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Public channel capacity on the Bitcoin Lightning Network continues to explode, with channel capacity hitting another all-time high of 2,738 BTC yesterday. The Lightning Network is a Layer 2 scaling solution built on top of the Bitcoin base layer, which allows two peers to open up a channel between each other and defer final settlement into the future.
The Lightning Network white paper was first released back in January 2016 as a proof-of-concept idea, as the Bitcoin base layer has a limited throughput, which was and still is needed to keep the network sufficiently decentralized (the larger the block size the larger the cost to run your own node).
Although the network functions using payment channels opened between two peers, public channels and node interconnectivity allow for payment routing through other Lightning nodes on the network, who can selectively choose what fees are charged and whom on the network they are connected to.
The Lightning Network also allows for private channels between peers, but this balance is not visible.
In the last three months, the Lightning Network has witnessed spectacular growth, most likely in part to El Salvador adopting bitcoin as legal tender, with the Lightning Network playing a major role in the onboarding process.
On average, over the last three months, public channel capacity on the network has grown by 12.5 BTC per day.
Similarly to the Bitcoin base layer, the best scaling solution for the Lighting Network is Bitcoin’s underlying “Number Go Up” technology. As additional people, institutions and nation-states choose to adopt the Bitcoin monetary network, the fixed supply of the asset means that the underlying BTC/USD exchange rate must appreciate, which itself scales the capacity of the network.
Not only is public-channel capacity going parabolic, but the exponential appreciation of the price of bitcoin since Lightning first began to enter mass beta testing in early 2018 has meant that the dollar-denominated channel capacity of the network has exploded.
Above is public channel capacity in linear scale and below is the same chart in logarithmic scale for context:
As the security model of the Bitcoin network continues to transition programmatically to an entirely fee-based model (as new bitcoin issuance trends towards zero), it is probable that fees will rise substantially as demand for block space continues to increase as bitcoin adoption increases. Below is the ratio of miner revenue derived from new supply issuance versus transaction fees over time:
This trend is very important for the adoption of the Lighting Network. It is likely true that on the other side of hyperbitcoinization, most people will not transact across the Bitcoin base layer, but rather across Layer 2 solutions like Lightning.