4 ms·

from the introduction: >The development of the Lightning Network may have consequences for welfare. First, as Bitcoin becomes a more efficient payments system,

from the introduction: >The development of the Lightning Network may have consequences for welfare. First, as Bitcoin becomes a more efficient payments system, users are better off. Their transactions settle more quickly and more cheaply (Zimmerman (2020)). Second, since fewer transactions need to be recorded on the blockchain, less memory and energy are needed to run a Bitcoin node. This saving lowers the cost of maintaining the blockchain, allowing more nodes to participate and making the system more secure against a double-spending attack (Budish (2018)). Third, by reducing fees, the LN reduces the incentive for Bitcoin miners to use large amounts of computing power, meaning less energy use and positive consequences for the environment.5 Fourth, less blockchain congestion may mean lower barriers to arbitrage across cryptocurrency exchanges, thereby improving market liquidity (see Hautsch, Scheuch, and Voigt (2018)). >While this paper focuses on Bitcoin, the same technology can allow other cryptocurrencies to be widely used, secure, and decentralized. For example, the Raiden Network is a similar netting solution for Ethereum. Other solutions to the scalability problem have been proposed, including sharding, and batching at exchange level.6 If the scalability problem can be successfully addressed, it may be possible for a currency based on a permissionless blockchain to obtain wide acceptance. very cool to see this coming from the Federal Reserve Bank of Cleveland

tromp 4y ago
> by reducing fees, the LN reduces the incentive for Bitcoin miners to use large amounts of computing power That's great for the environment, but in the long term of vanishing block subsidies, not so great for Bitcoin's security, as the costs of 51% or censorship attacks also decrease.
- DJBunnies 4y ago
  Bitcoin’s security has not changed.
- FabHK 4y ago
  Fees have constituted just 1% to 2% of mining revenue over the last year (the other 99% being the mining reward ("coinbase") of 6.25 BTC per block). So, LN does not reduce the incentive for Bitcoin miners in any meaningful way, unless I'm mistaken.
  - ETH_start 4y ago
    The mining reward declines geometrically, with a halvening every four years.
  - sillysaurusx 4y ago
    That’s temporary. If you read the original white paper, satoshi designed bitcoin to be miner-free. “People will probably always be willing to verify transactions for free,” or something to that effect. The rewards will transition to that 1% fee as the entirety of their business model.
FabHK 4y ago
> The views stated herein are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System.
- plankers 4y ago
  sure, but one of the authors works for the bank
notriddle 4y ago
> Second, since fewer transactions need to be recorded on the blockchain, less memory and energy are needed to run a Bitcoin node. The vast majority of energy consumed by the bitcoin network is in mining, and that's not impacted by any of this.
- dieortin 4y ago
  And what do you think mining does? Less transactions in the blockchain means less money to be made mining, and therefor less energy used.
  - notriddle 4y ago
    > Less transactions in the blockchain means less money to be made mining I don't think that's actually true. Mining earns money through transaction fees and the mining block reward. The block reward is directly set by an algorithm which lowers the amount over time. Transaction volume is totally irrelevant. Miners and users set the transaction fee by choosing what they'll accept, so it should respond directly to supply and demand. If the Jevons Paradox [1] holds, making transactions cheaper means that there will be more of them, so even though on-chain Bitcoin transactions now account for less than 100% of transactions denominated in BTC, that doesn't necessarily mean that there will be fewer total on-chain Bitcoin transactions. So transaction fees paid to miners might not actually go down, either. [1]: https://en.wikipedia.org/wiki/Jevons_paradox https://en.wikipedia.org/wiki/Jevons_paradox

tromp 4y ago

> by reducing fees, the LN reduces the incentive for Bitcoin miners to use large amounts of computing power That's great for the environment, but in the long term of vanishing block subsidies, not so great for Bitcoin's security, as the costs of 51% or censorship attacks also decrease.

DJBunnies 4y ago
Bitcoin’s security has not changed.
FabHK 4y ago
Fees have constituted just 1% to 2% of mining revenue over the last year (the other 99% being the mining reward ("coinbase") of 6.25 BTC per block). So, LN does not reduce the incentive for Bitcoin miners in any meaningful way, unless I'm mistaken.
- ETH_start 4y ago
  The mining reward declines geometrically, with a halvening every four years.
- sillysaurusx 4y ago
  That’s temporary. If you read the original white paper, satoshi designed bitcoin to be miner-free. “People will probably always be willing to verify transactions for free,” or something to that effect. The rewards will transition to that 1% fee as the entirety of their business model.

FabHK 4y ago

> The views stated herein are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System.

plankers 4y ago
sure, but one of the authors works for the bank

notriddle 4y ago

> Second, since fewer transactions need to be recorded on the blockchain, less memory and energy are needed to run a Bitcoin node. The vast majority of energy consumed by the bitcoin network is in mining, and that's not impacted by any of this.

dieortin 4y ago
And what do you think mining does? Less transactions in the blockchain means less money to be made mining, and therefor less energy used.
- notriddle 4y ago
  > Less transactions in the blockchain means less money to be made mining I don't think that's actually true. Mining earns money through transaction fees and the mining block reward. The block reward is directly set by an algorithm which lowers the amount over time. Transaction volume is totally irrelevant. Miners and users set the transaction fee by choosing what they'll accept, so it should respond directly to supply and demand. If the Jevons Paradox [1] holds, making transactions cheaper means that there will be more of them, so even though on-chain Bitcoin transactions now account for less than 100% of transactions denominated in BTC, that doesn't necessarily mean that there will be fewer total on-chain Bitcoin transactions. So transaction fees paid to miners might not actually go down, either. [1]: https://en.wikipedia.org/wiki/Jevons_paradox https://en.wikipedia.org/wiki/Jevons_paradox