Bitcoin Lightning Network payment is not about paying with Bitcoin
and here is why any global business should care about it
It was a rainy morning in late April, and I was biking from my parents’ place to my in-laws’ place in Beijing, when I heard the episode of the Decoder podcast with David Marcus, former President of PayPal and former head of Facebook’s Libra & Diem projects.
He was talking about why Bitcoin’s Lightning Network is the future of payments, a controversial topic I was super familiar with since my days at Strike. My biggest impression was that someone was finally clear on one very important thing — the promise of Bitcoin’s Lightning Network as the future of payments has nothing to do with the value of Bitcoin itself.
To me, this is a critical point that I felt the world didn’t pay enough attention to during the 2020 - 2021 period, the golden years of the crypto world when BTC prices rose from below $7,000 to almost $70,000. Naturally, everyone’s top-of-mind was all about price appreciation — for individuals, they bought any kind of coin hoping to make money; for companies/startups, they designed any type of product hoping to attract such-minded individuals as users. Therefore, it wouldn’t resonate with anyone even if we tried to stress this critical point.
When listening to David’s recent talk, I was still in the same mentality as when I was at Strike a year ago. I felt like “Oh it’s cool that you made this point very clearly now, but who’s going to care during this crypto winter? Even for those still in crypto, people care more about the web3/NFT side of it now, not the Bitcoin side, not to mention the Lightning Network side.”
So I wasn’t paying much attention to it, until last week my wife — a SaaS startup founder — listened to this podcast and started asking me questions about the Lightning Network (first time ever since my Strike days). As a fintech/crypto outsider, her questions offered me a huge realization of why this topic is so important to the general business & tech world, especially during this economic downturn. It could generate so much value for the whole world (beyond the US, which is a key point I’ll elaborate on later).
I feel the urge to write something about it — from my perspective as a global entrepreneur with fintech and crypto backgrounds. I believe if you are doing any type of business, especially global and related to tech, you will find this valuable.
Without further ado, here are some of the key questions my wife asked me. I hope my explain-this-to-a-normal-person style answers will help you better understand the true value of this topic.
Why is Bitcoin Lightning Network payment different from paying with Bitcoin?
This is a confusing point even to those from the crypto/web3 circle. For example, as a frequent listener and a fan of the Bankless podcast, I was surprised to hear Ryan & David as web3/crypto influencers also misinterpreted it.
Whenever hearing the two words “Bitcoin” and “Payments” together, people always think about the concept of paying with Bitcoin, which then leads to the conclusion that it doesn’t make any sense because of the fluctuation in its price. Importantly, this concern was the main motivation to invent all kinds of stablecoins, which was an interesting topic on its own, but not what I will discuss here.
As a Bitcoin holder (or “hodler”), I would never use my BTC to pay for anything — either a cup of coffee or a Tesla, because the $5 of $50,000-worth of Bitcoin I’m paying today might appreciate to $6 or $60,000. So of course I’d rather pay with my USD.
There is no doubt about this logic, which is why any product (e.g. Coinbase Commerce back then) that’s built based on this pay-with-Bitcoin behavior is at best a niche product for only the most hardcore enthusiasts — those who don’t mind sacrificing the up-side but only care about the fact that they can do the magic of paying with their crypto.
Rather, Bitcoin Lightning Network payment is about using Bitcoin as the payment network infrastructure and making payments fast and scalable. Everyone understands Bitcoin as a slow and low-throughput ledger system - it takes a long time to verify a transaction and the TPS (transaction per second) is super low (as a feature, not a bug). However, Lightning Network, the “Layer 2” of Bitcoin, is essentially the private channels between two Bitcoin nodes that allow for super fast ledger recording without having to broadcast to the whole Bitcoin network and wait for the long verification.
In plain English, you can think of Bitcoin Lightning Network payment as similar to a transaction on the Visa/Mastercard network, except it’s much cheaper.
Why should I care if it’s cheaper than Visa/Mastercard?
As an individual consumer, you probably don’t need to care because you are not paying for the transaction cost. (But you actually should care because merchants probably already baked in the transaction cost.) But if you are a business, you definitely should care because it’s a significant portion of your margin.
It might be cheaper in some parts of the world (e.g. Europe) where Visa/Mastercard (and the card issuing banks) charge lower interchange and scheme fees. However, in the US it’s easily 3%+ and sometimes 5%+ or even 10%+ if your transaction has a lower ticket size, because the fees are set as a “percentage” portion and a “fixed fee” portion — e.g. 2.9% plus $0.30 per transaction, and that $.30 could be 10% of your $3 goods.
