Analysis of use cases for the Lightning Network (Bitcoin 2.0)


Analysis of use cases for the Lightning Network

Business perspective and value creation

After the insane hype about Bitcoin in late 2017, it is now very quiet about Bitcoin in public awareness. Many people might think that Bitcoin is a product without a real use case or that it is even dead. In this article, I would like to introduce one of the most interesting technological developments of Bitcoin, called the Lightning Network.

My motivation to share this development with you is to point out an additional functionality of Bitcoin that has the potential to create a lot of new and interesting use cases besides pure value storage and as a speculative asset.

The underlying philosophical advantages of a decentralized global currency, such as autonomous control and the renunciation of inflation, remain intact.

In this short article, I will first outline the basic functionality of the Lightning Network, before pointing out some new use cases for this technology. Finally, I will conclude this article with a talk about possible challenges for this technology.

The functionality of the Lightning Network

The Lightning Network is called a second layer technology because it can be seen as an add-on to Bitcoin that solves the problem of transaction fees and scalability.

Bitcoin’s underlying blockchain technology allows only 7 payment transactions per second, which is far too less to be used in a global payment processor.

The Lightning Network allows people on the blockchain to move Bitcoins from the blockchain to a private two-person payment channel where they can make an unlimited number of transactions that are not captured on the original blockchain.

If they do not want to make any more payments, they close that payment channel and all of the Bitcoins of this channel are then going back into the original blockchain.

The genius of this technique is that a payment channel not only allows transactions between these two people but can also be connected to other two-person payment channels and therefore it is then possible to send money to other people via the Lightning Network even if a person is not directly linked to them.

This whole process is visualized in the following figures. In summary, Bitcoin allows you to have a “bank account” without a central bank that nobody else can access and with the Lightning Network it is possible to make cheaper and faster transactions of small amounts between these decentralized accounts.

Summary of the new features of this Bitcoin add-on:

  • Worldwide transactions with smaller fees than current payment transaction
  • Enables real-time transactions (very fast and no volume cap)
  • Potentially enhanced privacy, as Lightning Network transactions are not visible on the public blockchain

Lightning process in three figures

Use cases of the Lightning Network:

After this short introduction, I would now like to outline what possible use cases from a business perspective are. The following six exemplary micropayment services would be possible using the Lightning Network technology.

1. New revenue models for content creators in the media industry

The appearance of very low fees for payments via the Lightning Network allows newspaper sites or creative people to charge per article or per view of their site.

It would be possible to collect payments in cent amounts. It could also allow consumers to decide for each media content whether they want to consume advertising or pay a very small amount to skip it.

Today’s paywalls could be more flexible and therefore increase the total revenue because there are types of consumers who cannot/do not want to pay for a full month’s subscription.

2. Tipping in social media

An alternative business model for influencer marketing in the future could be that a supporter of an influencer gives him a tip for creating online content.

Currently, the online video platform shows that this business model works because content creators earn a lot of money by receiving tips from fans.

The Lightning Network’s reduced fees would allow much smaller tips than currently imaginable and could therefore allow even tips for individual images posted on Instagram.

3. More privacy in online payment and sending money to friends

PayPal offers a great user experience when it comes to sending money to friends or paying in an online store.

Despite this convenient way of payment processing, it can be seen as a problem that they share much of your transaction data with other affiliates such as Apple, Spotify or Facebook (LINK).

With the Lightning Network, people could send money to friends almost for free, without an intermediary collecting and selling your personal information.

4. Vending Machines

Even today, many vending machines still only work with cash because it is extremely expensive for the vending machine operator to accept card payments with a volume of perhaps less than one euro (a bar of chocolate).

Reducing these fees to almost zero will enable all vending machines to offer a digital payment in the future, with even lower fees than collecting and depositing cash in a bank.

5. Car-to-X communication

In the future, autonomous vehicles will have to communicate with each other and with other intelligent objects in the city.

Various things like the time, how long the journey with an autonomous vehicle will take, could be influenced by a real-time auction mechanism.

An extreme example could be that an autonomous taxi can pay at an intersection to get the green light faster and in return, the other autonomous vehicles, which are not under time pressure, can earn money. Such a small real-time transaction requires very low fees and a high level of privacy which can be ensured by the Lightning Network.

6. API services could be used by individuals

An example could be that for the translation service DeepL Pro (paid version with higher data privacy) a small amount per single translated word could be charged.

This would allow customers to use this service only for an important document without making a monthly subscription. This would allow the service provider to address a new customer segment with very specific demands.

Challenges of the Lightning Network:

In order to achieve a higher degree of usage and market penetration of this technology, a couple of challenges have to be solved.

First, the whole process of switching from US$ or € to Bitcoin and the first lightning payment must be much more convenient.

The user interface must be really easy to use and potential user errors must be eliminated. In the majority of the online shops, the payment fee is fully paid by the shop provider which leads to a lack of awareness on the part of the end consumer that even today credit cards or PayPal payments (e.g. 2,9% + $0.30) imply a high-cost position for online marketplaces.

As a consequence, online providers could play a decisive role in the market development of Lightning Network (Bitcoin), as they see a significant cost reduction potential.

Also, the Lightning project is currently in a testing phase, so much of the functionality still needs to be tested to ensure that everything is scalable. One last challenge is that the exchange rate of Bitcoin in US$ or € varies a lot today which makes it risky to have too much capital in this digital currency. If all challenges are solved and people adopted this technology it has the potential to really change how individuals exchange money and would disrupt the payment industry in terms of payment fees.

Analysis of use cases for the Lightning Network (Bitcoin 2.0) was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.