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Bitcoin Scales Up

Jenny Rudd went to the Bitcoin 22 conference and discovered that changes are revolutionising the crypto ecosystem. She says the future of crytocurrencies is exciting.

4 July 2022

Miami is positioning itself as the bitcoin capital of the world.

The mayor, Francis Suarez, takes his paycheck in bitcoin. And about 25,000 people flocked to Bitcoin 22 at the Miami Beach Convention Centre in April.

Suarez opened the event by unveiling a crypto bull with glowing blue eyes, saying: “The future of finance is here, in Miami.”

And there were some big themes. Like Senator Cynthia Lummis from Wyoming, who said that regulation and legislation were on their way - a good thing.

Capital will pour in from institutions when the legislation arrives, she says. If all fund managers put one per cent of their portfolio into bitcoin, the market would grow enormously. Early adopters are already doing something similar, like wealth management firm NZ Funds who own crypto assets in their growth-orientated mandates.

The options and derivatives markets are just two per cent of the bitcoin spot market at the moment, as compared to being eight times the size of the entire gold market. Pat Baker, chief executive of Centaur Markets, says banks are ‘salivating’ and just waiting to jump in and create new derivative financial instruments around the currency.

The mortgage market has also woken up, with some experienced players taking part.

But my biggest takeout from the week was the Lightning Network. For the bitcoin blockchain, a layer-one protocol, how to scale up has always been a challenge. Its proof-of-work consensus makes it the most secure and decentralised payment system in the world. But it can only process around seven transactions per second on-chain.

To give some context, Visa processes around 1,700 transactions per second, with the capacity for around 65,000.

To be a truly global payment system, bitcoin needs to process hundreds of thousands of transactions per second.

The Lightning Network (LN), a layer-two protocol built on open-source code, solves that problem by allowing you to send micropayments in bitcoin (sats) around the world at a tiny cost. The Lightning Network sits on any blockchain, but its biggest adoption so far has been on bitcoin.

A series of smart contracts act like IOUs, allowing people to transact with each other through nodes on Lightning, swapping IOUs until one person goes back on the blockchain and closes out the transactions.

It's a bit like going to a bar, handing over your card to the bartender, running up a tab then settling all your beers and margaritas in one payment at the end of the night.

The difference is that on the Lightning Network, you aren’t doing it with credit, it’s with liquidity provided by bitcoin loaded into Lightning wallets.

The adoption of Lightning exploded in 2020 when El Salvador made bitcoin legal tender. Businesses are supporting the payment network and helping increase its adoption, offering merchant-friendly software so shops can accept bitcoin, and credit cards like GoSats in India.

These ideas are being fueled by an enthusiastic and innovation-friendly venture capital industry. Lyn Alden, an expert in financial modelling and engineering economics, says unlike many things in crypto, Lightning has one of the highest “utility-to-speculation ratios”.

Elizabeth Stark, co-founder and CEO of Lightning Labs, which develops software to power the Lightning Network, says she realised its power for change when she met DJ Switch.

The Nigerian musician used her phone to live-stream police killing peaceful protestors in Lagos in 2020.

The Nigerian government denied the shootings and froze protestors’ bank accounts. DJ Switch fled to Canada, where she met Stark.

“Jacob on my team got her to pull her phone out, download a digital wallet, and a few seconds later had transferred about US$10 of sats to her over the Lightning Network.

“She didn’t have to open a bank account, so the government couldn’t take it away from her.”

Any ideas that bitcoin is merely a store of value are outdated and outmoded. Bitcoin isn’t just an asset, it’s becoming a truly global monetary system.

Jenny Rudd is an investor and analyst who is passionate about creating equality for women through business. www.aimsure.co.nz

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