The Lightning Network: Truth Or Liar’s Poker

As a former Wall Street analyst I always tried to know the most about whatever company I was assigned to work on.  Hours of research went into this effort. But in the end the question became: What’s the bottom line?

Today, there are dozens of crypto analysts but trying to get an answer on what’s the bottom line when it comes to The Lightning Network is another matter.  Bright, well traveled experts are claiming both amazing growth and acceptance while others insist TLN is a complete failure.

Here is my bottom line: The Lightning Network is a huge step forward for Bitcoin that will ultimately contribute to whatever level of mass adoption ends up taking place.  That is because its purpose is to facilitate small peer to peer transactions that represent the vast majority of daily financial transactions.

TLN probably sacrifices a certain amount of security… but, so what? No hacker in their right mind would waste their time swiping $5 and $6 transactions when their is far bigger fish to fry in the vaults of crypto exchanges. So security is not the most critical issue here.

After less than six months in operation TLN supporters and naysayers are engaged in a silly game. If we could only look into their crypto holdings I suspect we would have a clear picture of their bias.  But unless they choose to reveal their holdings, we will never know.

Background Briefing

In order to progress to mass consumption, crypto networks need to process transactions almost instantly.  As of August 1, the average confirmation time for Bitcoin was 23 minutes. That’s simply never going to foster mass adoption.

TLN is the technology touted as the solution to Bitcoin’s scalability problem. Introduced in March of this year, just about everyone is impressed with its growth.  And just about everyone agrees that the way to measure growth is by having a running total of the number of nodes.

Rompert.com counts 2014 nodes in the total TLN network compared with 29 when it was opened.  By some technique, they determined the network capacity at over $153,000. That is not a huge number by any means, but after all, TLN is still a baby learning to walk.

The Ridiculously Negative Case

Recently we ran across a headline claiming a 99% chance of failure of TLN on transactions larger than $200 and only ridiculously small sized transactions of less the five cents are completely successful.  If this were true, the next observation makes absolutely no sense whatsoever.

The claim is made that  since TLN was launched in March, transaction prices today are now $1.06 down from $55 back at the peak of December.  Meanwhile, transaction volumes on the network are nine times higher.

Somebody here is confused and I think it must be me.  Who in their right mind would pay a $1.06 fee to transact less than a nickel worth of crypto?

The Ridiculously Bias Positive Case

Completely contradicting the above expert is a quote from Bitcoin developer and so called long standing critic of TLN, Peter Todd.  Mountains of praise are now being heaped on TLN after Todd made payments of $3, $5 and $40 in near instant transaction time. Even though we are offered no proof that such transactions ever took place, at least we know where Peter is coming from.

The Bottom Line

Lightning Network promises to enable millions of transactions per second using a peer to peer network atop the Bitcoin blockchain. This is the fastest financial transaction network in the world, even compared to competing blockchain technologies, like Ethereum’s 15 tps, Ripple’s 1,500 tps, or the newly launched EOS with a maximum of 8,000 tps.

But the moniker, fastest financial transaction network in the world, is only a momentary notion. The Bitcoin Cash network is now claiming a new single day transaction record of 484 per second. Is this a valid number? Since the event just happen to take place on the first anniversary of the network launch, we suspect it is a phonied up claim: time will provide the truth.

There are all kinds of ways to measure the progress of TLN and we are in the time when there is enough date to prove the earth is flat.  To me the most important short term barometer is the growth of nodes. This is the truest measure of market acceptance. And TLN’s growth confirms it is going in the proper direction toward mass acceptance.

Headlines about TLN move Bitcoin prices so armed with this information makes for better investing skills, no matter if you are a trader or long term investor.  So much of the noise can be thrown into the category of short term imperfections or simply a game of liar’s poker.  

Featured image courtesy of Shutterstock. 

Author:
James Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.