worth and be willing to accept it for goods and services.

-In other words, in order to create a decentralized version of Visa, beneath that you must first create a decentralized version of Fedwire, and along with that you must first create a decentralized version of digital gold. It’s hard to envision any other path succeeding.

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