Lightning Network's effect on miner fees

Summary:

The Lightning Network is an off-chain solution for Bitcoin transactions that can be used for smaller, predictable transactions such as utility bills, groceries, rent, and mortgage. It makes economic sense to use the Lightning Network for transactions where the fee to include the transaction on the blockchain is more than the Time Value of Money of the encumbered funds on the Lightning Nodes amortized across the number of users pushing funds through a LN node. By minimizing the set of costs/externalities to the minimum necessary to conduct a series of transactions, there will be less transactions on the mainchain, which means less fees collected by the miners.The effect of the Lightning Network on fees is going to be hard to predict, as it depends on user behavior around the dynamics of bid-side demand of fees. New classes of transactions will be possible that aren't possible today, and the market effect of 'instant' transactions after a network-joining-intro period will have on Bitcoin's utility/price/adoption is yet to be seen. It would be useful if blockchain data scientists could study the effect of the fee market when high-volume exchanges unexpectedly halted trading.Regarding the block reward, idle hashing power becomes more of a threat in market scenarios where chain-extending PoW is scarce (late-game Bitcoin). If there isn't a convincing economic reason for a large majority of hashing power to be bolstering PoW defense on the main blockchain, the necessary number of block confirmation will go up, and there will be non-negligible mining power idle ready to defend actors' preferred chain. Large-value transactions that will be on the blockchain have more flexible time-settlement tolerance, and Lightning Network hot wallets are not an ideal place to store large quantities of BTC. Users that don't expect to be actively using the Lightning Network should prefer confirmed UTXOs for long-term cold storage.

Updated on: 2023-06-11T00:12:33.927643+00:00