Bitcoin’s Base Layer Thrived Because of Network Effects

The Bitcoin base layer took off because of network effects. If only one person is mining blocks and trying to use Bitcoin to pay for goods and services, it is useless. As soon as even one more person joins the network, the utility of the network grows. This utility grows exponentially as more and more users join the network. Bitcoin has gained traction today because of this phenomenon.

Lightning Strikes Twice

The confluence of events and circumstances that are needed for network effects to take hold will need to occur twice if the lightning network is to gain mass adoption. Typically, most technological innovations follow a similar adoption cycle. The hardest part is to get that initial spark from the small niche community of innovators. These enthusiasts will have to find enough utility to first start using it and advocating to their network. Next, early adopters will need to carry the baton and push adoption forward. The majority of users will follow suit.

Right now, the lightning network is in the innovator and early adopter phase. The majority of the usage is from Bitcoiner’s experimenting with the protocol. Some early adopters of Bitcoin are also building the exact same games, tools, and programs that were first launched on Bitcoin early in its adoption cycle. Lightning spin is a good example of a copy-cat game build on the lightning network. The next step for the lightning network is for early adopters to start taking advantage of the low fees and instant settlement, two of the major benefits of the lightning network, to start creating large scale businesses around this technology. At this stage, it is very important that there be organic demand for the network. Channels between users, hubs, and nodes must increase exponentially as more users join. One great example of a company building an entire business around the lightning network is Zap. Initially, it will allow users to buy Bitcoin instantly and with low fees using the lightning network. The long term plan is to become a ‘Bitcoin Bank’ built on the lightning network.

As you can imagine, a lot of things need to fall in place for the adoption cycle to play out as it’s laid out above. Innovators must find that the lightning network provides more utility or different use cases than the base layer. Early adopters must figure out ways to build businesses around it. Lastly, the majority of users must see this utility, get exposure to these new businesses, and drive organic demand to the network. This confluence of events is a major challenge to the mass adoption of the lightning network but we are hopeful that it will come to fruition one day. If history is to repeat itself, innovators will keep tinkering until something sticks. Early adopters will keep trying until they hit on a business model that works and scales. The majority will adopt it as long as the builders continue to focus on the user experience.

The Lightning Network is Hard to Use

User Experience (UX) is a big factor in determining whether a technology will succeed. We all remember dial up internet and how hard it was to use. Not many people were using the internet at that time and there weren’t many applications built on top of it. Fast forward a couple decades and most people in the world have an internet-enabled smart phone in their pockets. The lightning network is in its ‘dial-up’ phase when viewed through the lens of UX. It is not yet easy or intuitive to set up a lightning wallet and start transacting with other users on the network.

One problem is that the network still remains fragmented. For example, if two users have opened a channel between each other, they can transact instantly between each other. If neither user has a channel open with the broader network they remain siloed away from it. There might not be a ‘route’ available for the transaction to flow from point A to point B. In theory though, any one user should be able to connect with any other user through as many degrees of separation as needed. Right now, not everyone is connected to everyone else. Ideally over time, there will be ‘central hubs’ such as exchanges or online retailers that have channels open with all their users. This will also most users to connect with everyone else on the network. Until this becomes a reality in the present, the UX will remain subpar.

Another problem is that lightning network is that a user’s lightning node needs to be online in order to transact. This is the equivalent of a user having to keep their mobile bitcoin wallet open or their hardware wallet connected to the internet in order to receive or send Bitcoin. Obviously, this is highly impractical and does not scale. These types of issues create friction for the user, create a negative feedback loop, and ultimately lead to a bad user experience. If the user experience stays low for too long the network effects will never take hold.

Thankfully, entrepreneurs and members of the community are working tirelessly to solve all of these UX issues. Much like the internet early on, there is a lot of opportunities for innovators to enter the space and solve these pain points. Humans have done this throughout time with every technology we have ever used. We doubt it’ll be any different when it comes to the lightning network. The internet took decades to get to where it is at today and since Bitcoin and the Lightning Network are built on top of this infrastructure, we anticipate that it will take substantially less time for Bitcoin and the Lightning Network to gain mass adoption.