How Cheap Lightning Changes the World
Expensive tech is cool, but it takes cheap to launch a revolution
I’ve been writing a lot about cheap stuff recently. How Lightning’s cheap fees take Bitcoin from digital gold to digital money, or how cheap revolutions cannot be banned. Today I want to pull these together and look at how Lightning Network changes, not just our money, but our world. And it does it by being cheap.
Millennia of inventions show they don’t begin to change the world until they get cheap. Implying Bitcoin’s disruption of the real world hasn’t even begun, and Lightning Network can take it there, from the narrow “digital gold” of today to something revolutionary on the order of agriculture, the printing press, or the internet itself.
Diffusion, Not Invention
First, some background on innovation. I used to teach strategy at an MBA program, and the field is obsessed with innovation: How it starts, how it spreads, when it changes the world and why it fails.
A core thread is that it’s not invention that matters, it’s diffusion. For example, steam engines were invented in the 1st century AD by Heron of Alexandria, then forgotten for roughly 1,500 years until independently rediscovered, launching the single biggest transformation since the invention of agriculture.
The invention is the raw material, to be sure, but invention on its own is utterly useless. To actually change the world, it needs to be sufficiently cheap that it solves novel problems not being solved today – “latent demand” in economics — and does it at a lower cost than the problem itself. In other words, the solution has to be profitable to the customer; the benefits of the solution have to exceed the costs of the solution.
By the way, this is why government are so bad at innovating: They obsess about the invention, not the diffusion. Inventing new stuff rather than solving new problems. The Soviet Union, for example, invested massively in science, yet invented roughly nothing useful in 50 years. Meanwhile, our own technological czars habitually waste billions on novel but useless stuff. Invention without regard to profit to the consumer.
So latent demand is the starting point. And that latent demand often demands creativity, which is why innovation is hard. To illustrate, before Airbnb and Uber, nobody thought there was enough money in renting out your spare commute or spare bedroom. After all, “couch surfing” had been around for ages and represented trivial economic value, while in poor countries like Indonesia or Kenya random people driving home from work would long stop and offer taxi services, without spontaneously evolving into a trillion-dollar business.
So where were these trillion dollar markets hiding? They were latent, awaiting a sufficiently large reduction in transaction costs that they became profitable to both provider and user. And that’s where cheap becomes magical. Because the number of problems profitably solved by a cheap tech are exponentially larger than the number solved by an expensive tech.
To illustrate, in 1994 I had a roommate who spent $1,500 per month on his internet connection – about $3,000 in today’s dollars. And, indeed, just 2 million people used the internet in 1994. We can only imagine how little impact the information superhighway would have had if it cost $3,000 a month to connect.
Ditto with email; the first regular mail service was 4,400 years ago in Egypt, and by 1900 you could send a telegraph instantly anywhere in the world. Also in 1900 you could mail a brochure, a pamphlet, even the Sears Catalog – the era’s versions of a webpage or online shopping portal. A famous photo of John Maynard Keynes has him relaxing on the divan buying all his essentials with 1940’s electronic commerce, living his best Amazon life.
So mail and remote content were nothing new. In fact, they were trivial, which is why otherwise smart people like Paul Krugman dismissed the internet as no more important than that fax machine. He was wrong because he was focused on the innovation, not on the cheapness.
As we now know, this cheapness filtered to an enormous range of stuff via the internet. Cheap videos thanks to Youtube, cheap news and information thanks to blogs or Wikipedia, cheap music via iTunes, cheap physical goods on Amazon (retail) or Alibaba (commercial).
Chris Anderson’s The Long Tail beautifully details this process, how low transaction costs enabled tiny niche markets that, surprisingly, often summed up to the vast majority of total demand. In markets from music to TV shows, videos to blogs to news, the long tail actually took over. In politics, the transformation has been revolutionary: in the 1960’s Murray Rothbard quipped that you could fit the entire libertarian movement in a single living room in New York City. Today, the Mises Institute has 136,000 followers on twitter alone – quite a living room.
So cheap is a very big deal when it comes to changing the world. And that brings us to Lightning Network.
