Investor Letter #008

Bitcoin's Lightning Network continues to grow faster than ever before, with two major growth catalysts looming on the horizon.

Despite a decline in Bitcoin prices since May, Lightning Network nodes, channels, and network capacity are hitting all-time highs every day now, and Lightning Network applications are starting to get traction.

While the Lightning Network is small by crypto standards (public network capacity is only $56 million), its rate of growth is more important than its initial starting position.

For investors, it's important to understand how quickly is the Lightning Network actually growing, and the catalysts that might change the rate of growth in the future.

Growth of Lightning Channels

The Lightning Network is a collection of interconnected payment channels, and its ability to route payments from one user to another depends on a robust network with only a few degrees of separation between any two nodes.

Therefore, the total number of channels connecting different nodes on the network is an important measure of the Lightning Network's ability to route payments.

There are currently over 51,800 channels routing payments between 22,000 nodes, and 21% of those Lightning Network channels were created in the last 30 days.

On the surface, 21% monthly channel growth seems impressive, but new channel creation is a slightly misleading metric as nodes frequently open and close new channels.

A more accurate measure of growth is that the total number of channels on the Lightning Network is up by 10.8%, or over 5,000 channels in the last month.

Channels are necessary for routing payments on the Lightning Network, but their growth means nothing without actual users that want to send payments between each other.

How many users does the Lightning Network have?

Lightning Network Users Today

Last week I did an interview with Jack Everitt, the CEO of a Lightning Network gaming company called THNDR Games. The interview will go live later this week, but I couldn't help but share an interesting thought from it today.

Jack estimated that there are roughly 100,000 to 200,000 people using the Lightning Network on a monthly basis. This includes users of his online games, people sending remittances to El Salvador on Strike, and those using a variety of other Lightning applications.

Since the Lightning Network is private by design and many users onboard via custodial wallets, the exact number of Lightning users is almost impossible to ascertain, but let's go with the higher end of Jack's estimate and say that there are 200,000 active Lightning Network users right now.

El Salvador and the Lightning Network

The latest news from El Salvador is set to massively increase the number of Lightning Network users, and many haven't grasped its implications yet.

On Friday, El Salvador's President Nayib Bukele announced a plan to give everyone in El Salvador $30 of Bitcoin for signing up with their upcoming government Lightning wallet called Chivo.

Chivo is being designed in collaboration with Strike and will be available for any smartphone user in the country at no cost. The telecom providers in El Salvador are being instructed to give everyone free internet access for using Chivo, regardless of whether they have a paid mobile data plan or not.

In short, the El Salvador government is doing everything they can to lower barriers to adoption and get their country onboarded to the Lightning Network.

There are over 6.5 million people in El Salvador, and even if only half of El Salvador's population adopts the Lightning Network, that could add another 3.25 million users to the Lightning Network.

One important clarification from President Bukele today is that the $30 given to every citizen of El Salvador must be used to make an actual payment to someone else. Until that money is spent once, users of Chivo won't be able to withdraw the funds into dollars. This gives the citizens of El Salvador an even stronger incentive to actually use the Lightning Network for making real world payments.

There aren't many crypto projects that can claim to have millions of users, and fewer yet that offer users such compelling real world benefits from using their product.

Since $30 payments (and most day-to-day purchases) are too small to be sent across the base layer of the Bitcoin blockchain, El Salvador is in the unique position of adopting Bitcoin first through the Lightning Network, rather than learning about the Lightning Network after buying Bitcoin on-chain.

El Salvador will not only be the first country to adopt Bitcoin as legal tender, but it will also set a precedent for being a Lightning-first nation. When Chivo launches in September, the Lightning Network will morph from being a payment network for hobbyists and early adopters to being a real world solution for millions of people.

But that's not the only short-term catalyst for Lightning Network user growth.

Twitter and the Lightning Network

A few weeks ago, Twitter & Square CEO Jack Dorsey tweeted about Sphinx, a tool for sending messages and streaming podcasts with native Lightning Network integrations.

In response, Dorsey got a suggestion to add Lightning Network payments to Twitter, to which he replied "only a matter of time".

That kicked off a conversation with Jack Mallers from Strike, who offered his assistance with integrating Twitter and the Lightning Network through the Twitter API. Then, Dorsey cc'd Twitter's CTO and product lead before the public conversation ended.

A few Bitcoiners took note of this exchange, but it didn't get nearly as much attention as it deserved.

Twitter has 200 million daily active users and is currently testing multiple payment products within their app. The Lightning Network is a better way to transfer small amounts of money than traditional fiat payment rails, and Twitter has the distribution to move the needle for Lightning Network adoption in a big way.

In February, Twitter announced Super Follows, a way to pay creators directly on Twitter for additional content. In the last few weeks, some details about their upcoming application process have leaked, which signals that a launch date for the product could be around the corner.

In May, Twitter also began testing Tip Jar as another tool for creators to earn from their content.

Tip Jar uses fiat payment processors like PayPal, Cash App, Venmo, Patreon, and Bandcamp to transfer funds between users, but some of those platforms have fee structures that cannot accommodate small payments.

One clear example came from a user trying to send $1 on Tip Jar using PayPal. PayPal's 2.9% + 30 cent fee structure meant she was charged a 33% fee on her $1 payment.

Both Super Follows and Tip Jar are perfect use cases for Bitcoin's Lightning Network, making payments instant and nearly free on one of the world's largest social media platforms. While Twitter hasn't announced formal plans or timelines yet, Dorsey's latest comments suggest a Lightning Network integration is a "when", and not an "if".

Final Thoughts

Network effects are the most powerful moats in the crypto industry today. With a few hundred thousand hobbyists and early adopters on the Lightning Network, skeptics can still make a reasonable case today that the Lightning Network's moat hasn't fully formed yet.

However, that won't be the case for long. El Salvador is on the verge of onboarding millions of people to the Lightning Network, and Twitter is actively working on integrating the Lightning Network with its core product.

The Lightning Network is about to become one of the largest communities of users in the crypto industry, supporting millions of people making real world transactions that would otherwise be too expensive, too slow, or downright impossible.

My Writing Last Week

Last week I wrote about the potential impact of Uniswap's V3 platform on foreign exchange markets.

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