Paxful – Making Waves in Africa

Paxful is a peer-to-peer (P2P) Bitcoin marketplace. However, they aren’t just your run-of-the-mill trading platform: they have a very real agenda for good. Their mission is to help the unbanked gain financial freedom and improve the lives of communities across Africa.
Curb That Volatility!

There are some amazing crypto projects developing in Africa. With rampant inflation, strict financial regulations and corruption abound, it’s no wonder Africans are looking for an alternative approach to finance.

Some may argue that cryptoassets are too volatile and unsafe. But when you look at the fluctuating inflation rates in some African countries, using crypto doesn’t actually seem so crazy anymore. Just take a look at The South African Rand (ZAR): It has lost over 50% of its value against the US Dollar in the last decade. Unfortunately, it’s also consistently one of the most volatile fiat currencies around. Imagine trying to save money in a country with such rampant fluctuations. Can’t be easy!

Organizations such as Paxful are doing their utmost to affect meaningful change in Africa, offering a practical alternative to those crazy fiat currencies. Today I take an in-depth look at the Paxful Network and their ongoing humanitarian work in Africa.

What is Paxful?

Paxful is a peer-to-peer (P2P) network where people can buy and sell Bitcoin and connects various stakeholders from all over the world. With Paxful, users can transact using over 300 different payment methods including gift cards, cash, cars, and even groceries. Oh, and of course there’s the more traditional bank transfer as well, if that’s your cup of tea.

As Ray Youssef, CEO of Paxful, said in an interview with Max Keiser in February 2021:

A person in Nigeria can get a relative in California to buy a giftcard and send it to them. They can sell that gift card on Paxful to someone in China for Bitcoin. They can then convert that Bitcoin into Naira (Nigerian fiat currency) and then transfer it to their local bank

Paxful was founded in 2015 by Ray Youssef, an Egyptian immigrant who grew up in New York, and Artur Schaback, an Estonian who moved to New York. The name Paxful comes from the Latin pax or peace. The co-founders named the project Paxful because for them, Bitcoin is a way of bringing more peaceful, meaningful solutions to finance.

As the American economist, professor and columnist Paul Krugman once said:

Fiat money is backed by men with guns

The co-founders met at a Bitcoin Conference and soon realized they shared a common belief. The duo held the view that Bitcoin could be used to help individuals achieve financial freedom and gain the ability to trade unhindered by centralized authorities. The rest, as they say, is history, and Paxful was born out of this belief.

Paxful in Action

In the same interview with Max Keiser, Youssef gave examples of how Paxful is helping people in Nigeria.

Paxful realized that the way to get a toehold in Africa was to crack the Nigerian market. It is notoriously difficult to get money in and out of Nigeria. Also, at the same time Paxful was starting out, Bitcoin was trading in Nigeria between 40 and 60% above average market price. Naturally this made it difficult for ordinary people to buy Bitcoin. Paxful subsequently came up with a novel solution to this dilemma: gift cards. Simply put, Paxful connected Nigerian gift card sellers directly with Chinese gamers. Nigerians soon began selling gift cards for Bitcoin, and so the world’s first-ever crypto now had an easy route into Nigeria.

The used car business in Nigeria is huge and growing steadily year-on-year. According to Youssef, Nigerians are mainly importing used cars from America. They then resell them in Nigeria and make anything from 100 to 400% profit.

A few years ago the Nigerian government stepped in with regulations that made it difficult for Nigerian car dealers to exchange US Dollars for Naira. The car dealers looked for a solution and came up with the idea of trading using Bitcoin. They contacted Paxful for help. Youssef stepped in to show them how to buy the cars legitimately using Paxful and Bitcoin. Their business was restored without the use of banks or financial organizations.

Paxful also helps people in Nigeria make online purchases. In Nigeria, if you own a debit card, online purchases are limited to $100 per month. As a result, Nigerians are making use of Paxful to bypass this annoying regulation.

