To a casual observer, the Lightning Network looks like a protocol with roughly 2,100 BTC ($86 million) of value "locked" into its network. That's not much in comparison to popular DeFi protocols, and it's even less in comparison to the market cap of Bitcoin.
However, the analysis above is flawed on many levels.
The Lightning Network is not a borrowing protocol, an AMM, or a store of value. Furthermore, the idea that Bitcoin is "locked" on the Lightning Network is misleading at best.
The Lightning Network is a protocol for making instant, nearly-free payments to anyone in the world denominated in Bitcoin, and much of the payment activity on the network happens in private.
Only when we examine the Lightning Network through the lens of a payment network, can we begin to estimate how big it is today, and how much bigger it could be tomorrow.
One of the most commonly misunderstood Lightning Network metrics is node capacity.
Popular explorers like 1ML.com display a 'Network Capacity' figure, but it only includes the channel capacity of 'advertised' or 'public' Lightning Network channels.
Some nodes don't want their channels to be included in the public Lightning Network graph, and instead choose to open 'unadvertised' or 'private' channels.
In early 2020, BitMEX Research estimated that 27.8% of all Lightning Network channels are unadvertised, and that those channels had a combined 12% of all Lightning Network capacity.
While BitMEX's data is a year old and should be taken with a grain of salt, it's important to remember that total Lightning Network capacity is always going to be larger than the public capacity figures that are frequently cited in the media.
Another common misconception is that the node capacity of the Lightning Network refers to the value 'locked' on the protocol in the same way DeFi apps rely on 'total value locked' as a growth metric. This is a false comparison.
As explained in the book Mastering the Lightning Network, funds that are added to the Lightning Network are not locked, they are unleashed. As soon as a new Lightning channel is opened, those funds can be sent anywhere on the Lightning Network in an instant, and for almost no cost.
On the other hand, popular DeFi platforms do indeed lock your funds when you deposit them into the protocol. By opening a MakerDAO CDP or becoming an LP on Uniswap, you are committing funds to that cause, and can only make use of them by closing that position or leveraging a newly minted token representing your position.
By opening a Lightning channel, you have full control of your funds, and can freely send them anywhere on the Lightning Network.
Payments on the Lightning Network are private by design. While anyone can see the capacity of any advertised Lightning Network channel, nobody knows the exact balance of liquidity or the volume of payments being routed through channels.
This is a privacy protecting feature for users, and it makes the job of analyzing payment volume across the network almost impossible.
By default, analysts are forced to track the growth of the Lightning Network using proxies like public node capacity, despite the fact that it tells us nothing about actual payment volumes.
While figuring out exact payment volume figures may be an impossible task, there are clues and anecdotes we can use to piece together estimates hinting at the scale of Lightning Network payment volume today.
Though the results are far from perfect, they show conclusively that annual payment volume on the Lightning Network is already many multiples of total node capacity.
LN Markets is a Bitcoin derivatives platform built on the Lightning Network. It offers users instant deposits and withdrawals without KYC or a verification sign-up process.
Personally, I think it is the fastest trading platform in the entire crypto industry. Users can send funds directly from their Lightning wallet or node, funds arrive instantly, and a position can be opened in a single click.
Last week, LN Markets shared that they've done over $200 million of volume on their platform since their March 2020 launch.
Bitaroo is an Australian Bitcoin exchange that offers customers the ability to deposit and withdraw via the Lightning Network.
They recently shared that in the 9 months since their Lightning integration has been live, they have done more than $54 million of Lightning Network payment volume.
If applications like LN Markets and Bitaroo are doing $50-$200 million in payment volume, it's a safe bet that annual payment volume across the entire Lightning Network is measured in billions or tens of billions of dollars.
After all, LNMarkets is only the 37th largest public node by capacity and the 35th largest public node by total channels, while Bitaroo's node ranks 302nd and 804th respectively. There are dozens, if not hundreds of other nodes with similar capacity and centrality.
Whether or not they have the same payment volume is hard to determine, but I'd speculate that the nodes being run by Bitfinex, Wallet of Satoshi, Bitrefill, River Financial and other prominent Lightning Network apps are doing far more payment volume than LN Markets or Bitaroo today.
Payment Volumes for Routing Nodes
The success of LN Markets and Bitaroo is exciting to see, but those nodes are portals to their exchanges. I suspect that many of the 13,000+ active Lightning node operators don't have an exchange to attract users and capital with.
Beyond the minority of nodes that operate large businesses, it's also important to understand how payment volumes measure up for the typical Lightning node operator. This data is even harder to collect at scale, but anecdotes can give us some hints.
Alex Bosworth's Routing Nodes
I think he was referring to his profit (subtracting rebalancing fees), but to be conservative let's assume the $4,500 per month is only routing fee revenue.
Two of Alex's nodes (1, 2) have a total capacity of 55 BTC, so assuming roughly half of those funds belong to him, that's 27.5 BTC of outbound capacity. The nodes also have a routing fee of 0.25% on almost every channel.
Therefore, if $4,500 per month represents 0.25% of all payment volume routed through those nodes, he is processing an estimated $1.8 million (45 BTC) of payment volume every month and even more if $4,500 is Alex's profit instead of his revenue.
