On the Impact of the Lightning Network on Bitcoin Transaction Fees and Network Value

This paper examines the influence of second-layer networks, particularly the Lightning Network (LN), on Bitcoin mining fees and network valuation through Metcalfe's law. Analyzing Bitcoin transaction data from January 2014 to November 2023, we observe that transactions with a value below USD 1000 constitute more than 27 % of total mining fees, underscoring their economic importance. The LN's facilitation of faster, cheaper offchain transactions, particularly transactions of small value, could possibly decrease miners' fee revenues, especially from smaller transactions, which are a significant revenue source. To examine the impact of LN on the Bitcoin network, we employ Metcalfe's law to model Bitcoln's value over the next six years, correlating it with the number of daily active users to gauge network growth. Incorporating LN adoption rates into our model suggests that while LN may reduce fee-based income for miners in terms of the number of Bitcoins they receive, it is poised to enhance the overall network value by expanding the user base and transaction volume. This growth, driven by LN's improved utility and scalability, suggests a longterm net benefit despite short-term fee revenue losses. A part of our analysis is focused on LN's capacity to integrate millions of new users through its adoption by Superhubs. Superhubs could significantly boost the value of the Bitcoin network, counterbalancing the potential dip in mining fees. We explore LN's broader adoption implications, envisioning its role in expanding the Bitcoin value proposition from a Store of Value (SoV) to a Medium of Exchange (MoE). By applying Metcalfe's law, we offer insights into the economic effects of LN's widespread use, contributing to discussions on Bitcoin's scalability, mining sustainability, and digital currency valuation.