I’ve long been bullish on the Lightning Network as an open payments and information transfer network that will one day disrupt all closed payment networks (Visa, Mastercard, ACH, Swift, etc.) and eventually become the identity and private data transfer layer for the Internet itself. You can read more about that vision here.
The basic thesis has always been simple: the Bitcoin network has already won as the final clearing house of value for the Internet and will scale in layers to facilitate smaller payments and information transfer, similar to how the Internet scaled with TCP/IP >> HTTP. But while the Lightning Network was undergoing slow and steady infrastructure development over the last 3 years, this argument was backed only by limited data from the earliest innovators. Until now.
2021 has proven to be a breakout year for the Lightning Network as it reaches a crucial tipping point which should be the primary driver for Bitcoin itself crossing the chasm to mainstream adoption, especially in emerging markets where it’s unrealistic for most users to ever afford on-chain transactions.
The data speaks for itself. As of Oct 14, 2021, there’s currently:
Note that these are only lower bound estimates as an unknowable amount of private nodes, channels, and liquidity also exist. Early estimates put these at just under a third of the network.
Each of these graphs (especially capacity) sure look like the early stages of a hockey stick! And there’s nothing that venture investors love more than hockey sticks 🙂
So what happened in 2021? Why is Lightning adoption finally going vertical? The short answer is that the Lightning Network displays immense network effects (on top of Bitcoin’s already well-entrenched network effects). An initial critical mass of nodes and well funded routes (i.e. channels with sufficient liquidity) attracts developers who build applications to use the payment rails which attracts new users paying fees which increases potential node revenue, incentivizing more people to run nodes, open channels, and deposit more liquidity (h/t Ryan Gentry).
As with the stickiest networks (e.g. think early Facebook), there’s more marginal value for the N+1 user than for every user who came before. Which means that as the flywheel starts turning, it only accelerates.
One potential criticism of this interpretation is that we’ve already seen an early exponential spike back in 2019, which tapered off for a couple years before the next one. Could that happen again? Sure. But as this report explains well, the growth in those early years was not organic and driven by a small handful of extremely motivated and technically sophisticated innovators. As we cross from the innovators to early adopters, the tools and applications are finally user friendly enough for non-developers to easily interact with the network. I’ll dive deeper into this later, but essentially I think it means that this spike won’t taper off until we have at least 100s of millions (maybe billions) of users.
So, back to the question at hand: why is the network growing now? I believe there were two major unlocks: bottom up and top down.
Bottom up
The Umbrel Effect
After following the Lightning Network closely over the last few years, I first noticed adoption really starting to accelerate in late 2020. I believe this was largely the result of a new home server company called Umbrel. Umbrel lowered the barrier to and increased the utility of running a Lightning Node by at least an order of magnitude with its simple DIY Lightning Node OS, beautiful graphical user interface, and a slew of useful apps for node operators. Prior to Umbrel, I had tried running other home nodes with open source projects like RaspiBlitz or even LND directly. I’m a huge fan of both projects, but each required a fair amount of technical background and command line experience. Umbrel was literally just a couple clicks plus a few days to download the Bitcoin blockchain and I was up and running. And – as the data shows clearly – so were lots of other node operators as well.
Umbrel just released a user count estimate based on anonymous end-to-end encrypted Lightning channel backups and the results were staggering. Approximately 9 out of 10 Lightning nodes that came online since Umbrel’s launch in August, 2020 run on Umbrel. As of mid October, 2021, Umbrel powers almost half (~46%) of the entire Lightning Network! The growth of Lightning and Umbrel nodes over the last year are almost identical curves.
To be clear, other node providers – both DIY (e.g. Raspiblitz, Start9, & myNode) and cloud (e.g. Voltage & Nodl) – also played an important role. I’m particularly bullish on cloud providers in the long run as there will be many businesses and users who prefer to provision their nodes programmatically in the cloud. But the fact remains that Umbrel has played a pivotal role in amassing the initial critical mass of nodes for the Lightning Network. And their adoption is only accelerating, especially as they continue to offer more useful apps for the Lightning Node + home server combo.
Here Come the Plebs
Once lots of users had nodes up and running the next obvious question became – what now? This is where the Telegram groups like Plebnet and Rings of Fire entered the mix around April, 2021. Armed with new nodes, an App Store for basic node management, and some sats to spare, these groups began organizing organically on Telegram to share best practices for node management and to coordinate channel openings. These groups not only offer extremely valuable information to help noobs go from 0 to routing (I’ve heard many stories of previously non-technical people learning their first command line and more in these groups), but even more importantly, everyone’s having fun! I believe that as the Bitcoin base layer ossified – as was necessary to build a truly robust and resilient base monetary layer – we lost a lot of the light-heartedness and experimentation from newcomers that communities like Ethereum captured. Groups like Plebnet, however, give off similar vibes to what I saw in the early days of DeFi (which I covered at my last venture capital fund). An excellent combo of useful information, earnest idealism, and hilarious memes.
