Ride the Lightning: Turning Bitcoin into Money

29 Pages Posted: 7 Jan 2020 Last revised: 26 Jan 2020

See all articles by Anantha Divakaruni

Anantha Divakaruni

University of Bergen

Peter Zimmerman

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: January 5, 2020

Abstract

We show that recent technological innovations have significantly improved the efficiency of Bitcoin as a means of payment. We study three particular innovations: the Lightning Network, a means of netting payments off the blockchain; SegWit, an improvement to the way data are stored on the blockchain; and Bitcoin Cash, a new cryptocurrency forked from Bitcoin. We find a robust and significant association between adoption of the Lightning Network and reduced blockchain congestion. This improvement cannot be explained by other factors, such as changes in speculative demand for Bitcoin. We show that the Lightning Network has become increasingly centralised, with payments channelled through relatively few intermediaries. Finally, we argue that improved functioning of Bitcoin is positive for welfare, and may reduce the environmental footprint of Bitcoin mining.

Keywords: Bitcoin, blockchain, cryptocurrency, Lightning Network, networks, money

JEL Classification: D4, E42, G10, O33

Suggested Citation

Divakaruni, Anantha and Zimmerman, Peter, Ride the Lightning: Turning Bitcoin into Money (January 5, 2020). Available at SSRN: https://ssrn.com/abstract=3514125 or http://dx.doi.org/10.2139/ssrn.3514125

Anantha Divakaruni (Contact Author)

University of Bergen ( email )

Fosswinckelsgt. 6
N-5007 Bergen, 5007
Norway

Peter Zimmerman

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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