Alex is on pace to route 64% more payment volume each month than his entire outbound capacity. Again, it's hard to extrapolate these results, but let's entertain the idea for a second.
If the average Lightning node is routing the value of their outbound capacity every month, that's $43 million of routed payments every month (since outbound capacity is only half of total network capacity).
Assuming each routed payment requires 2 hops to reach its final destination, the $43 million must be cut in half to avoid double-counting, and we're left with $21.5 million per month.
$21.5 million per month is $258 million of routing payments every year, and this doesn't even include the payments that nodes with direct channels make to each other.
Whether we're looking at direct payments going to and from exchanges, or routing payments hopping across the network, you can bet that the volume being transacted every year is far greater than total public node capacity.
Top-Down Payment Volume
One other way we can get perspective on how high payment volume on the Lightning Network might be is by using the Bitcoin blockchain as a top-down point of comparison.
Bitcoin has a $750 billion market cap, or said differently it has $750 billion of value "locked" into the base blockchain. Bitcoin also settles over $10 billion of transactions every day, or roughly $4 trillion annually.
That means annual on-chain volume is almost 6x higher than the value locked into the Bitcoin network, despite the relatively high transaction fees and slow block times that make payments cumbersome.
The Lightning Network is designed for making fast and inexpensive payments, so if $85 million of Bitcoin is already on the Lightning Network, it would make sense for annual payment volume to be at least 6x higher, or at least $510M.
Personally, I've done more Lightning Network transactions in the last week than I have in the last few years of moving Bitcoin on-chain, so I think of $510 million as a baseline minimum rather than an actual estimate. The ability to move money freely and instantly should increase payment velocity.
Now that we understand how certain metrics and comparisons can dramatically understate the size of the Lightning Network, let's look ahead to the network's future.
The three most visible Lightning Network metrics are measures of public nodes, channels, and network capacity. We know that they can be misleading as absolute measures of growth, but they are directionally correct. More nodes, more channels, and more capacity are good signs.
In the last few months, the Lightning Network has not only seen continued growth across all three metrics, but also an increasing rate of growth.
For example, public Lightning Network capacity grew by 5% in April. It then grew 14% from a higher base in May, 18% from an even higher base in June, and 27% from an even higher base in July.
Below is a breakdown of monthly growth for public capacity, nodes, and channels on the Lightning Network.
Positive feedback loops like this are rare, and are powerful indications of a network effect beginning to form. More nodes, capital, and users beget more developers and more applications, which in turn, accelerates the cycle of node, capital and user growth.
The Lightning Network is designed for payments, an activity that becomes more useful as more users join the network. While most other crypto protocols build their moats by aggregating capital, users are a key component of the Lightning Network's network effect.
Without any users, the Lightning Network is useless. With billions of users, it is unstoppable.
Supporting this notion, there was even a Bitcoin 2021 panel on the Lightning Network titled 'Bitcoin for Billions, Not Billionaires'.
Onboarding billions is no easy task, but a few catalysts could help the Lightning Network scale to tens or even hundreds of millions of users in the next few years.
When El Salvador's Bitcoin bill goes into effect in September, all 6 million citizens will get a wallet pre-loaded with $30 of Bitcoin on the Lightning Network. The merchants of El Salvador will be obligated to accept Lightning Network payments too, creating a real opportunity for a network effect to form.
Furthermore, the citizens of El Salvador have millions of relatives living abroad in other countries that regularly send remittances back via antiquated payment channels.
Combined, it's entirely possible that El Salvador might onboard the next 10 million people to the Lightning Network through day-to-day payments and international remittances.
Twitter has 206 million daily active users and plans to integrate Lightning Network payments natively within the app. Because the Lightning Network can enable free and instant payments to and from anyone, Twitter can roll the service out instantly to their global user base without the constraints of integrating with individual payment processors in the 100+ countries Twitter operates in.
There is no launch date or timeline set for this program, but Jack Dorsey recently claimed it is "only a matter of time" before Twitter launches their Lightning Network integration.
Square has over 30 million active users on their Cash App, and a seller ecosystem of over 2 million merchants. Just like Twitter, Square has plans to integrate with Bitcoin and the Lightning Network, and has the ability to onboard all their existing users at once.
I suspect that many millions of people will have their first interaction with the Lightning Network through their accounts on either Square or Twitter.
Combined, the three entities above have enough influence and reach to onboard tens, maybe hundreds of millions of users onto the Lightning Network. However, they're not the only players in town.
The Lightning Network has a thriving ecosystem of apps, exchanges, games, and services that are leveraging free and instant payments to provide users with unique experiences that wouldn't be possible otherwise.
The entire ecosystem is too large to cite here, but this is a great resource to start exploring some of the projects being built on the Lightning Network today.
Inaccurate comparisons and privacy preserving features make it hard to truly understand how big the Lightning Network is, but there is good reason to believe that billions of dollars in payment volume are already circulating on the Lightning Network every year.
As network growth continues to surge at its fastest pace in history, a number of near-term catalysts could solidify the network effect being formed and truly bring Bitcoin to billions of people.