Bitcoin Lightning Network: Your Guide to Digital Cash

Although the utility of physical cash is limited, the Bitcoin Lightning network opens up a new realm of possibilities.

Cash is a key component of financial self-sovereignty. It allows us to transact directly, protecting us from third-party interference. Without cash, all of our transactions must be managed by intermediaries, opening up the possibility of censorship, surveillance, and seizure. Although the utility of physical cash is limited, the Lightning network opens up a new realm of possibilities by transforming bitcoin into the globe’s first truly digital cash.

What Are The Properties Of Cash?

Before the advent of digital money, physical commodities had to possess certain properties in order to be considered valuable as a medium of exchange.

While complex finance and accounting systems arose to facilitate global trade between large organizations, daily transactions between people generally made use of cash.

To be valuable as money, a currency had to have the following characteristics:

• Scarcity: It must have a limited supply.
• Durability: It must retain its condition across time.
• Divisibility: It must be divisible into smaller units (the more, the better).
• Portability: It must be transportable across space.
• Fungibility: Two units must be identical and of equal value.

A currency would also need the following characteristics to have utility as cash:

• Recognizability: It must be easily recognizable as authentic cash in the appropriate currency.
• Anonymity: Cash transactions can be conducted without the exchange or surveillance of personal information.
• Acceptability: It must be acceptable as a medium of exchange, either as legal tender or due to social acceptability.
• Immediate Settlement: Cash transactions are immediate and peer-to-peer, without the need for third-party approval or verification.
• Accessibility: Cash is available to anyone regardless of their financial status or access to technology.

Ultimately, the purpose of cash is to allow people to transact directly with others, with both parties in complete control of the transfer and no need for third-party intermediaries.

Comparing Cash To Digital Money

The 20th century saw the advent of digital money, revolutionizing the way we transact globally.

For the first time in history, financial transactions between separate parts of the world could occur almost instantly, without the need for the physical transportation of people, currency, or documentation.

Making money digital dramatically increased the speed with which we could transact worldwide, enabling us to send money at the speed of light. On the face of it, nothing really changed beyond the ability to transact instantly over large distances. In reality, however, the entire financial infrastructure of the world transformed.

The Double-Spend Problem: Digital Money's Achilles Heel

The problem with digital money is that it can be replicated endlessly, leading to the double-spend problem: If you’re receiving payment from someone digitally, how can you be sure they haven’t already spent it?

The answer was to have all transactions monitored and approved by third parties. When I receive wages into my account, my bank checks to make sure those funds are available to send to me by communicating with the sender’s bank. The two banks confirm that funds have been transferred, and both accounts are updated.

The same is true when you use your debit card. When you swipe your card to buy a pack of gum, the transaction is not actually confirmed then and there. What happens is the merchant asks the payment processor to ask your bank if you have enough money to afford the gum, and the bank responds that you do.

The transaction is “confirmed,” and you can take the gum and go, but the actual transferal of money occurs later between your bank and the merchant’s bank. If you use a credit card, it’s even more complicated because the credit card company is also involved in the process.

The Hidden Costs of Digital Transactions

While cash transactions take place directly between two parties, digital payment infrastructure involves multitudes of institutions. Even the banks themselves have third parties between them to act as intermediaries to settle payments.

All these intermediaries create opportunities for censorship, surveillance, account closure, asset seizure, and third-party fees.

In other words, we cannot be financially sovereign without cash.

How The Lightning Network Gives Bitcoin Cash Properties

A currency with the qualities of both digital money and cash, with the drawbacks of neither, would revolutionize the global financial system.

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Bitcoin pioneered peer-to-peer digital transactions by solving the double-spend problem. However, its limitations in scalability prevented it from becoming a true everyday currency.

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The Lightning Network unlocks Bitcoin's full potential. This technology empowers Bitcoin to finally become a viable global digital cash:

• High Transaction Volume: Unlike the Bitcoin network, Lightning can handle up to one million transactions per second, allowing people to use bitcoin for daily purchases.
• Instant Transactions: Unlike the Bitcoin network or traditional digital payment infrastructure, transactions are genuinely confirmed within seconds, mimicking a cash exchange.
• Low Transaction Fees: Although nodes and channels that facilitate payments on Lightning do take fees, they are considerably lower on Lightning than on the Bitcoin network and lower still than fees in the traditional financial system.

Bitcoin Transaction vs. Lightning Network Transaction

This table sheds light on the key differences between traditional Bitcoin transactions and those facilitated by the Lightning Network. 

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While Bitcoin laid the groundwork for digital peer-to-peer cash, its scalability limitations hinder its use for everyday purchases. The Lightning Network emerges as a solution, offering significant advantages in terms of speed, cost, and privacy for microtransactions. 

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In Conclusion

Cash was the only form of money for thousands of years, but the advent of modern banking and digital money changed the financial system beyond recognition.

The global network of intermediaries, once only necessary for facilitating global trade, expanded to the management of small, daily transactions.

This complex system, and all the third parties within it, open up the possibility for interference and authoritarian control on how we spend our money.

Bitcoin brought some of the properties of cash to digital money for the first time by solving the double-spend problem.

The Lightning network provides the finishing touches, giving bitcoin the final properties it needs to be viable as a global digital cash.

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