Cryptocurrency has become a major buzzword in the news this year. You may have heard the stories of people turning their $100 investment into $100,000, or you may have just seen Elon Musk talking about Dogecoin. Despite cryptocurrencies being touted as a means to obtain obscene wealth, the technologies behind these assets have great potential for the cannabis industry, particularly in the area of digital payments.
Digital transactions with traditional financial institutions have been a difficult hurdle for cannabis companies to overcome. Despite 38 states offering medicinal cannabis, and 19 states allowing it to be recreationally available, it is still federally recognized as a Schedule I substance. Because of this, it can be a challenge to work with banks. Cryptocurrencies like Bitcoin offer a current solution to digital payments.
Before I dive into how exactly Bitcoin can provide digital payments, it’s important to explain exactly what this technology is. At its core, most cryptocurrencies just provide a way to securely transact value digitally. This is all possible with the creation of blockchain technology, which combines the computing power of multiple computers (or nodes) across a network to create a consensus, called “Proof of Work”. If you are interested in the technical side of how this works, I will go further in depth at the end of this article. The important takeaway is that you are not trusting a single entity, like a bank, with your transaction, but instead, you are using the consensus of over 10,000 independent operators to verify the transaction, making the system incredibly secure.
This security comes at a price though, bitcoin can only process 7 transactions per second. With VISA being able to easily handle over 1,700 transactions per second, you might be asking, “How exactly is this technology a viable option for digital payments?”. This is where the Bitcoin Lightning Network steps in.
The Lightning Network is a protocol that is built on top of the bitcoin network. It promises to increase the transactions of bitcoin to more than 40,000 transactions per second with negligible fees. I’ll go into more technical detail about how it works below, but think about the lightning network as your checking account and bitcoin as your savings account. Instead of wiring money all the time with your savings account. You put a certain amount into your checking to quickly make transactions.
While still a new technology, the Lightning Network is already being used heavily in El Salvador. Access to banking for Salvadorans can be incredibly hard, some having to travel hours to get to a bank, but many have access to a mobile phone. This makes mobile payment networks like bitcoin incredibly attractive. Salvadorans can easily set up their own bitcoin wallet and start transacting with friends, family, and local businesses without the need for a traditional financial institution.
Though federal legalization of cannabis feels inevitable, the timeline still remains unknown. How much longer will we have to wait until we can freely bank as a caregiver? What restrictions will be imposed on me when I can? What will my options for loans be? All of these unknowns are what makes cryptocurrency so interesting. This technology exists today, and can be implemented immediately. Cryptocurrency deserves more than being treated as a get rich quick investment. It has the ability to help small businesses and individuals regain their sovereignty.
Bitcoin in more Detail
It is a hard task to explain the concepts of bitcoin without sounding incredibly long winded or confusing. For those who still are curious about how this stuff works, please, continue reading. But from here on out, it’s gonna get a little weird and abstract.
As I said earlier, bitcoin uses the consensus of over 10,000 nodes to securely verify transactions on the network. It does this with the use of cryptography. When a transaction is initiated, it is turned into a cryptographic puzzle. All 10,000 nodes are all trying to solve this puzzle. Hidden inside these puzzles are the details of the transactions that need to be recorded (send X amount of Bitcoin to Y). Once a node solves a puzzle, the transaction is recorded onto the blockchain, and the node is rewarded for completing the puzzle. All transactions that have ever been recorded since Bitcoin’s inception in 2009 can be viewed on the ledger. This is an incredibly simplified version of how Bitcoin works, but all of the important features are there to understand.
While this decentralized way of transacting can be an incredible store of value, it becomes more difficult to use for day to day transactions. This is where the lightning network comes into play.
Imagine if your savings account is your Bitcoin wallet, and your checking account is the bitcoin lightning network. Instead of sending wire transfers from your savings account for every transaction, you make one transaction into your checking account, and then use that money for all your transactions. In the Lightning Network, two node operators, A and B, create a channel between themselves by taking their bitcoin off the main chain (savings account), and locking it in a channel between themselves (checking account). This bitcoin can be transacted between these two channels instantly and at no cost. If a third channel exists between B and C, then A can actually utilize this channel and send funds directly to C, through B, by giving B a small fee (currently ~.0006 cents). All of the information sent between channels is encrypted with a password that can only be seen by A and C. Once C receives the funds, the password is beamed back to A confirming the transaction. If A doesn’t receive the password, that means node B failed to deliver, everything is sent back to A, and the process is tried again through a new pathway (ex: A>D>C). With new channels forming between nodes, quickly a web of interconnectivity is formed, so that you are able to pay virtually anybody on the network as long as they are connected to a public node. As confusing as all of this sounds, this all happens on the back end of the system. For the user experience, it is as easy as downloading an app, and invoicing someone (similar to Venmo).
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