Lightning Network Capacity Decreases While Number of Channels Increases

Disturbing trend or progress? The channels of the Lightning Network are constantly growing, but their capacity is constantly decreasing.

The Lightning Network is a second-layer solution designed to solve the scalability and speed issues of Bitcoin transactions. It creates off-chain payment channels that allow users to transact almost instantly and at a fraction of the cost compared to traditional on-chain methods.

By allowing multiple transactions to take place off-chain and only recording the final balance on the main blockchain, it eases congestion and lowers fees, makes microtransactions more feasible and increases the overall efficiency of the Bitcoin network.

The development of the Lightning Network shows that more and more people use bitcoin for everyday transactions, a sign of the cryptocurrency's wider adoption. Changes to the Lightning Network could also reflect changes in market sentiment — a sudden increase in capacity could indicate bullish sentiment as more users seek fast, cheap bitcoin transactions, and vice versa.

Lightning network capacity refers to the total amount of bitcoins transacted within the network at any given time. A reduction in capacity can hinder the network's ability to process many transactions. According to data from Glassnode, the capacity of the Lightning Network dropped significantly between July and August, down nearly 13% in the past 30 days.

Chart showing changes in Lightning Network capacity net position from May 14th to August 10th, 2023 (Source: Glassnode)

This decline brings capacity back to levels recorded in December 2022.

Graph showing Lightning Network capacity from May 14 to August 10, 2023 (Source: Glassnode)

The number of channels on the Lightning Network has grown by 3% over the same period.

Channels are the fundamental building block of the Lightning Network. They are private off-chain paths that enable two parties to transact without broadcasting to the blockchain. An increase in channels means more avenues for transactions, potentially increasing the efficiency of the network. This growth means expanding the network infrastructure to allow more users to participate.

Graph showing the number of Lightning Network channels from May 30 to August 10, 2023 (Source: Glassnode)

One potential reason for these conflicting trends could be the creation of more channels for holding small amounts of bitcoin. This may indicate that the network is more decentralized and users are more willing to open up their own channels rather than rely on larger centralized channels. While this could be seen as a step towards decentralization, a reduction in capacity could also indicate that larger players are withdrawing Bitcoin from the network, possibly due to uncertainty in the market or a shift in investment strategy.