El Salvador’s Bitcoin Experiment Could Still Go Wrong

Recently, El Salvador approved bitcoin as a legal tender. Within ten years, an open-source, cheap code for a new money system with a hidden creator which anybody across the world can utilize has metamorphosed from being of zero value and tagged as a criminals’ tool to being approved as a means of payment in a country.

It would be a gross understatement to say bitcoin has been and is still on the wild run. It is now a historical fact that this completely decentralized virtual currency is now acknowledged as legal as a country’s primary means of payment.

However, this beautiful announcement is coated with some little headaches. The el Salvador announcement specifically mentioned bitcoin instead of cryptocurrencies in general. Also, the adoption statement read that El Salvador will be in collaboration with a payments company called Strike. However, Strike uses the lightning network infrastructure, and it’s a primary off-chain scaling solution for bitcoin. This latter factor is a reason why there may be some obstacles to this historic adoption. There is are scaling limitations with the first layer, while the second layer’s state of development is not particularly encouraging.

I have eight years of cryptocurrency use cases, and I run my lightning mode. Hence, I have experienced use cases with bitcoin and other networks and can share my experiences. Now, let’s go into details about why the Salvadoran experiment could cause a forward movement to the crypto industry but might cause bitcoin to lose its market dominance in this space.

Millions of businesses will likely be on boarded, but most of them will be forced to do so. This new El Salvador law forces all business owners to accept it as a means of payment. It doesn’t just allow and encourage bitcoin adoption naturally:

“Every merchant (whether product or service business) must accept bitcoin as payment whenever a customer offers to do so.” Thus, all merchants (old and new) will be forced to learn how to start accepting bitcoin as payment.

Hence, millions of businesses will be attempting to access a network that currently processes about that same volume of transactions daily. Imagine each Salvadoran merchant receiving a bitcoin payment every 24 hours. That means the network must process double the amount of transactions it currently processes. There will be a user-experience nightmare because the network right now is operating past its capacity.

While the purpose of using the lightning network is to reduce this transaction volume, the two use cases discussed below make that proposal difficult.

Use Case 1: Direct Incorporation of the Lightning Network by Businesses

Suppose most businesses onboard to bitcoin directly. They would need to pay on-chain fees, which are usually in the double-figure dollar range. Even if customers chose to pay those fees for small items, the merchants would still need to pay fees to move their funds.

No merchant will want this kind of situation. Even if the merchant opts for the lightning network, they must have the technical competence and must have received the required amount of funds to rebalance their channel or pay a service provider. However, both of these options are still very costly.

Use Case 2: Merchant Integration Through Custodial Solutions

While this second option solves the challenges of the option above, it creates new ones. If Strike or similar companies open a lightning channel for everyone, the volume of transactions on the blockchain would still be enormous. Remember that Strike itself still needs to scale. 

As a new company, it will suffer from these nibbling challenges. It would be similar or worse than the times past when Coinbase would go offline when faced with a barrage of new clients.

Also, the main reason for El Salvador adopting bitcoin as a legal tender to help its citizens access vital financial services. However, these challenges won’t still go away. Fledgling services and unfamiliar infrastructure would even amplify them.

Tokenhell produces content exposure for over 5,000 crypto companies and you can be one of them too! Contact at info@tokenhell.com if you have any questions. Cryptocurrencies are highly volatile, conduct your own research before making any investment decisions. Some of the posts on this website are guest posts or paid posts that are not written by Tokenhell authors (namely Crypto Cable , Sponsored Articles and Press Release content) and the views expressed in these types of posts do not reflect the views of this website. Tokenhell is not responsible for the content, accuracy, quality, advertising, products or any other content or banners (ad space) posted on the site. Read full terms and conditions / disclaimer.