El Salvador will be a test for Bitcoin’s Layer 2 network

The passage of a law in El Salvador could help drive the advancement of Bitcoin (BTC) as a store of value and medium of exchange in the country. This is one of the most important developments in the entire history of cryptocurrencies.

Some critics argue that El Salvador’s promotion of the Bitcoin standard makes no sense due to the lack of capacity for online transactions on the Bitcoin network. However, these critics ignore the development of various second-layer bitcoin networks such as the Lightning Network, RSK, and Liquid. And most importantly, El Salvador will be an experiment on Bitcoin’s Layer 2 network, not necessarily the underlying blockchain.

Why is El Salvador interested in Bitcoin?

There are 3 main reasons for El Salvador to accept Bitcoin. According to the latest figures from the World Bank, 20% of the country’s gross domestic product (GDP) comes from remittances.

This means that a large part of the population is dependent on money transfers from abroad. According to Jack Mallers, CEO of Strike, the cost of sending money from the US to El Salvador can be up to 50% of the value of the transfer, on top of the security costs and the time it takes to safely receive the funds . appropriate. Location.

Second, El Salvador has an incentive to break its dependence on the US dollar and use a neutral store of value for savings, as newly issued dollars tend to depreciate at this point. This phenomenon is known as the Cantillon Effect.

For example, the people of El Salvador are not receiving any new funds generated to send stimulus payments to the United States.

When the money arrives in El Salvador, inflation will be there. This setup benefits the Americans, but not so much for El Salvador.

Third, according to President Nayib Bukele, around 70% of the population of El Salvador have no bank account. This restricts access to the global financial system that has emerged on the Internet and increases transaction frictions in the economy.

El Salvador will be a test of Bitcoin Strike and Lightning Network Layer 2 2

Strike can be summarized as a Venmo alternative and cash app that is heavily integrated into Bitcoin’s Lightning Network. Strike users can send funds from the United States to El Salvador instantly and cheaply via the Lightning Network. While critics point out that Strike users in El Salvador hold a value in US dollars through stablecoins like Tether (USDT) and not through Bitcoin, in reality users can deposit US dollars into their account as well, their Strike account instantly every Lightning Network bill. In terms of wire transfer use cases, the bottom line is Bitcoin’s ability to act as digital cash, enabling instant and free money transfers from the United States to El Salvador. With Strike, recipients of transfers in El Salvador can choose to receive US dollars as stablecoins (although the use of Tether has now been discontinued) or receive bitcoins straight into their own Lightning Network-enabled wallet, such as Bitcoin Beach Community.

In a situation where non-KYC (Know Your Customer) stablecoins do not exist and are under scrutiny, improvements in Bitcoin transfers to El Salvador could be greatly enhanced by the development of the e-money economy. But even in this case, those looking to hedge against Bitcoin volatility can do so through technologies like Discreet Log Contracts (DLCs), which allow users to sell Bitcoins and earn US dollars efficiently with one click in their Bitcoin account. Wallet to buy. However, this hedging policy can also be a little expensive as someone is willing to take on the other side of the trade.

One of the main criticisms of the Lightning Network from those who disapprove of Bitcoin, or some particular legacy currency that focuses on low-value payments, is that some of the most popular Lightning Network-enabled wallets are monitoring agents. This is because the monitoring setup creates a more user-friendly experience. In fact, the Bitcoin Beach Wallet works on a “shared custody” system where each user’s bitcoins are actually in the hands of trusted members of the Bitcoin Beach community and not every user has their own money.

Additionally, potential future improvements to the Bitcoin protocol, such as SIGHASH_ANYPREVOUT, could help make these unattended wallets more attractive to end users. The Bitcoin conquest in El Salvador will offer many opportunities to test different trust models for Lightning-enabled Bitcoin wallets. However, if you want a higher degree of financial sovereignty, you have to be prepared to pay for it, at least for the time being.

El Salvador will be a test for Bitcoin’s Layer 2 network – Liquid and RSK

While the Lightning Network gets the most attention, it’s not the only Layer 2 Bitcoin network in existence today.

The Liquid-Linked Sidechain is another alternative to using the basic blockchain, which makes various tradeoffs, and Liquid could play a role in El Salvador. Blockstream specifically mentioned how Liquid can help modernize El Salvador’s financial markets. According to Samson Mow, Blockstream’s Chief Strategy Officer, it is also possible that stablecoins that are closely linked to the traditional banking system, such as Tether and USD-Coin (USDC), could see a new competitor in the form of a stablecoin, which is Bitcoins Liquid can be issued. While still centralized and trustworthy, this alternative stablecoin model will potentially have the added benefit of improved transparency and security of reserves.

Another Bitcoin sidechain that has seen tremendous growth in 2021 is RSK, which is compatible with smart contracts created for use on the Ethereum (ETH) network but uses BTC-linked tokens for payment. The two most popular applications at RSK today are Sovryn and Money on Chain. Money on Chain’s dollar-on-chain token (DOC) may be of particular interest in El Salvador as it is a somewhat decentralized, Bitcoin-backed stablecoin that is pegged to the value of the US dollar.

“The people of El Salvador will be the world’s beta testers for the usability of Bitcoin for trade and finance – decentralized or otherwise,” said pseudonymous contributor Sovryn Ingalandia.

Since this is a country with the majority of people without a bank account, bitcoin apps like Sovryn can be their first experience with a safe savings account.

It should also be noted that, as with the Lightning Network, simple Bitcoin payments via Liquid and RSK are cheaper than on-chain transactions.

Much remains to be done when it comes to improving the privacy, scalability, censorship resistance, and interoperability of the Lightning Network, Liquid, and RSK. However, El Salvador has created a useful environment for seeing how valuable these two-tier systems can be as the world continues to move towards a bitcoin standard. The entire country of El Salvador is not going to switch from dollars to bitcoins overnight, so it is helpful to remember that these projects are imperfect today just because they cannot offer great value in the long run.

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