Promoting Community Upliftment with Paxful

As well as giving Nigerians the ability to trade with Bitcoin, Paxful is strongly committed to improving conditions for communities in Africa. Their foundation, Built With Bitcoin, devotes itself to the creation of equitable opportunities by providing clean water, access to quality education, sustainable farming, and humanitarian support. The foundation is funded by a percentage of Paxful’s profits as well as donations from individuals and organizations.


The foundation opened their first school in Rwanda in 2017. Since then, five more have been built: one in Rwanda, two in Kenya and two in Nigeria. Their ultimate goal is to build 100 schools across Africa.

The foundation also provides funding for generous scholarships to train female teachers in Afghanistan. As a predominantly Muslim nation, many parents are reluctant to send their daughters to school because the vast majority of teachers are male. Only 25% of Afghan teachers are actually female. The aim is to get more girls in schools so that they can enjoy the many benefits an education brings.

Clean Water

Many communities in Africa have limited or no access to clean water, an essential part of maintaining hygiene, staying healthy and running sustainable farming operations.

Paxful has introduced a range of solutions in order to provide clean water including filtration units powered by solar energy. These units filter dirty or contaminated water using sand and chlorination, making it suitable for human consumption.

Depending on the topography, Paxful builds sustainable boreholes, underground rain-catchment systems and/or water tower reservoirs to provide clean water to communities.

The Olympics

In July 2021 Paxful donated to The Friends of Nigerian Basketball Foundation, a Non-Profit Organization (NPO) dedicated to promoting basketball in Nigeria and with the Nigerian diaspora. The donation was to help fund The Nigerian Men’s National Basketball Team in their bid to win an Olympic medal.

Paxful is just one of many interesting projects currently operating within Africa. The continent’s large, primarily young population has demonstrated that they are ready to embrace new technologies and ideas. This attitude provides fertile ground for crypto projects to thrive. I know I’ll be watching Paxful with great interest and truly hope they continue to go from strength to strength.

The Sun Exchange. Lighting up South Africa


Climate change and crypto are two interesting topics that have made the news a lot in recent times. Today I take a closer look at a Blockchain project that tackles both of these subjects: Sun Exchange. Simply put, the company aids communities by crowdselling solar power cells. People can then lease their cells to organizations in emerging economies and get paid in Bitcoin. It’s a win-win situation in my opinion. Read on and you’ll see exactly why…

A Unique Discovery

Based in South Africa, Sun Exchange is the first peer-to-peer (P2P) solar leasing marketplace. I first heard about the company back in 2018. Max Keiser and Stacy Herbert were appointed as advisers to the project and talked about it on the ever-popular Keiser report. I was fascinated by the concept and signed up for the Sun Exchange Newsletter that same day. Over the years I have followed their progress with keen interest.

The Nhimbe Fresh and Sun Exchange project really grabbed my attention because it’s the latter’s biggest and most ambitious initiative to-date. For this reason I decided to take a deep dive into the project and share my findings with all of you. It’s a great example of crypto entrepreneurship that’s really helping change peoples’ lives. So let’s get to it!
What’s Sun Exchange?

First of all, let me explain how Sun Exchange works, because it’s a truly unique approach that deserves some attention.

Sun Exchange identifies schools, businesses and organizations that want to move away from fossil fuels and go solar. Once an entity has been verified as viable and responsible, Sun Exchange runs a crowdsale to sell solar cells (by the seashore?) and raise money for the project.

Anyone from anywhere in the world can sign up to be a Sun Exchange member and buy solar cells. Purchases can be made using a traditional bank transfer, credit card or Bitcoin.

Owners of solar cells receive monthly payments once their cell starts generating electricity. Owners can either get paid in the currency of the country in which the project is based, or they can receive payment in Bitcoin.

So organizations benefit from getting access to clean, constant power whilst the people who lease their solar cells can earn crypto and feel good about themselves. Isn’t that awesome?

The Brain Behind Sun Exchange

Sun Exchange was founded in 2015 by Abraham Cambridge. Before starting the company, Cambridge ran a business in the UK installing solar panels.