And this is a key point, because while I sense that many folks do expect the financial upside of their node to increase as the Lightning Network develops (a decent bet in my opinion), many seem more interested in the friends and social rep they’re building along the way. It’s always a good sign to see Twitter Nyms flexing their lighting node ranks!
And the Devs
And now with all of this activity from newly minted node runners, it’s no surprise that more devs are entering the space to build them tools and create apps to utilize their new liquidity. Here are a few of the coolest tools I’ve come across so far:
I’m particularly excited about the marketplaces. As Ryan Gentry points out, liquidity marketplaces are just the beginning. Soon, we’ll see marketplaces for other node resources like: storage, bandwidth, and compute. I’m particularly excited about p2p file storage with native Lightning payments (e.g. Agora). I expect this is just the beginning of Bitcoin based protocols overtaking other “decentralized projects” with unnecessary tokens.
Meanwhile, the influx of node operators and fresh liquidity is providing fertile ground for developers to start experimenting with Bitcoin Layer 3 – apps built on top of the Lightning Network. Early examples here were OpenNode, Strike, Sphinx Chat, Stakwork, LN Markets, and Breeze – Lightning based apps for payments, chat, employment, trading and podcast streaming. Now with all of the new liquidity and developer activity we’re seeing a new wave of end user apps, including:
And what’s even more exciting is the Layer 2.5 infrastructure that’s emerging. These are APIs to help entrepreneurs build new Lightning based apps, banks, and businesses. Key examples here include:
The possibility for building on this new infrastructure is immense. Impervious recently hosted a hackathon to show the possibility of what could be built with their API. You can see the top 6 winning projects here. A few that really stuck out include:
And this is just the VERY early days of Lightning development. All in all, this bottom-up groundswell was critical to unlocking an initial critical mass of nodes, payment channels, and liquidity. Shoutout to the protocol devs and node distributors for making this happen. But while this groundswell was critical to get us started, the top down surge is primarily responsible for the recent exponential explosion in liquidity.
Top Down
Sovereign Nation States?!
El Salvador’s adoption of bitcoin as legal tender is perhaps the biggest news of the year. As part of this adoption, every business in the country is now required to accept bitcoin as a means of payment and most appear to allow for the usage of both main chain and Lightning Network payments. Here’s the video of someone using a Bitcoin/Lightning enabled wallet at Pizza Hut. Woah! The user may only be holding dollars and paying in dollars, but using the Bitcoin/Lightning networks as the instant, final settlement rails. And what’s even cooler is that many international businesses operating in El Salvador are now gaining institutional knowledge of how to integrate Bitcoin/Lightning, which can be applied in all of their other markets when the time is right.
Due to this massive shift, several of the top downloaded apps in El Salvador are Bitcoin/Lightning enabled. And the nationally sponsored – and Lightning enabled – Chivo Wallet has confirmed >3M active users. That’s a HUGE deal as El Salvador’s total population is only ~6.5M people, >70% of whom were unbanked prior to Bitcoin adoption. That means that in less than a month, the Bitcoin and Lightning Networks have already on-boarded almost half of the entire population, many of whom had NEVER accessed a bank account before. 👀
And all of this adoption is, of course, driving a ton of liquidity for the Lightning nodes of local service providers. OpenNode and IBEX Mercado – two of the major payment processors powering El Salvador adoption – have added >42 BTC ($2.4M USD) in liquidity to their nodes in just the last 30 days.
If El Salvador continues to develop successfully, then there is a string of other nations actively considering adopting Bitcoin as well, such as: Ukraine, Zimbabwe, Uruguay, Paraguay, etc. With each successive adoption, the network and its applications grow larger, more resilient, and more valuable. Buckle up.
Corporate Adoption
The big news here is Twitter, which recently announced its plans to offer native Lightning powered tipping for all users. This comes as no surprise given CEO Jack Dorsey’s public history as a true Bitcoin believer. While we’re still in the early stages of rollout, this is absolutely MASSIVE news as Twitter boasts ~200M accounts. It’s estimated that only ~200M people have interacted with the Bitcoin network in any way as of 2021. Overnight, Twitter can match that number – which took Bitcoin over a decade to achieve – for the Lightning Network. 👀
Other tech cos are getting in on the action as well. Substack recently rolled out a public beta of Lightning payments for select writers. With >500,000 users and growing, this could be another major moment for the network.