This is crucial if your ticket size is about that of a short-distance Uber or Lime bike ride, which is why these merchants spend a lot of effort on saving transaction costs by asking you to deposit higher amounts in your in-app “wallet”.
You will be lucky if you are a large merchant, because then you can negotiate the pricing with payment processors, Visa/Mastercard, and issuing banks, and or hire an amazing internal payments team to do cost optimization. But only a small portion of all merchants fall into that bucket.
Some merchants do choose to pass on the cost to the consumers and charge a payment processing fee to the consumers, but this is a really bad choice.
If what you are offering is “in-elastic” such as utilities, DMV, HOA, certainly you can get around with bank transfers / ACH (or open-banking in Europe) or even cash & check, but you are suffering from inefficiency (as your financial ops are more complicated than needed) and unfavorable consumer goodwill (as people hate these frictions). And if what you are offering is “elastic”, such as normal goods and services, this could cause a serious drop-off before payment conversion, if not a dent in your consumer brand image.
I’m fine with bank transfer / ACH / open-banking, which is virtually free of charge with no chargeback risk, so why should I still care?
If you can say this, you are probably a US / EU merchant and I’d say good for you. However, this is exactly the problem of most US- and EU-centric businesses — they don’t have a good understanding of how the rest of the world operates.
From my Adyen days, and even earlier as a global macro investor at Franklin Templeton, I worked with many countries and saw many merchants who leverage many local payment methods in different parts of the world, as many as 200+ (a shameless plug for Adyen which can handle the most local payment methods around the world — I no longer have any conflict of interests with Adyen and I’m a forever advocate).
Not many parts of the world operate on bank cards, and not many parts of the world even operate on banks. In most emerging market countries, people rely on mobile-based wallets offered by tech companies & telecom providers, such as the famous Alipay of China (Part 1 & Part 2) and M-Pesa of Kenya.
If you are a US / EU merchant operating in these markets, you will need to build your payment stack flexible enough to account for these different payment systems, even if you can leverage a smart modern payment processor (e.g. Adyen, Checkout.com, Stripe, etc.). To do it super well, you will need a very savvy payment team that can handle engineering, operations, legal & compliance, product, etc.
Why should I care about it now, during this economic downturn?
Assume you are a sophisticated large merchant that has an amazing internal payments team and uses several wonderful payment processors. Because of the inconsistent back-end of all of these payment methods, you will lose a lot of valuable data, which you could have leveraged to generate useful consumer insights to grow your business further and offer better goods and services to win more brand loyalty.
This might have been a low-priority pain point during the good years of globalization and internet-fueled growth. However, after the global pandemic and especially during the recent economic downturn with high inflation, and unstable financial markets, this opportunity to grow the topline is too costly to miss out on.
SaaS valuations are tanking, startups are raising significant down rounds, and everyone from tech giants to unicorns is laying off. At this point, any basis-point you can save on payment cost or improve on payment conversion would be golden for your bottom line, let alone any amazing shopper experience improvement ideas you can get from valuable payment data.
Besides lower costs, what else can Bitcoin Lightning Network payment bring?
1. It’s not just low cost, but low cost + high approval rate + final settlement.
Not all card transactions are successful. The best US and EU banks have at best a success rate of mid-90%, while the average approval rate can be, depending on the country, merchant type, card type, and shopper profile, in the 60%-80% range, or even as low as a single-digit percentage.
Similarly, not all wire, ACH, check and local payment method transactions are successful — worse than cards, you can’t even decipher the refusal reasons to understand why they failed, and can only blindly keep retrying the failed transactions.
Also, you no longer need to wait for settlement delay, whether caused by card chargeback, international money movement, or inter-bank or inter-system reconciliations.
The root cause of all of these is that none of these payment methods operates on open-source networks. Their backends are all blackboxes and they are not interoperable. Lightning Network offers such a payment rail that operates on Bitcoin as a global single open-source network. You no longer need to build on and decipher 200+ different back-ends and you no longer need to suffer the delay of money movement and settlement across 200+ different backends — it’s one network globally.
2. It goes beyond improving payments — it is the ultimate network for embedded fintech and for the future of work.
With Lightning Network, payment can become a streaming service, just like any digital goods and services have become now. You can pay for Youtube and Spotify down to the granularity of a single second, you can pay for news and analyses down to by word, and you can pay for charging your EV down to by kWh.
