XRP: The Dead Cat Bounce

The cryptocurrency XRP is back in the spotlight despite the fact that the Lightning Network (Bitcoin) has made it completely useless for a long time…

XRP, the same old song

Managed by the XRPL foundation, XRP (ripple) is yet another cryptocurrency that has profited by claiming a much higher transaction throughput than that of bitcoin.

Executing cheaper and faster transactions has always been the main selling point for the thousands of cryptos that are created every year. The propaganda is well-crafted and goes as far as convincing some that bitcoin would be an “outdated” technology.

Of course not. To understand this, we need to briefly talk about the famous blockchain trilemma and then about the Lightning Network.

This trilemma refers to the impossibility of maximizing all three essential aspects of blockchain technology at the same time: security, decentralization, and transaction throughput. In simple terms, optimizing one aspect comes at the expense of the others.

Bitcoin prioritizes decentralization at the cost of a relatively low transaction throughput of seven transactions per second. It’s 1500 transactions per second for XRP.

Decentralization is measured by the number of nodes. It is directly proportional to the size of the blockchain (630 GB currently), with the growth increasing the cost of setting up a node (hard drive, RAM, bandwidth, etc.).

Ensuring that the network remains decentralized requires small blocks and thus limits the number of transactions they contain. The 1 MB per block limit is the cornerstone of this design.

This limit was fiercely defended during the “Blocksize War”. At that time (2017), some wanted to sacrifice decentralization on the altar of transaction throughput, but they were unsuccessful. The reluctance led to a bitcoin fork: Bitcoin Cash (BCH).

The evident failure of BCH shows that the main appeal of Bitcoin is being a truly decentralized and secure store of value rather than a means of payment. That said, the creation of the Lightning Network allows for both.

Paying for coffee with bitcoin

The Lightning Network (LN) multiplies transaction throughput while preserving the security of the Bitcoin network. It is a secondary network firmly anchored to the Bitcoin network through the opening of “channels” that are created through what are called HTLCs (Hash Time Lock Contracts).

Transactions there are faster, cheaper, and more confidential. LN is perfect for small payments that can be as little as a satoshi, or 0.00000001 BTC (0.001 euro). This enables, for example, the distribution of micro-tips online, paying for a few seconds of internet service (streaming) without the need for a subscription.

And all of this is done instantly. While the Bitcoin network propagates blocks approximately every ten minutes, the Lightning Network executes transactions in real-time. Once the BTC are anchored in a channel (via an “on-chain” transaction), it is possible to make real-time payments that are almost free.

The LN can theoretically handle millions of transactions per second. Fees are significantly lower than those of on-chain transactions, which can soar during network congestion. Fees are calculated in milli-satoshis, which is one-thousandth of a satoshi.

But isn’t the satoshi already the smallest unit? Absolutely, but the LN operates with even smaller units. The amount is rounded down to the nearest satoshi when the channel is closed via a second on-chain transaction.

Like the Bitcoin network, the Lightning Network also operates via a decentralized network of nodes that can route payments to earn routing fees. Routing is also dynamic, ensuring that the cheapest paths are chosen to route payments across the internet.

A network that grows slowly but surely

Since its launch in 2018, the Lightning Network has experienced exponential growth, which seems to have slowed down in the past two years. By the end of 2024, the network hosted around fifteen thousand nodes. There are about fifty thousand active channels collectively displaying a capacity of 5,000 BTC, which is equivalent to 500 million dollars.

The LN network is an open-source project with several interoperable implementations such as LND, Core Lightning, or Eclair. They coordinate through a set of standards described in BOLT (Basics of Lightning Technology), whose philosophy is the same as that of the Bitcoin network.

The most popular LN wallets are the French Phoenix and Breez. Several exchanges like Bitfinex, OKX, Binance, or Kraken have integrated it. This allows their clients to deposit and withdraw BTC through Lightning channels and avoid paying high fees during peak periods.

The adoption of the Lightning Network by merchants continues to make progress. For example, Bitrefill, a major bitcoin gift card retailer, or OpenNode, a payment processor that allows over 500,000 merchants (e.g., Shopify) to accept LN payments.

Additionally, the fact that LN transactions are very confidential is a cherry on top. Their journey through numerous channels before reaching their destination makes them intrinsically private. This is a significant difference from the Bitcoin network, where all transactions are public.

Lightning payments reveal the sender and recipient only to the parties directly involved. Thus, instead of going through a Coinjoin, making numerous transactions to oneself on LN allows one to erase their traces.

In other words, LN renders cryptocurrencies with high transaction throughput unnecessary, as well as those that, like Monero (XMR), rely on privacy to stand out. In this regard, it’s worth noting that the Finnish police managed to trace transactions in Monero…

In short, Lightning has obliterated the raison d’être of thousands of cryptocurrencies that now only serve to enrich their creators. The creators of XRP, for example, have allocated no less than 100% of the XRP they gradually sell to pump & dump enthusiasts…