Bitcoin Lightning Network hits new records, but channels are declining

Recently, the Lightning network set a new record for capacity: 5,630 bitcoins (about $172 million). 

At the beginning of 2023, the capacity was around 5,000 BTC, so it increased by 12% in the first six months of the year. But a year ago it was around 4,000 BTC, so the annual increase was more than 40%. 

Most of this increase took place around the middle of 2022, at the height of the bear market, and then stopped in October. 

It began to rise again in January 2023, although it fell between April and May. In June, however, it rose again to a new all-time high.

The power of the Bitcoin Lightning Network

The Lightning Network (LN) is a network of nodes that connect channels. The individual channels are the equivalent of wallets, and it is possible to accurately measure how many BTCs are stored in total across all channels. 

Note that only the BTCs on the channels can be traded on the LN, so capacity also measures the maximum theoretical amount that can be traded on the LN. 

The number of channels, on the other hand, is decreasing after reaching an all-time high of almost 88,000 channels in February 2022. From January 2023 onwards, they start to fall and are now around 75,000. 

In fact, the average channel capacity increases significantly, from 2.8 million satoshi at the beginning of 2021 to 7.3 million today. 

At the beginning of 2021, the price of BTC was in line with today’s values, so the average LN channel capacity then was around $800, while now it has jumped to $2,200. 

It is possible that this sharp increase is not so much due to the actual increase in BTC deposited on the large channels, but to the disappearance of the smaller channels, which in the past may have been opened only by chance or for testing purposes.

In other words, as evidenced by Lightning Network transaction data to and from the exchanges, the use of LN seems to be getting more serious.

The causes of growth

The increase in Lightning Network’s capacity in 2023 is mainly due to the crypto exchange Bitfinex, which is an ardent supporter of LN. 

Bitfinex generates around 12,000 transactions per month on Lightning Network, with a total liquidity of 1,300 BTC. 

Bitfinex’s LN node (bfx-lnd1) has 1,900 channels and is probably the most active LN node among crypto exchanges. 

Truth be told, there are still very few exchanges that have activated their own LN node to handle BTC transactions via the Lightning Network, despite the fact that the cost of on-chain transactions in Bitcoin is by no means low. 

It should be noted, however, that LN is often used primarily for small-value transactions, while for larger BTC transactions the transaction cost is less on a percentage basis. 

For example, the average cost per transaction is currently around $2.5, which is not much if you are transferring tens of thousands of dollars. 

At the beginning of May, however, it rose to over $30, making it much more worthwhile to use LN. That peak lasted just one day, however, and within a week the average cost was back below $4.

Paolo Ardoino’s comment 

Bitfinex’s CTO, Paolo Ardoino, commented:

“The Lightning Network is revolutionizing the way we transact, and its impact cannot be overstated. It has the potential to make cryptocurrency payments more accessible, efficient, and scalable, ultimately leading to greater adoption and mainstream acceptance. At Bitfinex, we have fully embraced the potential of the Lightning Network, and as operators of the largest lightning nodes, we are proud to play a part in facilitating its success. Currently, we are handling an impressive 12,000 transactions and providing almost 1,500 BTC liquidity every month through this innovative technology.

This remarkable milestone emphasizes the value of the Lightning Network in shaping the future of digital payments. By enabling lightning-fast transactions and significantly reducing costs, the Lightning Network offers a transformative solution for businesses and individuals alike. I believe it will keep growing as more people use bitcoin as a means of transfer, attracted by its high speed and immutability.”