In 2014 he moved to South Africa and began work as a solar engineering consultant. He was shocked by just how few buildings had solar panels installed despite South Africa being one of the world’s sunniest countries. He later discovered that accessing finance to pay for solar projects was a major roadblock to greater uptake. Cambridge was eager to address this problem and help schools, businesses and organizations across Africa access clean and affordable renewable energy.

With experience in climate change studies, solar panel installation and crypto, it should comes as no surprise that Cambridge is the brains behind Sun Exchange.

Nhimbe Fresh

Founded in 1996 in Zimbabwe, Nhimbe Fresh is one of Africa’s largest producers of fruit and vegetables. The company supplies the world’s markets with bluberries, stone fruits and vegetables. There’s a good chance that those blueberries you bought at your local supermarket were grown and exported by Nhimbe Fresh.

Nhimbe Fresh is more than just a farm. They are also dedicated to helping local communities. At present they provide employment for around 1,500 people in the local area and run several support programs to help local families enjoy a better quality of life.

Small farms in Africa provide up to 80% of total food production. Sadly they face a host of difficulties including small plots of land, barriers to entry into larger markets and a lack of finances.

Nhimbe Fresh takes active steps to help these small farms by providing them with practical support and solutions. One such program is the farmer education project which focuses not just on farming practices, but also healthcare and business procedures.

Nhimbe Fresh provides access to export markets for small farms with its outreach program. It collects produce from farms up to 100 km away and allows access to their packing and cold storage facilities. This outreach program allows said farms to earn money and gain access to finance, expand their operations and improve their overall standards of living.

All Nhimbe Fresh farms have clinics and childcare facilities available for employees. In addition, Nhimbe Fresh supports Marondera Children’s Home where some 200 children receive housing and care on a daily basis. Nhimbe Fresh are currently looking at ways to provide funding to pay for school fees at Marondera and offer students employment post-schooling.

Nhimbe Fresh is proud of their efforts to operate transparently as a sustainable business and protect the environment. However, their operation requires a huge amount of electricity for processing machinery, chillers, pumps and lighting. The Zimbabwean electricity supply is ‘unpredictable’ to say the very least and suffers from frequent power cuts. Nhimbe Fresh is thus forced to use backup diesel generators during power outages. As you can imagine, these generators are unreliable, noisy and very costly to run.

The power outages have a major impact on our production and processing, reducing our capacity to 60%. We have backup diesel generators for the packhouses and irrigation, but they’re too expensive to run – Edwin Moyo, Nhimbe Fresh Chairman

It’s clear that Nhimbe Fresh needs a clean, affordable and reliable power supply to run efficiently. This is where Sun Exchange enters their story…
Sun Exchange & Nhimbe Fresh

Sun Exchange has committed to providing solar panels and battery storage solutions for Nhimbe Fresh over three phases:

  • Phase One – Solar and battery project to power the packhouse and cold store
  • Phase Two – Power water pump sites
  • Phase Three – Power for Churchill Farm

The project will provide 1.9 Megawatts of power and battery storage and is Sun Exchange’s biggest initiative thus far, as well as their first outside of South Africa.

Providing solar power has many benefits, and not just for the environment. Firstly, it will provide Nhimbe Fresh with a continuous, reliable supply of power. The solar project is forecast to reduce their energy costs by more than 60% per year. Moreover, their carbon emissions should decrease by more than one million kilograms per year. That’s huge! This is a far cry from running diesel generators and relying on an unpredictable power supply from the ailing national grid.

In June 2020, Sun Exchange ran a crowdsale to raise money for the Nhimbe Fresh project. The sale managed to bring in $4 million and was considered a great success.

You can learn more about Nhimbe Fresh and the Sun Exchange crowdsale on the Sun Exchange YouTube channel

Progress so Far

At time of writing, equipment for the first phase of the Nhimbe project is en route. The aim is to have the equipment installed and running by the end of August, so it will be interesting to see if this goal is achieved in the expected time frame.

