Bitcoin Lightning Network & Big Banking

Video transcript:

So, the Bitcoin Lightning Network, it’s an interesting thing and I think it’s a needed thing if you want widespread adoption of Bitcoin and you want it to act as a true replacement for fiat. It obviously has its limitations in speed. And part of that is really because, you know, it’s an anonymous sort of software that really hasn’t had the support it needed. And it was conceivably never really thought to, you know, have attained the level of adoption that it has. So, it doesn’t work fast enough. It’s actually slower than cash despite what a lot of people think. But there’s a few parts of it, right? And, you know, you really…

There’s a lot of understanding that goes into how it works, but I wanna kinda take it in parts because I think there is some interesting implications in terms of how this would fit into our existing financial system and how the Lightning Network would conceivably bring Bitcoin into more of the mainstream, but perhaps involve more of the mainstream which traditional Bitcoiners may not really want. But if you think about the basic concept of at least the first of sort of three tenets of the Lightning Network is you have these off-chain sort of transactions, right, where if I wanna send bitcoin to you, I’d open up a channel and my output can only match your input. And that’s how the redundancy works, even though it’s off-chain and at a later day when that transaction…that channel is closed, that transaction is then reduced back to the blockchain and put on-chain.

Well, the concept is that that channel that I open up with you would serve to create this network much like, you know, sort of sinews in a brain in a sense, right? So, if I want to send bitcoin to you, I open up a channel with you, but you happen to have a channel with John. Okay, fine. Well, I wanna send bitcoin to John, right? So now under the way the Lightning Network is currently structured is I would send the bitcoin through you or be able to send the bitcoin through you, to John who you have a channel with because of that connection. And so, you can see where if you multiply that over many, many people, you have this multiplicity of smaller transactions which begs a question, how do you arrive at, you know, the entirety? If I wanna send you one bitcoin and it’s gotta go through ten channels, how do you have that arrive at once? And that’s sort of a technical question.

But really the bigger issue which I think, you know, that’s outside of the technical aspect, a bit more on of the feasibility aspect is if I wanna send five bitcoin to John, it has to go through you. And if you don’t have five bitcoin, okay, I effectively have to lend that too, right? And that’s the only way that you’ll be able to get my bitcoin over to this third party. Well, what does that effectively sound like? That’s a bank, right? That’s a traditional bank. If I put in a $1,000, right, under current banking regulations, they take $900 of it and they lend it to you whether it’s in the form of a business loan or a mortgage, credit card, you name it, but that’s how it works, right? That’s how our financial systems, you know, and our capital market is really based on.

At the same time, you know, if you wanna take the concept that Bitcoin is a security and not a, you know, a currency, what does it sound like? Well, it sounds like a market maker in an equity market, right? And market maker acts to hold an inventory of a security and facilitates trades between two people, especially when there isn’t an awful lot to be made. Well, again, if I’m going to transfer through you, because this is how these off-blockchain transactions need to work, it’s just a series of lending transactions and ultimately when you get enough people, it’s gonna fail, right? Unless you have an intermediary that’s either holding a block of bitcoin and can facilitate these exchanges, right, with these sort of instantaneous lending and borrowing exchanges, or like a market maker where I’m just putting two people together and getting it spread.

So, you know, I believe, at least as the first of really three tenets of the Lightning Network, the only way that it really would work on a grand scale and actually, you know, be able to obtain the scalability that it needs and that in theory it should make, and not in the speed that the whole concept is based upon is that you really almost need the involvement of major financial institutions to do it, right? That have the capability, have the, you know, the viability, have the capitalization to effectively act as a facilitator of these off-chain transactions.

So, you know, while the Lightning Network is something that I think is necessary and I think everybody wants, you know, it’s one of those “Be careful what you wish for” because you just might get it, because in fact if you get it, you’re probably welcoming in major financial institutions which some hardcore, like, early adopters don’t want. But, you know, at the end of the day, it’s part of the legitimacy argument.

So, something to consider, and it gets brought up a lot on, you know, the chat boards and all that, so I wanted to kind of cut a hit on that point. But there’s two other points which I’ll sort of [inaudible 00:05:13] just later. But in the meantime, you know, want to talk about this first element of channels and look at, you know, really trying to understand the Bitcoin Lightning concept to channels and make some sense on how when I’ve gotta go through other people to reach another person, how it becomes this sort of lend-lease opportunity for Bitcoin, and how on a grand scale it just simply can’t really happen. So, again, check me out, The Tracy Firm and / or The Bitcoin Lawyer.

Take care.

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Adam S. Tracy, J.D., M.B.A. Attorney At Law
Adam S. Tracy, J.D., M.B.A.

Bitcoin attorney, Adam S. Tracy , J.D., M.B.A. is an authority in the law of blockchain technology with keen understanding of the regulatory issues facing crypto currency industries and can help you navigate regulatory waters in the field where innovation collide with the law and taxation issues. Located in Chicago, Adam has built his career in one of the world's great financial hubs while helping clients locally and around the world managing the complex process of cryptocurrency compliance.

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