Hard Money Diploma · Module 7: Using Bitcoin in Daily Life

7.0 Introduction

Technologies typically grow and expand in layers, like a stack. Think of your favorite website, email, or social media: they were built on top of the internet protocol, which was built on top of computers, which were built on top of electricity, and so on. These technologies started out with a very simple design and continued to improve over time.

Bitcoin is no exception. As Andreas Antonopoulos famously put it, "Bitcoin is the internet of money." It is the base layer of sound digital money, providing a solid foundation upon which new technology will be built.

One of these layers is called the Lightning Network. It's like a super-fast highway for Bitcoin, helping people send and receive bitcoin quickly and with very low fees. It allows users to make instant, small transactions on top of the regular Bitcoin network. This makes buying a coffee or paying a friend simple and fast! Of course, as with everything, this comes with trade-offs.

7.1 The Lightning Network

The Lightning Network is a payment system that allows users to send and receive bitcoin quickly and inexpensively. It works by setting up a shared wallet where both parties store some of their bitcoin. They can then make unlimited transactions with each other without needing to record each one on the main blockchain. In doing so, they bypass the need to verify and include every single transaction in a block, which makes the process both fast and cost-effective. The lower fees mean that the Lightning Network can be used for small payments which are not always viable on-chain. Once the parties decide to end their collaboration, only the final balance is recorded on the blockchain.

Picture a day working in a café. Planning to stay a while, you open a tab and prepay instead of paying for each order. At the end of the day, you and the owner review the tab to settle the bill. If your deposit is more than what you spent, you get the difference back; if you spent more, you pay what you still owe.

This scheme can scale to include more participants. For instance, on one of your visits to the café, you bring a friend who the bartender doesn't know and can't open a tab. You offer your friend your existing tab to cover their expenses, and agree they will repay you privately. Now imagine thousands of people doing the same thing simultaneously, allowing others to use existing tabs to connect with even more individuals: that shows how the Lightning Network works!

With Lightning, you can make payments to anyone on the network, not just the person you share a direct tab with, provided a route between the two parties can be found. Your payment can navigate through the network until it reaches its destination, even if you don't have an open channel directly with the recipient.

On-Chain Transactions

These are transactions that happen directly on the Bitcoin blockchain. They take about 10 minutes to confirm, and the fees depend on the size of the transaction in virtual bytes. They are more secure but slower, since they require the consensus of the network.

Lightning Network Transactions

These transactions happen on a separate network built on top of the Bitcoin blockchain. They settle faster and with lower fees. They are commonly used where considerations like the speed and cost of transactions are more important. Compared to on-chain transactions, they are less secure.

7.2 Types of Lightning Wallets

A Lightning wallet is similar to a Bitcoin wallet in that it lets you send and receive bitcoin. The key difference is that it works on the Lightning Network, a second layer built on top of Bitcoin. Like Bitcoin wallets, Lightning wallets have different features to consider before choosing one.

Self-Custodial vs Custodial

Lightning wallets can be grouped in many ways, but for simplicity, we divide them into two types: self-custodial and custodial. A self-custodial wallet means you control your keys. A custodial wallet means someone else controls them.

With a custodial wallet, you can send and receive payments, but you rely on a third party and give up full control of your funds for convenience. This may be fine for small amounts, but using a self-custodial wallet is recommended once you understand how it works. For the rest of this section, we will focus only on self-custodial Lightning wallets.

7.2 Types of Lightning Wallets (continued)

Open Source vs Closed Source

Lightning wallets can also be open source or closed source. Open-source wallets are preferred because their code is public, can be reviewed by anyone, and can be improved by the community.

7.3 Setting Up a Bitcoin Lightning Wallet

Setting up a self-custodial Lightning wallet is very similar to setting up a self-custodial Bitcoin wallet.

7.4 Sending and Receiving Lightning Transactions

With a Lightning wallet, using Bitcoin is fast, cheap, and private, making transactions between two people easy. You can quickly send and receive bitcoin for everyday things like buying coffee.

Example 1: Marcia, Jeff, and Eve

Both Marcia and Eve have 5 units of currency. Marcia wants to send 2 units to Eve. The payment travels through Jeff, who helps pass the payment along the Lightning Network. After the payment is completed, Eve has 7 units and Marcia has 3.