The next phase will concentrate on providing clean water to Nhimbe by using solar-generated power to pump water from reservoirs to the facility. Nhimbe uses a huge amount of water to irrigate their crops, so the success of this phase is absolutely critical.

Sun Exchange is just one of the many amazing projects coming out of Africa. I hope to bring you more stories about innovative projects in the future, but in the meantime, I’m rooting for Nhimbe Fresh! I hope to bring you updates on this initiative as and when they emerge.

El Salvador’s Love Affair with Bitcoin


El Salvador is the first country in the world to make Bitcoin legal. Will this be the answer to the nation’s financial woes? Or will it be a match made in hell? Let’s find out more!

The Beginnings of a Financial Romance

Unless you’ve been living under a rock for the last while, you must have heard that El Salvador recently passed a bill to make Bitcoin legal tender. In fact, the bill was passed by a large majority, gaining 62 out of 84 possible votes within Congress. Under the new law, which will be implemented in September 2021, Bitcoin must be accepted by firms when offered as payment for goods and services. Tax contributions can also be paid in cryptocurrency.

However, El Salvador is not getting rid of the US Dollar all together. El Salvador’s President Nayib Bukele stated:

‘The use of Bitcoin will be optional, nobody will receive Bitcoin if they don’t want it. If someone receives a payment in Bitcoin, they can choose to automatically receive it in Dollars’

El Salvador is the first country in the world to make Bitcoin legit. You might be wondering why this is such a big deal for El Salvador as well as several other Central and Latin American countries. Let me explain by first giving you some history on the nation that is El Salvador.

This small Central American country’s past is a troubled one. It has endured political and economic instability with a series of coups, revolts, and a succession of authoritarian rulers. Persistent socioeconomic inequality and civil unrest led to the Salvadoran Civil War which took place between 1979 and 1992. Due to this constant state of conflict, El Salvador has been ravaged by poverty and gang-related criminality.

Traditionally, El Salvador relied heavily on coffee exports for revenue. However, they later looked to diversify their international exports and the economy by opening up trade and financial links as well as expanding their manufacturing sector. To facilitate trade and attract foreign investment, El Salvador dropped its own currency, the Colon, in 2001 and adopted the US Dollar.

So what has all of this got to do with Bitcoin? Well, simply put, adopting the US Dollar didn’t solve El Salvador’s financial problems. The foreign trade that was promised, the high-quality jobs, the foreign investment, the increase in exports…all of this didn’t come to pass. So how does El Salvador keep its financial head above water?

Foreign remittances is the answer. In 2019, foreign remittances amounted to the equivalent of 16% of the country’s GDP. Many Salvadorans migrate to the United States to find work so they can send money home to their families, and foreign remittances allow them to accomplish this.

Naturally, this is where Bitcoin comes in. Now as many of you know, sending money through the traditional banking system is slow and expensive, because everyone wants a slice of the pie. Moreover, opening a bank account requires legal documents, like a passport. This is a major issue in developing countries where accessing official documents is typically expensive, time-consuming and complicated.

Bank accounts…now that’s another problem! According to President Bukele:

‘Some 70% of people in El Salvador lack access to traditional financial services.’

So, with such a large percentage of the population unbanked, Bitcoin could solve a lot of problems by getting money from abroad, quickly and far more affordably.

Not Quite a Fairytale?

Many arguments have been put forward criticizing El Salvador’s decision to make Bitcoin legal tender. The IMF and World Bank have outright refused to assist with the roll-out. The World Bank cited that they had problems with the transparency of Bitcoin transactions and the environmental impact of Bitcoin mining.

Excuse me? Did they not hear President Bukele say that El Savador will mine Bitcoin using geothermal power from the country’s volcanoes?

 More on that in a follow-up article. Stay tuned!

One common argument is that using Bitcoin is too difficult and risky for the average person. To address this issue, President Bukele has committed to offering training to people and initiatives promoting the use of Bitcoin.

