Using your digital assets to pay for various goods and services is already a reality. In most cases this is done using a crypto debit card offered by a cryptocurrency exchange such as Crypto.com or service such as Cash App. There is a distinction between these two offerings though. With the card offered by an exchange, you’re typically converting digital assets for fiat at time of purchase or before loading the card. Whereas the Cash App card lets you use the Lightning Network to send BTC for free. In both these scenarios, Bitcoin is useful for micropayments. However, this doesn’t apply on a global scale.
Whether Bitcoin is useful for micropayments (purchases under $5), hinges on whether you and/or the retailer uses the Lightning Network. In its current state, the Bitcoin mainnet is not useful for micropayments, as the transaction fee would add another couple dollars to your cost. However, if every platform uses the Lightning Network, the transaction is essentially free. Let’s first take a look at fees on the Bitcoin mainnet compared to the Lightning Network, which is a layer-2 built on top of Bitcoin.
Bitcoin Mainnet vs Lightning Network Fees
Bitcoin has long been known to have a fairly slow per second transaction speed at 7. Of course, this doesn’t take into account the transaction being confirmed. At 5-6 block confirmations and an average of 1 block per 10 minutes, this means it actually takes an hour for your Bitcoin transaction to be finalized. It’s worth noting that with Bitcoin, you can pay a higher transaction fee in order to have your transaction included in an earlier block than it might be otherwise.
Even if you pay a higher fee, you’ll still be subject to 6 block confirmations, meaning that if you were paying someone with BTC using the mainnet, it could take an hour for them to feel comfortable with you walking away with your goods. This isn’t useful if you’re buying coffee, especially seeing as the average fee is at least 0.0001 BTC (over $2 USD), and the US conversion will only be higher as Bitcoin’s price rises.
The Lightning Network
The Bitcoin Lightning Network is a layer-2 blockchain network. It’s built on top of Bitcoin’s base layer. The Lightning Network uses smart contracts and bidirectional payment channels to essentially remove the need for block confirmations. This means that transactions are instant, with the only limitation being the number of channels that are currently available. So as long as you and the recipient are both using the Lightning Network, the transaction will be instant and the fee will essentially be zero.
In addition, the more bidirectional payment channels that are open (nodes), the faster the network, as it can route payments through any open channel. The Lightning Network can handle 1,000,000 transactions per second and they are instantly finalized with almost no fee. This makes it extremely well suited for micropayments.
The only limitation of using Bitcoin for micropayments then becomes whether all parties use the Lightning Network. If you’re using the Lightning Network but the retailer or platform isn’t, then you’ll have to instead send funds on the main Bitcoin network. This is doubly frustrating because BTC held on the Lightning Network is separate from the mainnet, meaning if you sent all your funds to the Lightning capable wallet, you’d have to send some back to the mainnet. However, most places that are serious about using Bitcoin, such as El Salvador, tend to favor using the Lightning Network as it allows them to receive payments quickly with little fee, which attracts customers who want to use BTC to pay.
Why Don’t All Platforms Use the Lightning Network?
You may be wondering at this point why not every exchange and platform that uses Bitcoin uses the Lightning Network for their transactions. The simple answer is that it’s not that profitable for them to use the Lightning Network.
Most exchanges and digital asset platforms charge you close to the actual network fee for Bitcoin, but realistically they make at least a little bit off of every withdrawal transaction they process. By implementing the Lightning Network, they would essentially lose this piece of potential revenue because of how cheap Lightning Network transactions are. This is especially true for platforms charging a flat rate for Bitcoin withdrawals that is intentionally above the actual network fee required.
Closing Thoughts: Lightning Strikes for Micropayments
Bitcoin is already useful for making micropayments, with the caveat being that all parties involved in the transaction must be using the Lightning Network.
With nearly instant transactions and no fees, it’s an ideal way to pay for something like a cup of coffee. Whether you actually want to spend your Bitcoin at little to no cost rather than HODL is totally up to you.