Meanwhile traditional payment companies are hinting at their own experimentation as well. It seems just a matter of when not if for Square, another Jack Dorsey led company. And Ricardo Salinas, another orange-pilled billionaire, has promised to roll out Lightning payments for his Mexican payment network.
What’s more, we’re seeing newly dedicated Lightning companies popping up all over. As you’d expect, there are tons of new startups (the area I’m tracking and participating in most actively) and even new public companies like LQwD Fintech Corp, which are going all in on Lightning. And bringing lots of fresh liquidity and users with them!
While many of these corporate experiments may start small, there’s precedent for meaningfully ramping up. LNBig, a pseudonymous entity who famously helped to seed the Lightning Network with >330 BTC in 2019, has just doubled down on the network with >191 fresh new coins (>10.5M USD) in liquidity over the last few weeks. As with Bitcoin itself, most individuals and businesses will start by dipping their toes, but seem to only go in one direction with their commitment.
Exchange Adoption
While exchanges have generally been slow on the uptake of Lightning, they’re natural users of the technology to facilitate cheap, instant settlement among themselves and with their users. Over the last few months, we’ve seen meaningful adoption and liquidity from exchanges like: River, Bitfinex, OkCoin, and Paxful. With others like Kraken set to join the mix this year, it appears only a matter of time until Lightning becomes the standard for the largest bitcoin on-ramps to move sats. Bitfinex has been particularly active on the liquidity front adding >85 new coins (~5M USD) worth of liquidity over the last month. And Paxful is particularly exciting on the user side as they bring >7M users in mostly emerging markets who are most likely to use Lightning immediately to save on prohibitively high base chain fees.
What’s Next?
We’re reaching escape velocity for the Lightning Network which will be critical for Bitcoin to cross the chasm to mainstream adoption by billions of users who will likely never be able to afford transacting on the base chain and who frankly may not ever even need to know that they’re using Bitcoin the network or bitcoin the asset at all. Remember that we’re only at ~200m users on the Bitcoin network, putting us at 1997 Internet adoption levels. I expect the next decade to mimic 1997 – 2007 for the Internet, when companies like Google, PayPal, Facebook, and Twitter were created. And many of those companies will be Lightning Network companies.
The only difference is that adoption of Bitcoin/Lightning should go even faster thanks to the already ubiquitous adoption of smartphones and the Internet globally. What’s more, while network effects are strong at the Bitcoin base layer, they’re even stronger at the Lightning Network level. Why? As one Lightning nym points out, “A blockchain gets slower and more expensive per person the more users participate. A Lightning Network gets faster and cheaper the more users participate.”
Perhaps the two most important lessons I’ve learned from a decade of investing in and studying new technology waves is to never underestimate the power of network effects or the speed of a new technology’s adoption along an exponential S curve. The ultimate adoption and value creation of networks like the Internet, Facebook, and Twitter has *always* been far greater than almost anyone could imagine early on. And despite most people’s incredulity, the adoption of new technologies like the Internet, smart phones, and solar energy along well defined S curves almost always outpaced even the most bullish estimates. The one major error that I expect every investor – myself included – will make is underestimating the power of Bitcoin and Lightning’s network effects + ultimate value creation and the speed at which adoption occurs.
I’m therefore extremely eager to double and triple down on investing in the Lightning Network. I’m particularly excited about infrastructure, which might include:
Most of all, I’m excited to invest in companies that use the Lightning Network to enable human behavior that simply was not possible beforehand. Global commerce with streamable, programmable micropayments available to 8B people should create a MUCH larger economic pie and new economic frameworks that no one has yet imagined. What a time to be alive!
Despite my unabashed enthusiasm, I certainly acknowledge that there are a lot of technical challenges left to solve in scaling the Lightning Network. Challenges like:
I believe that most of these will be solved either through technical breakthroughs (e.g. channel factories) or a spectrum of centralization for different types of users, or likely a combo of both. Just remember that these sorts of scaling challenges are not new: think back to when you first used a modem in 1997 to connect to the world wide web and see how far we’ve come since then. There’s a lot of reason for optimism!
If you’re an entrepreneur or engineer experimenting with Lightning today, please reach out. I’m actively investing in the space and would love to help you get funded!
I’m an investor in many of the companies mentioned above, including: Umbrel, Galoy, Mash, Lastbit, and Fountain. I hope to invest in many, many more!
Special thanks to Mayank and Luke of Umbrel for their help on “The Umbrel Effect” section of this piece.
npub copied to clipboard
ok