This is different from the old-world user experience of “on demand” or “pay per view” when you need to click on the “pay” button to unlock a news article. With this “streaming payment” possibility, any digital service can be purchased without this UX friction and happen automatically behind the scenes.
COVID significantly expedited the digitization of virtually all services: even notarization can be done virtually now. My startup Sora Union is completely globally distributed - from our client base, to our teammates, and to our outputs. So streaming payment on Lightning Network can essentially be embedded into any workflow and any service, down to each step of the process, and available to anyone in any part of the world. This is the payment platform for the future of work.
Why does it have to be Bitcoin & Lightning Network? Why not Ethereum which is becoming more influential and active than Bitcoin, and stablecoins on the ETH network?
It’s becoming obvious that Bitcoin and Ethereum have different value propositions. Bitcoin is the digital gold that aims to be bulletproof and preserve value, and Ethereum is becoming the most popular smart contract platform that aims to empower builders/developers.
With these different value propositions, Bitcoin will remain the most trustworthy (by mainstream, or at least the traditional / institutional finance world) and technically stable network among all cryptos, with a fixed “money supply” and no change to its code, which is essentially its “law”.
Meanwhile, Ethereum is becoming an iterative platform, with many hard forks that shift its proof mechanism, extend its scalability, and improve its efficiency. I’m not saying these iterations are bad — in fact, they are so good for ETH’s own value proposition for the developer/builder community that I don’t see any other layer 1 solution (e.g. Solana, Near, etc.) can compete against it. But they are taking Ethereum away from being a gold standard of a monetary system.
Admittedly, some ETH-based stablecoins and experiments strive to achieve what Bitcoin Lightning Network can do in revolutionizing payment. There will be competitions, and I think competitions are good. But just like social media platforms such as LinkedIn and Facebook are serving different purposes, I expect the BTC and ETH networks to continue to optimize for their different value propositions and evolve into different ecosystems for different purposes.
OK, so if this is really so powerful, why hasn’t it become more influential yet?
Great question. First of all, Lightning Network is a very new thing with its original whitepaper written in 2016. (Bitcoin itself is a very new thing too that came about only in 2008.) It will probably take a few more economic cycles, like the downturn we are not out of yet, for more people to realize its value and build on it.
Second, it was a big thing, at least within the circle, back in 2021 when Bitcoin for the first time became a legal tender of a sovereign nation — a project I worked on at Strike. However, as I mentioned above, the value of Lightning Network was overshadowed by the value of Bitcoin price appreciation during that year.
Even though a few promising projects were launched, including Twitter processing global tipping and Shopify processing some payments on Lightning Network (again, both are Strike projects), their influences were eclipsed by the movement of asset prices.
Later, even when the prices were finally down, people’s attention shifted to the scandals of Luna/Terra & FTX, but never to this piece of promising technology.
What are the challenges it is facing?
I can elaborate on so many challenges that I saw firsthand during my Strike days, but to avoid boring you with the details, I think highlighting an overarching issue here is more helpful for understanding the context.
The main challenge to me is that Lightning Network is still too closely associated with Bitcoin itself, especially in terms of PR and story-telling. This is exactly the issue I mentioned at the very beginning of this article (and my motivation for writing this article).
The specific challenges I used to see, such as the capacity issue, on-ramp/off-ramp problem, the banking regulation problem, the commercial adoption problem, and the user perception problem, can all become relatively easier to solve once people start to realize and internalize the fact that Bitcoin Lightning Network is different from paying with Bitcoin.
Once people start to understand that it is just a payment rail that is more powerful than the existing ones — because it is a global single open-source platform, the magic will happen:
more and more commercial interests and investments will be put in to improve on-ramp/off-ramp experience (a product design problem)
enough countries will look into improving their banking regulations around Lightning Network (just like many countries spearheaded open-banking regulatory frameworks), which would
further lower the friction of commercial and consumer acceptance of this technology, and
boost its capacity as more and more BTC nodes would find it valuable to jump in, and even more and more people would set up BTC nodes to run Lightning Network.
Hope this is helpful. I’m trying my best to explain the value of the Bitcoin Lighting Network so that it’s easier to understand for the general business community.
I’m happy to keep updating this article - feel free to DM me on any platform if you have any questions & comments, and I look forward to incorporating them in my future updates. Thank you.