For the loose group of developers who work on the Bitcoin protocol, the Lightning Network is generally viewed as the best option in terms of gaining massive improvements in the area of scaling for the peer-to-peer digital cash system. Unsurprisingly, the developers behind various altcoins have taken notice and plan to implement the layer-two scaling solution as well. Unfortunately for the altcoin developers, they may be adopting a technical improvement that will have a negative effect on the prices of their respective coins.
Bitcoin’s Strong Network Effects
The first-mover advantage is perhaps the biggest advantage bitcoin has over other coins on the market. This advantage leads to more liquidity in the bitcoin market, more stability in the bitcoin price (as compared to altcoins), and a variety of other invaluable perks that other coins have been unable to attain.
Having said that, there are some altcoins and other types of tokens that have interesting features. For this reason, people sometimes sell a bit of their bitcoin for altcoins in an attempt to test out some of those new features around privacy or smart contracts.
While some have argued that these features that are not found on the Bitcoin network create a reason to invest in or speculate on the prices of these altcoins, the reality is there is not much value to be had in a network where people are moving in and out rather than staying within the ecosystem. For example, Monero does not gain nearly as much from offering enhanced privacy on an individual’s transaction for a few minutes as bitcoin does from acting as a sort of digital gold that will be held for many years into the future.
For a full explanation of this point, read Daniel Krawisz’s “Appcoins are Snake Oil” article.
Lightning as Steroids
One of the key points made in Krawisz’s article regarding appcoins is that people will generally prefer to store value in a better form of money and simply switch back and forth between appcoins only as they are needed to gain functionality out of that alternative network. With the Lightning Network, this movement between different cryptocurrency networks becomes nearly instantaneous through the use of cross-chain atomic swaps.
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While the Lightning Network is mostly known as a way to enable cheaper, instant transactions on top of the base Bitcoin protocol layer, those who use the Lightning Network on multiple cryptocurrency networks are also able to route value between different chains instantaneously.
Going back to the aforementioned example involving Monero, a user is only exposed to the monero token for a matter of seconds when routing through the Lightning Network, as opposed to waiting minutes or hours for on-chain transaction confirmations. This effectively amplifies the scenario discussed by Krawisz in his appcoins article where there’s not much of a reason to hold the altcoin or appcoin because a user will be able to route their altcoin or appcoin payments instantly via the Lightning Network.
