Bitcoin Gaming & The Power Of Nano-Transactions

Intro

Blockchain is inherently a financial innovation, originally designed to facilitate the self-custody of funds and trustless transfer or value. We have previously discussed the benefits of unlocking this global liquidity layer and how it enables types of player spending not previously possible with legacy financial payment systems.

What isn’t widely discussed is how, in our pursuit of programmable blockchains and novel in-game token designs, the industry’s most prominent pillar has become shockingly underutilized in games.

This report will illustrate how a fundamentals-first approach to integrating blockchain into existing casual mobile games is producing a meaningful uplift in key metrics across a number of real-world case studies.

Let us now shine a light on Bitcoin and how the Lightning Network has the potential to change mobile gaming monetization models.

Scaling Bitcoin Payment Infrastructure

To be clear, Bitcoin is not widely considered an optimal scalable payment infrastructure. One could even argue that it is possibly one of the worst ecosystems to build any application that requires more than one transaction every 10 minutes. Not only is it relatively slow, but it is also expensive — another deterrent for any experienced developer.

Bitcoin was intended to facilitate the storage and infrequent transfer of value in a trustless, transparent, and decentralized manner. In fact, we have argued in the past that Bitcoin’s high transaction fees and resistance to scale are by design.

That said, there are some sound reasons why a Bitcoin scaling solution is needed. Not only is it necessary for more mainstream Bitcoin adoption, but a sizable increase in activity will also produce more fees for Bitcoin miners.

The most established Bitcoin L2 is the Lightning Network (LN), a chain-agnostic scalability framework that was first introduced in 2016 by Joseph Poon and Tadge Dryja. At a high level, the LN is made up of peer-to-peer trading channels that collectively form a “gossip network.” Similar to how, in our everyday lives, we may find connections within six degrees of separation, the gossip network allows entities to transfer value amongst one another even if they don’t share a direct channel.

The chart above illustrates the gradual growth of the LN. A node is needed to open a channel, but one node may host multiple channels. The median node-to-channel ratio is currently just under 8. The total number of nodes ranges between 15k-18k and has remained relatively flat over the past two years (somewhat expected due to bear market conditions).

The total number of channels, on the other hand, has decreased by approximately 11% over the past year. This is not necessarily a bad sign, as many node operators actively close channels that are being underutilized.

Capacity represents the total amount of BTC both locked and circulating within the LN. This is a rough indicator of network activity and has increased by 405% since January 2021. At a glance, one would think that after five years of going live, the roughly $133M in LN capacity is bearish compared to the TVL of popular protocols on other chains.

However, these alternative blockchains and protocols are designed predominately with capital accrual in mind (staking, trading, farming, etc.). The LN is, first and foremost, a payments network and hosts an average transaction size of $11. Blockers of wider LN adoption and higher overall capacity may likely come down to user behavior (Bitcoiners like to HODL) and the relatively low fees during a bear market (making the LN unnecessary for users with alternative means of value transfer).

Transactions on LN occur off-chain and are only recorded on-chain when a channel is opened or closed, making it both incredibly cheap and almost instantaneous. Payments can essentially be streamed in real time. This unlocks several interesting possibilities we will discuss later in the report.

The LN currently operates at a median fee rate of 0.005%, or 5,000 Sats ($1.34) for every 1 BTC ($26,740.62). Comparing this to the 1.5%-3% charged by traditional ban