Read this section about the evolution of Bitcoin and the introduction of Lightning Network.
During the seventeenth century and a few decades after the
founding of the Bank of Amsterdam, a speculative price
bubble occurred in Dutch tulip bulbs. As a beautiful luxury item, tulips became all the rage in the Netherlands as
everybody wanted a piece of the highly coveted commodity.
Prices of bulbs exploded and then collapsed shortly there-
after, as all speculative bubbles do. The word bubble would
be used throughout history to describe increases in the price
of an asset that seemed unfathomable to many, increases
that would unquestionably and consistently end in ruinous
decline. Of course, many have fruitlessly tried to associate the
word bubble with Bitcoin.
Bitcoin's exponential price rise since its birth continues
to bring about cries of a bubble and comparisons to Dutch
tulips despite having fully recovered from intimidating 80%
price declines now on three separate occasions. The BTC/
USD price is breathtakingly volatile, far outstretching price
fluctuations we typically see across other asset classes. Its
volatility, however, is not a reflection of asset quality or even
excellence. If Bitcoin truly is to grow from an adolescent
monetary network to the basis of an international monetary
system, surely the ups and downs on its way will mimic a
formidable rollercoaster. If the market value of BTC were
to equal the market value of all the world's gold, the BTC/
USD price would reach approximately $500,000. It is safe
to assume that the journey from less than $1 to $500,000
would come with its fair share of frenetic price swings, both
up and down. These vacillations are ingrained into Bitcoin's
maturation and will separate early adopters from those who
will wait for the price to stabilize in USD terms. None of
this volatility, however, precludes BTC from being a store
of value and an alternative to currencies based on aging
In reality, Bitcoin is nothing like the Dutch tulip mania.
Bubbles don't burst three times in a decade and come back
stronger each resurgence, and the investing public is finally
waking up to this fact. In 2020, some of the most legendary hedge fund investors of this generation, Paul Tudor
Jones and Stanley Druckenmiller, acknowledged ownership of BTC. Investment management powerhouses such
as AllianceBernstein, Blackrock, and Fidelity Investments
made public recommendations for clients to have BTC in
their portfolios as a hedge against the devaluation or demise
of government currencies. PayPal, the world's largest online
payment processor, gave its 300 million global customers the
ability to purchase BTC on its platform. It began to become
clear to the investing community that denying Bitcoin's place
in the future of money was like denying the Internet's place
in the future of commerce in 1999. Internet stocks might
have experienced a speculative price bubble at the turn of the
twenty-first century, but the world's biggest publicly traded
corporations today are Microsoft, Apple, Amazon, Alphabet
(Google), and Facebook, which have generated trillions of
dollars in market value thanks to the Internet.
The flurry of endorsements preceded the BTC/USD price reaching a new all-time high at the beginning of 2021 as the total market value eclipsed $600 billion. What was once a digital token attached to a hobbyist software worth less than a penny in 2010 had become a $34,000 commodity only a decade later. The famous $25 Papa John's pizza trade would be worth $340 million on Bitcoin's twelfth birthday, January 3, 2021. Figure 15 shows the meteoric rise in BTC's total market value since 2010.
Lightning Network is a technological enhancement to Bitcoin
that positively transforms it from a slower-moving commodity like physical gold to a currency moving at lightspeed. And
the key ingredient to the Lightning Network is the smart
contract. Generally, smart contracts are programmable agreements capable of anything that can be coded into software.
For the objective of Bitcoin, smart contracts are most importantly capable of escrow and multiple-party coordination. The
smart contracts in Lightning Network, Hashed TimeLock
Contracts (HTLCs), have scaled Bitcoin into a monetary network capable of processing millions of transactions per second.
Let's take a closer look at how Lightning Network evolved.
In the first couple years of the Bitcoin network, a small
contingent of Bitcoin enthusiasts contributed their own ideas
and improvements to the project. They fixed some critical
vulnerabilities that could have abruptly ended the network
before it caught momentum. These software engineers and
cryptographers worked on Bitcoin because they had conviction in the technology, owned BTC, and wanted the net-
work to succeed. They weren't receiving an income from any
employer; they were working out of belief in a new denomination. Over the years, they graduated Bitcoin from a project
to a legitimate global monetary network.
The most crucial updates that transitioned Bitcoin to a smart contract platform occurred from 2015 to 2017. These Bitcoin Improvement Proposals (BIPs) turned one-dimensional Bitcoin transactions into wildly customizable financial contracts, without changing any of Bitcoin's fundamental rules.
In 2016, a paper from software engineers Joseph Poon
and Thaddeus Dryja called "The Bitcoin Lightning Network:
Scalable Off-Chain Instant Payments" built upon all the
smart contract innovation happening on the Bitcoin soft-
ware. The paper was a proposal for a new type of Bitcoin
smart contract (HTLCs) that enabled instantly settling payments without having to wait for the next block to be mined.
Lightning Network not only infinitely increases Bitcoin's
capability as a medium of exchange but also allows for innovations such as paying for online streaming by the millisecond. And in the digital age of streaming everything, why
shouldn't money stream as well?
Lightning Network also brings a new dimension to the
time value of BTC. Users that provide BTC as collateral to
Lightning Network in order to facilitate transactions can
potentially earn income from providing this liquidity. This
is a historically unprecedented way to earn a return on capital without ever relinquishing custody of it because collateral providers don't actually part ways with their BTC when
dedicating it to Lightning Network. Interest rates derived
from this type of activity could function as a reference rate in
the Bitcoin world because of Lightning Network's uniquely
counterparty-free nature. The very concept of the time value
of money is changing as these new technologies permeate the
Source: Nik Bhatia: Layered Money
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