put, the current infrastructure of Bitcoin and the Lightning Network will not be able to handle the massive influx of users and transactions.
This is where the concept of Bitcoin-backed banks comes into play. As mentioned by Hal Finney years ago, Bitcoin-backed banks would issue their own digital cash currency that is redeemable for bitcoins. This would solve the scalability issue of Bitcoin, as most transactions would occur between banks to settle net transfers. Private individuals would rarely use Bitcoin for transactions, similar to how Bitcoin-based purchases are rare today.
The limitations of Bitcoin and the Lightning Network have not changed since its early days. Even with the Lightning Network, the maximum number of regular users that Bitcoin can onboard is optimistically a million. This number does not even consider usability and user experience, which are challenges of the Lightning Network due to its unique way of functioning.
The cap on users who can use Bitcoin in a self-sovereign way without relying on a trusted third party is a significant problem, especially considering the projected growth and adoption of Bitcoin. Saifdean Ammous, in his book “The Bitcoin Standard,” argues that Bitcoin will out-compete the current fiat money system due to its hard supply. Similarly, Pierre Rochard popularized the idea of a “speculative attack,” where the adoption of Bitcoin as a monetary unit would happen gradually and then rapidly.
In this projection of the future, it is assumed that demand for Bitcoin as a monetary unit will attract increasing savings, leading to widespread global adoption. However, the current constraints of the Bitcoin core protocol and the Lightning Network cannot handle this scenario of “hyperbitcoinization.”
Therefore, it is crucial to address the scalability issue and develop a more robust infrastructure that can accommodate the anticipated growth of Bitcoin. Without such improvements, the optimism surrounding Bitcoin’s potential may be misplaced, and the risks of regulatory capture, uncapped fractional reserve supply, and censored transactions may become a reality.
In conclusion, while Bitcoin has come a long way and garnered significant attention from institutional investors, there is a need to address the scalability issue and avoid complacency. The future of Bitcoin depends on its ability to adapt and evolve to meet the demands of a global financial system.