Daily Fintech

RTGS, Segwit, Lightning Network, Offchain processing and the future of BCH and the Mining business


That is an SEO smorgasboard of tech jargon. Apologies – I will break it down for those who do not live in cyber land. Alternative titles which may encourage you to read on:

For an explainer on the technologies needed for Bitcoin to scale, please go to this post to learn about Segwit, Lightning Network, off chain processing etc.

First, an explainer that will be needed for those who live in cyber land, from the old engine room of cross border payments.

RTGS is off chain processing from ye olden days

Back in the dinosaur era, global banks processed cross border payments via central banks and a mechanism called Real Time Gross Settlement (RTGS). Actually they still do that. As I lived in the dinosaur era, let me explain the basics and why it is relevant to Bitcoin.

RTGS is how Central Banks settle among themselves – it is real time, but only Central Banks get access. It is fast, permissioned, big ticket. Think of that as Onchain processing. Then a payment gets into national payment systems and ledgers within banks get changed and Josephine Q. Public gets credited/debited after Banks process messages via the SWIFT network. This national settlement is slow, semi-permissioned (any SWIFT Member can do it) and can be small ticket. Think of that as Offchain processing.

That is how cross border payments work today.
The Bitcoin world we are moving to today will look similar but better. Big transactions will be done Onchain, small transactions will be done Offchain. That is where the similarity ends. The Bitcoin cross border payments model that will emerge with Lightning Network (which required Segwit) will be:

Note: those who bemoan the centralisation that comes with Offchain processing need to chill. Its like email. We all can/could run our own email servers, but most of us choose not to do that. You can run your own mining rig and be the modern equivalent of a Central Bank – but most of us will choose not to do so.

You can sell your BCH because buying your coffee with BTC will soon be viable.

If you received BCH after the hard fork, you might be tempted to keep them because BCH is faster/cheaper for small payments and so BCH will rise in price. BCH makes sense today because small ticket payments are slow and expensive. Now look at what happens when Bitcoin moves to Lightning Network and Offchain processing. Are you still comfortable holding BCH? Hint: it might be smarter to sell as there are still a lot of trading days until Lightning Network and Offchain processing go mainstream.

Bitcoin will soon go mainstream as a currency, adding more fuel to the price rise.

The idea that Bitcoin price could be sustained only as a digital gold makes no sense. It is a one legged stool and if that image conjures pictures of a crash that is deliberate. Bitcoin needs two legs to sustain itself. It needs to be a currency as well as a store of value. Gold is theoretically a currency as well as a store of value, but in reality it is lousy as a currency. Bitcoin maybe flawed as a currency but Gold is even more flawed.

However if Bitcoin becomes a two legged stool – store of value and currency – then the price rise looks sustainable.

Once Lightning Network and Offchain processing go mainstream we will do another Bitcoin Ecosystem Healthcheck and the numbers should be different.

Why you can ignore the “Bitcoin is doomed because of the electricity cost” stories.

Motherboard has done a great job with this. The numbers are staggering and with most electricity coming from fossil fuels this is the last thing the world needs. The conclusion – Bitcoin is bad. Expect a lot of well researched pieces on this subject. There is enough money threatened by Bitcoin’s rise to pay for research along these lines (and plenty of honest researchers who believe that the “Bitcoin is doomed because of the electricity cost” story is true).

Imagine a world where Lightning Network and Offchain processing go mainstream. A much smaller number of big ticket transactions are done Onchain via Miners and the vast majority of small ticket transactions are done Offchain which will consume about the same amount of electricity as updating your Facebook status.

Bitcoin Miners will make OK money but won’t control the ecosystem.

It makes total sense for Bitcoin Miners to resist Segwit. They know that Segwit leads to Lightning Network and Offchain processing going mainstream. Today, Miners get the best of both worlds. They process big ticket e-gold type transactions via BTC and small ticket coffee shop type transactions via BCH. All they will lose when Lightning Network and Offchain processing go mainstream is BCH processing. They will still process big ticket transactions, where the security of Onchain processing is critical. Volumes of big ticket e-gold type transactions via BTC will go up to settle all those Offchain transactions. Miners will be just fine. They won’t control the whole Bitcoin ecosystem but they will make a very good living.

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Bernard Lunn is a Fintech deal-maker, author, investor and thought-leader.

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