He is also launching an e-wallet called Chivo, which is Salvadoran slang for ‘cool.’ As part of the package, people who make use of it will receive $30 in Bitcoin so that adoption is incentivized.

Athena Bitcoin announced plans to install 1,500 Bitcoin ATMs in El Salvador, targeting places where residents receive remittances from abroad. This should make it easier for people to buy and sell Bitcoin.

President Bukele was asked whether the use of Bitcoin would encourage criminal activity and money laundering. This is a common argument often used by opponents of crypto and Blockchain. He replied that criminals are already using the Dollar…

‘The problem is not the Dollar, it is the criminals.’*

Another argument is that Bitcoin is highly volatile, which makes it risky. However, with rampant inflation across many Central and Latin American countries, the volatility of Bitcoin doesn’t hold a candle to the levels of inflation these nations have endured. For example, Argentina is battling an unsustainable debt load while Venezuela’s economy has shrunk by 75% since 2013. Nice job fiat currencies!

Dissenters have often said that Bitcoin transactions are slow and expensive. Slow? I’m not so sure about that. I’ve personally had to wait longer than 10 days for money to arrive in my bank account from abroad. In my opinion, Bitcoin is definitely the hare while banks are more like the old arthritic tortoise…

Also, don’t forget Jack Mallers’ Strike app and the Lightning Network. The Strike app makes it fast and cheap to send and receive small amounts of Bitcoin. This is because Strike is powered by the Lightning Network, a layer 2 protocol that settles transactions ‘off-chain’ through a growing network of user-hosted channels and nodes. In fact, the Strike app has quickly become the most popular one in El Salvador.

Expensive? Start looking at organizations like Western Union and MoneyGram…the fee system is mind-boggling! Fees differ depending on where you’re sending your money, whether you’re using a bank transfer or a credit card, or even whether your recipient is receiving the money as cash or into a bank account. Also, one time a relative sent me some money via Western Union, I had to show my passport to prove my identity. So as it stands, the use of personal documentation is necessary to transact in the legacy financial system.

 Making It Together

Whether other Central and Latin American countries follow El Salvador’s lead and make Bitcoin legal tender remains to be seen. The reaction of the IMF and The World Bank is certainly something to take into account. Do they really believe Bitcoin is too risky and simply don’t want to be associated with it? Or do they see Bitcoin as a threat to the financial status quo and therefore their power and influence? Hmmm…

In my opinion, anything that shakes up the traditional financial system is only a good thing. Whatever happens, you can be sure that I’ll be bringing you all the latest updates on El Salvador and Bitcoin as they occur. Until next time!

Bitnob Changing Lives in Africa

Africa is adopting crypto at a crazy rate, and so far, Nigeria and Kenya top the charts. In fact, a recent report by reveals they are two of the top 10 countries globally for crypto adoption (Kenya is 5th while Nigeria is 6th). Let’s take a look at a project that is helping to drive this trend, Bitnob.

Based in Nigeria, Bitnob is a platform that makes it easy for individuals and businesses to buy and save Bitcoin. Users access Bitnob through a mobile app that’s available for both Android and iOS. With staggering rates of inflation, Nigerians are always on the lookout for ways to save money, so it’s no surprise that platforms like Bitnob are really taking off.

Cool Features

Not only does Bitnob help people buy and hold Bitcoin, they also release free weekly educational webinars. These webinars teach people how to use Bitnob and everything they need to know about Bitcoin and investing. These webinars play a major part in Bitnob’s mission to help people achieve financial freedom.

Bitnob has some really nifty features including a referral program based on the concept of Ubuntu, a Zulu word that means ‘community.’ According to co-founder Adeolu Akinyemi

 ‘In Africa, we depend on each other, rely on each other and really need each other. It’s a concept called Ubuntu: when we are good, then I am good’

The program is designed to celebrate and reward Bitnob users and encourages them to spread the word about its efforts to lower the barrier to entry to Bitcoin.

