At the Bitcoin Miami Conference in June 2021, President Nayib Bukele of El Salvador became the first head of state of a sovereign nation to announce active support for Bitcoin to become legal tender in his country.
What does this mean for ordinary El Salvadorans? As Bitcoin is a global network, its effects will be more deftly felt in the area of remittances: World Bank data shows that remittances account for 24% of El Salvador’s GDP. A quarter of all El Salvadorans live in the United States and, last year, they moved around $6 billion worth of remittances to their relatives. But a different World Bank report highlighted that it is an expensive process: for every $200 that El Salvadoran expats have sent back home, processing costs have accounted for around 6.38%, translates as $13.
However, the trend for using Bitcoin for remittances had already begun, even before Bukele’s announcement. Cited data from Chainalysis showed that many off-shore El Salvadorans have been sending remittances in Bitcoin to El Salvador already, and, in increasing frequency. As a result, the value of remittances sent in Bitcoin quadrupled from $424,000, in May 2020, to $1.7 million in May 2021. Should Bitcoin really become legal tender, the lower cost of paying remittances through Bitcoin will be available to many more people.
But how can Bitcoin make transactions cheaper? Bitcoin’s on-chain scaling issues make transactions soexpensive for El Salvadorans that sending remittances using the raw first-layer Bitcoin technology is still an expensive activity. Throughput for on-chain Bitcoin transactions is also an issue: Bitcoin the network currently runs at seven transactions per second. Compare that with Visa’s ability to handle 1700 transactions per second.
Enter the Lightning Network.
Lightning enables a payment ecosystem that gives users more control over their Bitcoin and promises to run transactions at an even faster rate than Visa. And it is this payment ecosystem that has empowered Bukele’s government to present to its people a Bitcoin-based payment solution for remittances that is both faster and cheaper than anything in the dollar ecosystem.
Lightning presents El Salvador with a tremendous opportunity to make remittance payments cheaper and faster than first-layer Bitcoin. Through Lightning’s highly efficient infrastructure for off-chain transactions, users can create payment channels to trade Bitcoins with each other. They can also receive fees for performing actions that sustain the network, such as routing payment activity within a channel, running a watchtower, and managing liquidity pools in a channel.
Lightning ensures that El Salvador will make a successful step towards making remittance payments a simple and inexpensive process. The presence of Lightning in various projects like Bitcoin Beach and Strike, both of which have been active in El Salvador, has likely provided an on-ramp for Bukele to offer his people Bitcoin as an official unit of exchange.
We, at LQWD, are developing tools for Lightning that will help Bitcoin to revolutionize money transfers right at this juncture in history where institutions are coming on-board with Bitcoin