Digital gold

Bitcoin is often being described as digital gold. Same as gold, it is scarce and being mined and released into circulation at a fairly predictable rate. It is impossible to counterfeit. It is fungible, meaning some gold is not better than any other gold. It is divisible to a high degree. It can be anonymous.

It has most of the properties of gold, but improves them. It’s much easier to transfer, for one. Which means it is also easier to steal large quantities of. If you steal a ton of gold, people will notice when you try to carry it with you on the plane. If you steal 100 million worth of Bitcoin, you can carry it in your head or on a USB stick.

Carrying gold around and using it to pay for beer is not very practical. Our ancestors found that out long time ago and started using bank notes and coins instead. Not so long ago, the bank notes were still covered by gold and you could go to the bank and get your gold in exchange for them. Not anymore of course. Today’s fiat money is just paper, created out of thin air by running an UPDATE SQL statement in the central bank database.

Even though Bitcoin is better, digital, version of gold, I think it is still not practical to be used for paying for beer. That is by design. In order to keep Bitcoin decentralized and secure, it has to put constraints on what goes into the blockchain. Putting your day to day purchases on a globally replicated database for everyone to store just does not make sense.

Lightning

This is where the Lightning network comes in. Greatly simplifying, it allows you to lock up some of your Bitcoin into so called Lightning channels and use this locked-up Bitcoin to perform instantaneous and cheap transactions at practically unlimited rate. You could think of it as exchanging your Bitcoin for “Lightning coins”, which are backed by Bitcoin, but much easier to transact in.

In this I see the analogy of gold and bank notes of yesteryear. Bank notes were much easier to work with, but still could be redeemed for gold if need be. Nobody did that in the end, but the thought that you could do this gave the currency stability. I believe similar things will happen with lightning and bitcoin. Most people will have some portion (or even all) of their Bitcoin locked up in lightning and use it for transacting. On-chain Bitcoin will be used only as a reserve.

Another rather good analogy might be using checking and savings account. Most people, who have little money and spend most of it between paydays, keep it all in checking account. Only the money you expect not to touch for extended periods of time you keep in savings account. I believe the same thing will happen with Bitcoin and Lightning. A lot of people will only have balances locked in Lightning channels and use this money for day to day transactions. Only larger sums, destined for savings, will be kept out of Lightning channels on the blockchain directly.

Lightning network is still in it’s infancy. It is still not consumer-grade and requires skill to use. There are many technical challenges to solve. However, I believe it will become generally useful sooner, than many people think and it will finally enable Bitcoin to be used as true digital cash.