With the referral program, users can earn cash rewards when they encourage their family and friends to sign up for Bitnob. To add a further fun twist to the program, there is also a leaderboard where people can earn points for the number of successful referrals they achieve. People on the leaderboard are known as Bitnob Ambassadors, and there are several levels they can attain including Bronze, Silver, Gold, Platinum, Diamond, Ruby, and MVP.

Another interesting feature of Bitnob is that it provides an easy way for users to Dollar-cost average (or DCA) Bitcoin. Dollar-cost averaging is an investment strategy used to reduce the impact of volatility when purchasing high-risk financial assets like stocks and cryptocurrencies. With DCA, you schedule regular purchases at a set amount. Using Bitnob, people can regularly buy as little as $1 worth of Bitcoin. There is also a handy Dollar-cost averaging calculator. This makes it easy for people to work out their earnings based on the current market value.

At present, it’s not possible to buy Bitcoin in Nigeria using a bank account. In February 2021, the Central Bank of Nigeria ordered banks to close the accounts of crypto traders.

However, Bitnob figured out a clever workaround to counter this problem using Ovvar vouchers, which are sort of like mobile phone top-ups. First someone must buy an Ovvar voucher from a vendor, which are apparently common in Nigeria. Once a voucher has been purchased, a code is sent directly to the purchaser’s mobile phone. They then input this code into their Bitnob account, and the money is transferred. Simple right?

Bitnob also offers NobCredit, which allows users to make use of instant crypto-backed loans. With NobCredit, users can take out flexible loans with zero hidden fees or penalties and use their Bitcoin balance as collateral. In this way, Nobcredit allows users to meet urgent financial obligations while continuing to HODL their Bitcoin.

 Lightning News

As if all these cool features weren’t enough Bitnob, recently announced that they had successfully integrated the Lightning Network into their platform. On August 19th 2021, Jack Mallers Tweeted a video of himself sending money from his US bank account to Nigeria using Bitnob and the Lightning Network. The transactions took seconds!

So what does the Lightning Network mean for Bitnob? So through the integration of this revolutionary technology, Bitnob becomes a node within the network. This means it can connect to other Lightning Nodes for processing transactions. As a result, Bitnob users can easily send Bitcoin to other platforms and Bitcoin wallets that have Lightning Network functionality.

The Lightning Network means faster transactions, so Bitnob users can confirm deposits and withdrawals within a few seconds instead of several minutes.

In addition, the Lightning Network allows users to send smaller amounts of money that would not have been possible with the on-chain network due to high fees. This opens Bitnob users up to a new world of possibilities including paying for utilities, buying data, and performing mobile airtime top-ups.

Bitnob is just another example of one of the ingenious crypto projects operating out of Africa. With a large and educated population of young people and rampant financial instability, it’s no wonder why Bitcoin adoption is gaining pace in Africa.

Lightning Network Explained

Bitcoin is great in many ways. It’s border-less and decentralized. It provides an efficient way to transfer money anywhere in the world without the need for banks. It puts you in charge of your money.

However, despite all these plus points bitcoin does have certain drawbacks.

Transaction speeds can be slow. On average only 7 transactions are processed every second. Compare this to Visa which can process over 65000  transactions per second and you realize just how slow bitcoin transactions are.

Transaction fees can be high. Blocks on the network can only contain 1MB of information. If there are a lot of transactions, miners will process the ones with the highest fees first. If you haven’t paid a high enough fee your transaction could be left waiting for days.

These issues mean that it’s difficult to use bitcoins for micro-payments. Micro-payments are everyday payments such as buying groceries or gas. Using bitcoin to buy your cup of coffee is just not feasible at the moment. You could end up waiting ages until your transaction is confirmed. Your coffee will be cold and the transaction fee may be higher than the price of the coffee!

Lightning Network offers a solution to these problems.

