The FED published a study on the Lightning network. These are his conclusions

Bitcoin is the new hot topic for the Fed. Fresh off the Federal Reserve Bank of St. Louis measuring inflation in BTC terms, the Federal Reserve Bank of Cleveland presents a study called “The Lightning Network: Turning Bitcoin into Money.” An in-depth investigation that unfortunately only “covers the period from January 1, 2017 to September 5, 2019”, its conclusions are far from surprising.

“We found a significant association between LN adoption and blockchain congestion reduction, suggesting that LN has helped improve the efficiency of Bitcoin as a means of payment, which is explained by other factors, such as changes in the demand or the adoption of SegWit.

However, what is surprising here is that the Fed is investigating the Bitcoin Lightning Network. And he has positive things to say about it. What’s going on here? Let’s see what they found to see if it gives us any clues.

BTC price chart for 07/14/2022 at Timex | Source: BTC/USD on TradingView.com

Table of Contents:

• The most interesting observations of the Fed
• Observations on the Bitcoin network as a whole
• Dubious observations in the Fed study
• The surprising results of the study.

The most interesting observations of the FED

• “We found that the adoption of the Lightning Network has led to reduced Bitcoin blockchain congestion and reduced mining fees.”

Well, the Fed is exactly the target. Could “falling mining fees” affect the project in the long run, as altcoin fans like to say? Maybe in 50 to 100 years. For now, miner rewards are guaranteed.

• “We found limited evidence that greater network centralization is associated with lower fees.”

Good to know EDF!

• “Recent episodes of heavy congestion, particularly in early 2021, suggest that LN is not a panacea.”

In this study, every little sentence has its source… except this one. Why is it, FED?

• “Less blockchain congestion may mean lower barriers to arbitrage between cryptocurrency exchanges, improving market liquidity.”

Notice the “may” here, it’s not guaranteed. And that’s the least interesting thing about The Lightning Network.

• “Bertucci studies a strategic model of network formation and shows that competition between nodes prevents the network from becoming highly centralized.”

Take that, altcoiners! Even the FED knows how terrible the “Lightning Network is centralized” argument is. Nevertheless…

• “When the network is more centralized, each channel and each bitcoin locked in the protocol is likely to support a higher volume of payments”

Good to know, Federal. However, no one wants or needs centralization.

Observations on the Bitcoin network as a whole

• “Total fees attached to pending payments in the mempool have decreased since 2017, suggesting weaker demand or increased supply of settlement capacity.”
• “Overall, fees have been reduced in nominal bitcoin terms.”

There are no more comments on these.

Dubious observations in the Fed study

• “By lowering fees, LN reduces the incentive for Bitcoin miners to use large amounts of computing power, which means lower energy consumption and positive environmental consequences.”

Lightning Network involves much lower power consumption as it does not require mining. However, the bitcoin network and PoW mining are the best friends of the environment, as this other study clearly shows.

• “Although this paper focuses on Bitcoin, the same technology can enable other cryptocurrencies to be widely used, secure, and decentralized.”

High, federal. The bitcoin network is the only decentralized one. Altcoins can be many things, but decentralization is not one of them.

The surprising results of the study.

• “Our results suggest that the Lightning Network can help Bitcoin achieve greater scalability, allowing it to function better as a payment system.”

Once again, that is exactly the goal. However, it is good that even the Fed admits that it is working as intended.

• “An increase in the number of LN channels reduces the number of mempools.”

It is worth remembering that the channels and network capacity are at an all time high.

• “Network centralization has no clear effect on network efficiency.”

Fine, but no one wants centralization anyway.

• “If, in 2017, LN had existed and been the size it was at the end of our sample, how much would Bitcoin congestion have been reduced? Our results suggest that the number of mempools would have been 93% lower, mempool fees 96% lower, and the proportion of transactions with low fees 197% higher.

These are promising numbers, to say the least.

• “Our results suggest that the off-chain clearing benefits of the Lightning Network can help Bitcoin scale and perform better as a means of payment.”

Even the Fed knows it.

• “There is no data available on how bitcoin is used, so we can’t say for sure whether bitcoin is being used more and more as a form of payment.”

However, it is the case. And the party has only just begun.

• “The Lightning Network alleviates a key technology constraint by enabling faster payment settlement.”

Yes, that is exactly the goal.

And that’s it. It’s crazy how this Fed study and the blog post discussed above came to such different conclusions. Are we dealing with a good cop/bad cop situation here?

Featured Image: FED Study Cover Image | Charts by TradingView

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