Bitcoin News: Lightning Network capacity drop

Not very good news for bitcoin In fact, Lightning Network capacity has dropped by 13% in the last month. 

Since the beginning of February, it had been above 5,400 BTC, reaching an all-time high of 5,520 BTC on 18 April. 

Since then, it has remained more or less above 5,400 BTC, but on 5 August it suddenly fell to 4,750 BTC, with a sudden drop of 13%. Since then it has remained around 4,700 BTC. 

The current level is also lower than the 5,000 BTC it reached in October last year, so last month’s drop was a significant one, wiping out all of last year’s growth. 

Other Lightning Network metrics: the latest bitcoin news

This drop is anomalous, not only because it happened suddenly in one day, but also because the use of the LN, bitcoin’s main second layer, is instead constant. 

For example, the number of nodes has risen from 17,000 to 17,600 in the last twelve months, with an all-time high of almost 18,200 in June. 

The number of channels has been falling, from 85,000 to 68,000 over the last twelve months, with a further sharp drop on 5 August from 70,300 to 68,900 in a single day. 

Given that the sharp drop occurred in a single day, after which all metrics returned to fairly constant levels, it is safe to assume that it was due to the closure of a limited number of interconnected nodes and channels. However, the reason is not known. 

Note that the market value of BTC barely moved on 5 August, so the drop is not due to price movements.

Lightning Network

The Lightning Network, often abbreviated to LN, is the main second layer of Bitcoin. 

It was created to allow transactions in BTC to be executed very quickly and at almost negligible cost. 

Currently, the average cost of a transaction on the Bitcoin blockchain is around $1, but in June, for example, it was over $2. In May, it briefly spiked above $30 due to the Ordinals boom. 

In addition, to get a transaction validated on the bitcoin chain, you typically have to wait at least 10 minutes, if not longer. 

LN, on the other hand, does not record transactions on the blockchain. Or rather, it only records the opening and closing of channels on the blockchain, which, once open, can then make as many BTC transactions as they like without having to write them to the blockchain. 

LN transactions are actually P2P, they are instantaneous and have to pay fees to an LN node. These fees are ridiculous, often in the order of cents or thousandths of a dollar, and in the case of using your own node they are effectively zero. 

LN is mainly used for low value transactions, where even a $1 fee can be significant. 

Perhaps this is why its use has declined somewhat recently, as it is mainly small BTC holders who use it, while those moving large sums still prefer on-chain transactions.

Bitcoin transfers to and from exchanges

Given the speed with which bitcoin transactions are executed via LN, it is sometimes used to move funds to and from exchanges quickly and instantly. 

It is no coincidence that one of the first crypto exchanges to enable LN transactions, Bitfinex, reported that it had processed LN deposits and withdrawals totalling 912 BTC since the beginning of the year. 

However, the year 2023 saw a drastic drop not only in the volume of bitcoin exchanges, but also in the amount of BTCs left on exchanges. 

So it is more than normal that LN usage has declined somewhat. What is anomalous, however, is the sudden drop on the 5th of August. 

It is possible that in the event of a new bull run, the above metrics could reach new highs, not least because it is during bull runs that transactions generated by small BTC holders increase, for whom on-chain fees are likely to have a significant impact.

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About the Author: Daniel