Ride the Lightning: Turning Bitcoin into Money
29 Pages Posted: 7 Jan 2020 Last revised: 26 Jan 2020
Date Written: January 5, 2020
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: Suggested Citation