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Working Paper

The Lightning Network: Turning Bitcoin into Money

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The Lightning Network (LN) is a means of netting Bitcoin payments outside the blockchain. We find a significant association between LN adoption and reduced blockchain congestion, suggesting that the LN has helped improve the efficiency of Bitcoin as a means of payment. This improvement cannot be explained by other factors, such as changes in demand or the adoption of SegWit. We find mixed evidence on whether increased centralization in the Lightning Network has improved its efficiency. Our findings have implications for the future of cryptocurrencies as a means of payment and their environmental footprint.
Topics
Cryptocurrencies
06.21.2022ISSN 2573-7953 WP 22-19DOI 10.26509/frbc-wp-202219
Keywords Bitcoin, blockchain, cryptocurrency, Lightning Network, payments
JEL Classification Codes E42, G1

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Divakaruni, Anantha, and Peter Zimmerman. 2022. “The Lightning Network: Turning Bitcoin into Money.” Federal Reserve Bank of Cleveland, Working Paper No. 22-19. https://doi.org/10.26509/frbc-wp-202219