Bitcoin is not transactional!
BTC Series #7
Stay up to date on Green Candle by subscribing to our newsletter and following us on Twitter and Instagram!
In our Friday series, we take a deep dive into different asset investments. The first asset we’re covering - which we will stick with over the next several weeks - is Bitcoin (BTC). Our goal with this weekly series is to familiarize readers with BTC and to address common anti-BTC arguments. For full disclosure, Brandon and Daniel are strong believers in Bitcoin and both have allocated portions of their portfolios to BTC (HODL baby).
State of the Coin
Last week we wrote about El Salvador passing legislation to make Bitcoin legal tender. The adoption of Bitcoin in El Salvador was driven in large part by “Bitcoin Beach.” Bitcoin Beach, also known as El Zonte, has been using Bitcoin as a transactional currency for ~2 years. President Nayib Bukele has even cited Bitcoin Beach as a reason to move forward with the adoption of Bitcoin as a transactional currency. Although El Salvador was the first to adopt Bitcoin as legal tender, individuals from South Africa, Vietnam, Cyprus, Cuba, Zimbabwe, Morocco, Philippines, United Kingdom, Uruguay, Mexico, Nigeria, Senegal, Ghana, and Peru have reached out to El Salvadorans to see how they can replicate the success of Bitcoin Beach. The implementation of Bitcoin as a transactional currency is largely due to the efforts of Jack Mallers, who took the “boots on the ground” approach bringing Strike (a transactional app on Bitcoin’s Lightning Network) to the forefront. We’ll get into how this is possible below.
In other news, China recently called for a Bitcoin mining crackdown (again) and it appears many of the Chinese miners are moving to Texas. Texas offers wide access to cheap and renewable energy, 20% of which comes from wind energy technologies. In 1848, people flocked to California with the hopes of finding gold. In 2021, people are flocking to the countries and states that offer the opportunity to mine digital gold in the form of BTC. We’re excited to see how countries/states compete to draw in the best and brightest in the crypto space.
Can Bitcoin be Used for Transactions?
The short answer is yes. But before we get into how BTC is used transactionally (and provide specific examples), let’s dive into why this argument continues to arise.
As we’ve discussed throughout this series, two key components of BTC as a technology are it’s blockchain foundation and proof of work model. The blockchain serves as a public ledger of all transactions that have occurred using BTC. Transactions occurring directly on the blockchain are known as “Layer 1” or “On-Chain” transactions. That’s right - we’re using the term transaction: a sender is paying a receiver directly on the blockchain. But BTC skeptics argue transactions aren’t possible, right? Not exactly. Many BTC skeptics argue that BTC transactions are slow and often costly, making it a less pragmatic mode of transacting in the real world. And they have a point - Layer 1 transactions are slow and costly. Here’s why:
Miner incentives and transaction fees: As transactions are added to the blockchain, miners spend energy to add blocks to the chain. This energy expenditure comes at a cost to miners (e.g., electricity). To incentivize miners, they are rewarded with BTC - so long as the value of BTC remains above the cost of mining, miners are incentivized to continue. When all coins have been mined, the network will require new incentives. This will likely come in the form of transaction fees.
Consistent block sizes and new block times: Block size is hardcoded in the BTC network and the average time to add a new block is consistently ~10 minutes. The proof-of-work model that BTC is built on limits the number of transactions that can be processed in a given amount of time. On average, only 3 to 7 transactions can be processed per second. If 1 million transactions occurred simultaneously, it would take ~40 hours to process all transactions. This is far too slow, particularly for smaller transactions. Imagine having to wait 40 hours to receive $10 from your friend for covering lunch.
The BTC Solution to Slow Transactions - the Lightning Network
No one wants faster transaction speeds more than those in the BTC community. However, the features that make Layer 1 transactions relatively slow and often costly are fundamental features of the BTC network (hardcoded limit on number of coins, proof of work, small block size). To most of the BTC community, these fundamental features are non-negotiable. So, a new solution is needed…
To solve the Layer 1 transaction issues, the BTC community created Layer 2 technologies to allow transactions to occur “off-chain.” The predominant off-chain transaction technology is known as the Lightning Network. Briefly, Lightning Network allows individuals to transfer bitcoin via wallet-to-wallet “channels” rather than transacting directly on-chain. The participating parties in these channels are engaged in a “smart contract” and can transact as many times as they wish so long as the channel remains open. For a good introduction to the Lightning Network, check out Investopedia.
Does Lightning Solve the Congestion Problem?
Theoretically, off-chain Lightning transactions reduce on-chain congestion. One transaction on the block chain does not equal one payment. I repeat, one transaction on the block chain does not equal one payment. Bitcoin transactions on Layer 1 are advantageous for large transactions and Bitcoin allows trust that value transfers are final and within a short period of time. Layer 1 transactions are able to send billion-dollar transactions without incident and within a few minutes, no institution in the world could pull off transactions of that volume in that amount of time.
Because of the large transaction capabilities of one transaction on Layer 1, thousands of off-chain or near-chain transactions can be settled in just one Layer 1 transaction. Thus, the Lightning network channels can settle millions of payments into a SINGLE Bitcoin transaction with a channel closure.
How Fast is Lightning?
While on-chain transactions are limited in speed, check out how fast off-chain transactions take place on the Lightning Network:
<blockquote class="twitter-tweet"><p lang="en" dir="ltr"><a href="
15, 2021</a></blockquote> <script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
<blockquote class="twitter-tweet"><p lang="en" dir="ltr"><a href="
15, 2021</a></blockquote> <script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
So...Is BTC Transactional in the Real World?
As mentioned above, Bitcoin is now legal tender in El Salvador and it’s popularity appears to be growing, particularly in countries with historically poor economic track records. Although on-chain transactions can be slow and cumbersome, off-chain, Layer 2 transactions can be conducted much faster. Currently, Bitcoin is being used for everyday transactions around the world, and many are happening off-chain on the Lightning Network. It’s also important to keep in mind that some of the world’s best and brightest programmers are committed to working on BTC and its Layer 2 technologies.Take a look at your phone. Take a look at your computer. Do you really want to bet against the best programmers in the world?
Going forward
As we said in our introduction, we plan to address several arguments against BTC, one at a time, over the next several weeks. We hope that our weekly posts will encourage readers to learn more about this emerging technology.
Common arguments against BTC:
Be sure to check out our previous articles explaining Bitcoin and subscribe to get the new topics straight to your inbox!
BTC is not a transactional currency (cannot be used to buy everyday items)
Governments will not allow it or will heavily regulate it
It’s easy to lose access to BTC wallet
Happy Friday everyone - get after it this weekend!
Stay up to date on Green Candle news by subscribing to our newsletter and following us on Twitter and Instagram!
Brandon and Dan
Disclosure: The authors of this writing hold positions in cryptocurrency mentioned in this article. That cryptocurrency is Bitcoin. The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.