Jeff helps route the payment, but he cannot steal the funds. The Lightning Network uses cryptography to ensure that only the intended recipient can receive the payment. Jeff simply helps the payment move through the network. This shows a key advantage of the Lightning Network: people can send payments quickly without trusting intermediaries like banks. Node operators like Jeff can also earn small fees for helping route payments. By doing this, they help the network remain decentralized and efficient.

Example 2: Mina buys a coffee

Mina wants to buy a coffee, but paying with a regular Bitcoin transaction can sometimes take time and require higher fees. Instead, she decides to use the Lightning Network. To start, Mina downloads a Lightning wallet on her phone. She then sends some bitcoin from her regular Bitcoin wallet to her Lightning wallet. This step uses a normal Bitcoin transaction on the blockchain. Once the funds are in her Lightning wallet, they can be used on the Lightning Network. Now Mina can pay the café instantly using Lightning. The payment happens off the main Bitcoin blockchain, which is why it is much faster and cheaper than a regular on-chain transaction.

Thanks to thousands of Lightning node runners, you can send sats to any user with a Bitcoin Lightning wallet, wherever they are in the world. The payment will arrive in a few seconds and will only cost a few cents.

7.5 Buying Coffee and Groceries with Bitcoin

Have you ever wondered if you could use bitcoin to buy your daily cup of coffee or stock up on groceries? Turns out you can! There are many options, both online and in person, that let you pay with bitcoin. We'll explore some of those options as well as the tools that will help you find local stores so you can spend bitcoin.

Even though paying with a credit card or an app can seem easy to understand for the person paying, the processing of the payment is actually very complex and involves many different parties.

Each intermediary charges a fee so, while it may seem easy, fast, and cheap, these costs can quickly add up for a small business owner, often exceeding 3% of the price. And that's not to mention currency exchange fees!

With Bitcoin and the Lightning Network, businesses can receive instant payments from all over the world via an open, secure, internet-native, borderless, and censorship-resistant monetary system.

7.5 Buying Coffee and Groceries (continued)

Online

BTCPay Server is an open-source payment processor that allows merchants to accept payments in bitcoin with little technical knowledge. It's completely free and doesn't charge any commission. Online businesses can integrate BTCPay Server seamlessly by adding the BTCPay plugin to their website. Because BTCPay Server is an open-source project, not a company, you can contribute to the project once you learn more about it and computer programming.

BTCPay Server: How is it different?

7.5 Buying Coffee and Groceries (continued)

In Person

Brick and mortar shops can also use BTCPay Server to accept payments, or they can simply download a Bitcoin wallet and accept payments directly from their phone.

To find a merchant that accepts bitcoin in your area, go to BTCMap.org and search for your region. BTCMap.org is an open-source map where merchants that accept Bitcoin can list their businesses. Plus, users can also add new merchants and even update the map to make sure the listed merchants are still accepting bitcoin. It's a powerful tool for people who wish to spend their bitcoin.

7.5 Buying Coffee and Groceries (continued)

Transitional Tools: Vouchers, Gift Cards, and Payment Cards

To purchase products or services from businesses that do not yet accept bitcoin, there is an intermediary tool you can use: gift cards.

Some businesses focus on buying and selling gift cards in exchange for bitcoin. That means you can acquire a gift card for the store you'd like to shop at in exchange for bitcoin, and then spend the gift card directly at the store. Plane tickets, hotels, games, SIM cards... you can buy almost anything with bitcoin and gift cards!

7.5 Buying Coffee and Groceries (continued)

Circular Economies

A circular economy is made up of participants who decide to support one another by trying to buy from and sell to each other as much as possible. For instance, a community of farmers exchanging their produce instead of going to the supermarket.

When applied to Bitcoin, a circular economy is built by supporting local merchants and skilled workers who accept bitcoin, so that all participants can flourish together thanks to Bitcoin's superior properties.

The first Bitcoin circular economy ever created is located in Arnhem, Netherlands. It was created way before the Lightning Network existed, but back then, on-chain fees were really low! The second one was Bitcoin Beach, located in El Zonte, El Salvador. It was the first to leverage the power of the Lightning Network to provide the community, which was mostly unbanked, with instant digital payments directly with their smartphones! Today, hundreds of circular economies are being created all around the world, powered by Bitcoin, the Lightning Network, and educational resources.

Wrap-Up and Check for Understanding