Lightning Network - How to track growth & adoption using KPIs
Insights into KPIs for tracking growth of LN adoption
1/n] Lightning Network is gaining attention. You may want to keep a close eye on its growth & some KPIs to track over the next few years. LN is on track to serve as the payment rails on top of bitcoin as the settlement layer for the whole world by end of 2030. A thread follows.
2/n] Let's start from the very basic - What does LN offer? Instant, global, borderless, frictionless, permissionless, near zero fee transactions, the likes of which the world has never seen before. Think about sending money from US to Japan. How would you do it instantly and free
3/n] There is literally no option that meets all the above mentioned features that LN offers today, which makes it a 10x improvement on existing payment rails at the very least and puts it in category of the most disruptive payments tech out there.
4/n] You can send an email sitting in yo basement in your grandma's house in Palo Alto to yo buddy in Greece, instantly & for free. Why can't you do that with money? Because we work with closed, private, outdated payment networks - Visa/MC/WU which are about to be disrupted soon.
5/n] The best thing? The base layer of these transaction settlement is the most pristine form of money humans have ever created or found. We have never had a form of money quite like bitcoin, with its properties which make it the hardest & soundest form of money. Immutable af.
6/n] Let's take a look at the growth of LN to understand the the pace at which it's disrupting payments as we know today. As we know, LN works via payment channels, the tech side of which I covered in my previous thread. See here a visual of the network channels between nodes.
7/n]Let us firstly look at some KPIs to keep an eye on for understanding & tracking the growth of LN. We'll use visuals from https://bitcoinvisuals.com/lightning and verify data via http://1ml.com as well to get two confirmations. Wherever I find a discrepancy, i'll point to it.
8/n] The first one is - Total number of LN nodes. Currently there are close to 16k nodes as seen below, and the growth trajectory is pretty clear here. Only up. 1ML actually shows 27k total nodes and also has a countdown to 1mil nodes running on the side. Why the difference?
9/n] There might be some delta arising due to 'private vs public nodes' which may throw this data off on both sites. I'm not sure on this one, someone who knows more should correct me. Anyhow, 16k or 27k, the growth is obvious. Node go up.
10/n] The 2nd KPI is - Number of channels. LN routes payments via channels, so that's an important number to track. Total channels currently sit around 75k and this is verified by 1ML as well. The channel count has already doubled since Jan 2021. Again NGU.
11/n] The 3rd KPI is - Network Capacity. This refers to the funds unleashed on the LN to offer liquidity to route payments. Currently there are close to 3000 bitcoins or ~$150mil on LN as network capacity [Oct 2nd 2021]. This is parabolic growth, 3x already since Jan 2021.
12/n] One thing to keep in mind as we talk about network capacity is that, it in no ways related to total payment volume flow on the network. Remember our tech thread on LN? The way it works is that capacity is routed through local to remote side of channels constantly..
13/n] even when the overall capacity remains the same for all parties. Hence, network capacity is not related to payment order flow. Its not easy (if at all possible?) to figure out the exact flow of payments currently being done on LN because both balance of channel liquidity..
14/n] and volume of payments routed through channels are private on the network. A feature not a bug. This makes it harder for analysts to figure payments volume out, and they have to rely upon proxies like network capacity instead which as we now know is not the same as flow.
15/n] Can we do some public math to get a better proxy for payments volume flow on LN? Lets do this 2 ways. First lets go bottoms-up approach. So we already know that ~$150mil worth of bitcoin is there on LN as network capacity.
16/n] Let's assume every LN node is routing their value of outbound liquidity every month. Is this a fair assumption? Idk. Lets get a number atleast. So, the total outbound liquidity on the network should be 1/2 of network capacity ~$75mil, assuming a balanced network all along.
17/n] Let's further assume that each payment that's routed takes 2 hops to reach its final user, well that cuts the volume flow in 1/2 again. So now we have ~$37.5mil of payments flow per month.
18/n] So $37.5mil/month becomes $450mil/yr in total payment volume flow on LN network as of today. I think this number is severely underestimates the total flow. I think some nodes are doing more than their outbound liquidity as payments every single month while we did not even..
19/n] consider payments that nodes with direct channels make to each other every single day. Anyhow, one thing we've realized already, and that is network capacity is not equal total payment flow on LN. Payment flow is multiples of network capacity as we're seeing.
20/n] Let's take another approach then. Let's go top down this time. Bitcoin's market cap is $900bil [as of Oct 2nd 2021] while it settles ~$12bil worth of transactions daily. That's ~$4.5T/yr or 5x market cap. Market cap is one way of saying how much value is already locked up..
21/n] on the bitcoin protocol. Let's test that analogy to LN now. so we know that network capacity is ~$150mil as of today. If we do a 5x multiple on it, we get to ~$750mil payments volume flow per year. This is very rough math (may not be anything accurate) but..
22/n] it starts to give us a feel for the scale of transaction throughput LN already does per year. Let's say an easy ~$1bil/yr for simplification. That is still a tiny amount when it comes to payment throughput per yr for the whole world, but LN is growing exponentially.
23/n] This also shows us that LN has a long way to go to reach parity with Visa or similar private networks of today and be the global payments rail for the world. So in a way we're very early. If you're running a LN node today, you're setting yourself up for this very upside.
24/n] So far, we've learnt a few things here. There are 3 important KPIs for LN - total nodes, total channels, total capacity and an important hidden KPI of total payment flow. All these KPIs are atleast directionally telling you about the exponential growth of LN already.
25/n] One thing to remember is that LN is a reflexive loop. The value of LN grows with the number of users that onboard onto it and become daily active users. That will attract more nodes to join, more channels will be opened and more capacity would be unleashed.
26/n] Where will the users come from? Who'll onboard the next million users to LN? Well, in comes El-Salvador & Twitter. Get it now? Nation states & Internet networks will onboard the next millions of users onto LN, in front of your very eyes over the next 10 yrs, maybe quciker.
27/n] So now we're starting to figure out the pyramid of the monetary system we're most likely heading into - bitcoin as the base layer of settlement, LN as the payments/transaction layer, nations & internet networks plugging user bases into LN and bringing it all together.
28/n] In his 2002 NYT bestseller, Malcolm Gladwell defined the Tipping Point as “that magic moment when an idea, trend, or social behavior crosses a threshold, tips, and spreads like wildfire.” Well freaks, LN is either already there or soon getting there.
29/n] Hence i recommend anyone out there who's interested in this, to setup their own full node and start routing payments on LN. Be that extra node, extra channel provider, extra capacity provider, help LN out and make some fees in return. Set yo self up for the next 10 yrs.
30/n] Here are some of the references I used to write this thread, big shoutout to these since they formed the basis of my learning and this very thread.
1/ https://lightninglabs.substack.com/p/the-summer-of-lightning-reaching…
2/ https://kevinrooke.blog/the-lightning-network-is-bigger-than-you-think/
31/n] If you like the thread, share it with anyone who maybe interested and do give me a follow in return. Let's get LN to where it's going faster. If not now, then when? If not you, then who? Cheers.