Lightning Picks Up Where Altcoins Failed
From the start, Satoshi hoped Bitcoin would be feasible for micropayments. I think because he understood that cheap changes the world. Indeed, the biggest civil wars within Bitcoin have revolved around micropayments – it was the justification for forks from Litecoin to Doge to clones by Roger Ver or random Australians. It divided the community for years until the consensus finally settled on prioritizing security – for the nitty gritty read Jonathan Bier’s excellent Blocksize War.
So this is part of why I’m so happy about Lightning’s takeoff: an end to our civil war. But the much bigger part is that magical, world-changing, revolutionary cheapness.
And that’s where latent demand comes in: what problems aren’t being solved today that near-zero permissionless transactions could solve.
We have a fantastic test in the ill-fated ICO boom of 2017 to 2019. For those who weren’t around, it drew $20b in startup money in three years, raising breathless predictions how permissionless investing would take over the venture world, sending venture capitalists into the dust-bin of history, their Patagonia vests and powerpoint decks collecting dust in forlorn pawn shops along Route 101.
Why did they wipe out? Because they had two central flaws: they were centralized, and they failed to understand the importance of a liquid and secure coin. Indeed, they were often centralized specifically to try and maintain liquid coins in the first place.
Centralization meant ICO’s were vulnerable to regulators, who indeed effectively banned them. And their currency flaws meant the tokens weren’t secure and couldn’t hold value. And so the ICO boom was a bust.
But the boom did give us a tidy natural experiment of what problems might be solved with low-cost transactions. And since Lightning on Bitcoin can solve both the centralization and the scale problems, those applications get much closer to economic viability.
So, what are some potential applications?
Taking a page from the internet’s own Long Tail, first up is trading things that are valuable in aggregate, but too cheap on their own. These can include in-game assets or NFT’s, it can include music or meme rights (microcopyright), or “internet of things” functions like energy or data. It can include file storage (Filecoin in ICO era) or marketing data (Datacoup). It could, with sufficiently low cost of use, include real-world things like parking spaces or your position standing in a line.
Much bigger, I think, is things that are very valuable individually but that are currently either too expensive to trade or that face regulatory barriers. Think stock markets being replaced with tokenized security exchanges. Or tokenization of assets that are not traded individually at all today, such as peer-to-peer fractional mortgages or car loans. Or equity crowdfunding where you can launch a ramen joint and sell convertible shares. Indeed, financial tokenization was one of the most interesting applications of ICO’s, and remains active in today’s DeFi. Both can be robust and secure if built on a Lightening-powered Bitcoin layer, so that they might actually survive this time.
Finally, an application that’s dear to me personally, Lightning could build uncensorable speech platforms, even uncensorable commerce of physical things. A Facebook or Twitter replacement, a Youtube that pays per minute or per view, or a blog that pays per read. Even a decentralized “Silk Road” that sells things governments don’t want you to have.
I’m sure I’m missing many good ones here, but these strike me as some low-hanging fruit. Of course, there were thousands of ICO’s monetizing things from casino tokens to browser visits to social media followers to porn views. We don’t know which failed because of their altcoin architecture and which failed simply because they were stupid ideas.
Similarly, of course, there are millions of failed or obsolete business plans through the ages that are viable with sufficiently low transaction costs. For example, in medieval Europe people bought fractional trees — the right to pick the fruit, the right to the fallen fruit, the right to trim branches, the right to fallen branches, the right to fallen leaves. Trees are too worthless for fractional trading given today’s transaction costs, but extend that thought process to the many valuable but untraded things in our far more complex world.
Final point, many of these applications will seem trivial at first. Just as Airbnb and Uber were silly until they were not. We have no idea how much latent demand is lurking in parking spaces, meme background music, fractional mortgages, or secondary markets in Disney tickets. Even for real-world applications like stock markets, we have no idea how big they grow if they’re easier to use and easier for startups to provide new versions.
And, to be fair, we’re not talking an overnight revolution; Lightning is growing fast, but probably still has years to reach scale. So I have no idea if we’re talking 2 years or 20 years. But neither should be surprising.
Still, in aggregate, I think microtransactions have the ability to finally unlock Bitcoin’s potential far beyond money. Leading, I hope, to a fundamental transformation towards a decentralized society that replaces coercion with freedom. The decentralized vision that, indeed, drove the original Cyberpunk community, but that our modern internet hasn’t even begun to realize.
See you next week!