What is Lightning Network

Lightning Network is a second layer solution built on top of the Bitcoin blockchain. If the blockchain is the first layer, Lightning Network is the second layer. Lightning Network enables users to send transactions within payment channels that work outside the bitcoin blockchain.

This makes the transactions super quick and much cheaper.

The Benefits of Lightning

Solving Scalability

Bitcoin does have problems with scalability. The more transactions there are, the slower the network becomes.

Back when bitcoin started out there were few transactions usually carried out by passionate enthusiasts. However, bitcoin use has been steadily increasing over the years and at the time of writing, there are roughly 281,727 transactions every 24 hours.

As bitcoin adoption becomes more widespread the number of transactions taking place daily will surge. If the network struggles to cope with an increase in transactions, fees will increase and transactions may not be confirmed for days.

Lightning has the potential to solve these scalability issues by enabling multiple transactions to take place off the main blockchain.

Low Transaction Fees

Bitcoin fees can be very variable and at times can be extremely high. With Lightning, transaction fees are minimal. This means you can carry out small transactions, even as small as one Satoshi! A Satoshi is the smallest unit of bitcoin, it is one hundred millionth of a single bitcoin (0.00000001 BTC)

Faster Transactions

Lightning Network promises fast transaction times. Transactions could be settled in seconds or even instantaneously. If Lightning achieves mass adoption it could provide stiff competition to Visa and Mastercard.

The Downside of Lightning

Ease of Use

Bitcoin is not the easiest system for beginners to handle. Lost passphrases, lost passwords, confusing fees and complex addresses are just some of the difficulties faced by new users. Smartphone wallets have made great strides in helping beginners transact with bitcoin. But there are few smartphone apps available to help make lightning easy to use.


There are some concerns that well funded nodes with lots of payment channels may become very powerful. These nodes could potentially monopolize the network and cause the system to become more centralized. The complete opposite of what Bitcoin is all about.


New research has shown that Lightning Network may have privacy issues. Researchers probed the channels of the network by sending different sized payments. They were able to find the balance held within the channel fairly easily and with no expense incurred.

How Does Lightning Work

Alice and Bob want to send bitcoins to each other. They open a payment channel and deposit bitcoins. This initial transaction is broadcast to the Bitcoin blockchain. Within this channel, they can transfer bitcoins as many times as they want. The transactions are basically a redistribution of the bitcoins within the channel.

When either Alice or Bob want to leave the channel their last transaction is broadcast to the bitcoin blockchain. Alice and Bob could have made limitless transactions within this channel but only 2 transactions are sent to the blockchain.

What if Bob tries to back out of the payment channel without honoring the transactions?

If Bob decides to cheat, his initial deposit gets sent to Alice. This harsh penalty acts as a deterrent against fraud.

The Network Effect

The above example only describes transactions between two parties. What happens if you want to send payment to someone but you don’t want to open a channel with them? This is where the Network effect comes into play.

Alice would like to buy coffee from a coffee shop using bitcoins. Unfortunately, she doesn’t have a payment channel set up with the new coffee shop she wants to try out.

Using Lightning Network Alice can transfer bitcoins by jumping through other interconnected payment channels. The only requirement is that the payment channels must have enough bitcoins in them to cover her transaction and the other transactions routing through.

This Network effect makes it possible to send micro-payments throughout the world quickly and cheaply.

In Conclusion

This is a very general overview of Lightning just to give you an idea of its potential. In reality, it is a lot more complex than the way it has been described here. Having said that Lightning Network does have the potential to shake up the existing financial system. It enables money to be sent anywhere in the world without using banks or third parties. It could provide an opportunity for the world’s 1.7 billion unbanked to access financial services.

Lightning Network could also be the catalyst that triggers mass adoption of bitcoin and cryptocurrency. If payments can be made almost instantly, worldwide and without  high fees the argument for using cryptocurrency is extremely compelling.

Lightning Network still has a way to go before it is rolled out completely. At the moment it is still in testing and its adoption has been slow.

However, I am interested in tracking its progress and look forward to seeing its effect on the crypto community.