Mental Models of Money and Lightning

Sam Abbassi
FCAT Blockchain Incubator
10 min readFeb 13, 2021


Lightning is not a silver bullet, but it will significantly aid in the utility of Bitcoin and the expansion of its monetary regime.

Money invention is something that necessitates first principles. Much like our founding fathers who found it more suitable to create a new system of government from scratch, rather than monkey-patch the existing agreement called the Articles of Confederation; Bitcoiners find it more suitable to create money from scratch rather than mangle our minds and hands through the legacy infrastructure that stilts today’s existing financial system. Or even worst yet, somehow reengineer the dollar back to a hard money standard.

Bitcoin is the hardest money we’ve ever had¹. New money doesn’t come around every century, and when that realization is stitched into the cerebral fabric of society, it becomes a game of resource allocation. There’s a finite number of these digital units of property that exist solely within cyberspace and solely within this defined system that all participants (hodlers, noderunners, and miners) accept and submit to — voluntarily.

Layering Bitcoin both in terms of money and technology is a major nexus for growth. Developing a mental model for this layering will provide insight and direction for understanding the potential implications of Bitcoin as programmable money.

Mental Models of Money Layers

There are two thinkers that are relevant for this mental model — Giacomo Zucco and Nik Bhatia. Both of these bitcoiners have developed frameworks for understanding bitcoin as money.

The Bhatian Model

Bhatia provides us with a four-layer hierarchy to understanding gold layering² and its historic relation to money. Though the dollar is no longer backed by gold, money evolved through time through gold. Thus, it is helpful to begin framing our minds with this model as bitcoin’s world reserve currency status is contingent on a similar layering model.

  • Layer 4: certificates backed by bank-issued gold certificates
  • Layer 3: bank-issued gold certificates
  • Layer 2: raw gold that has been melted and shaped into bars and coins
  • Layer 1: physical gold in its raw form after it is mined

This model highlights the granularity and separation of utility that is represented at each layer. It takes all of the obfuscation that is presented with money and strips it down to its core elements.

In layer 1, you are trusting whatever method is being used to verify the purity of the raw gold. In layer 2, it is the mints (either government-controlled or private) that have melted and shaped the gold according to a set of standards and it is they who you are trusting (namely trusting that they are using real gold). In Layer 3, it is the banks who are issuing the certificates on gold they are holding in reserves whom you need to trust. And in Layer 4, it is the liquidity providers issuing certificates on the gold-certificates issued by banks. Every layer trusts the layer below it and goes no farther in verification of the money than the layer immediately below it³. Trust increases as you go up the stack, but the facilitation of economic activity is entirely contingent on this layering of trust and this abstraction of money.

Base layers are for final settlement, while higher layers are for facilitation of economic activity. — Nik Bhatia

The Zucconian Model

Zucco takes Bhatia’s concept a little further with a six-layer stack and obfuscates the granularity in gold highlighted by Bhatia’s model. If Bhatia’s model is “how money worked in the past,” then Zucco’s model is “how money works today.”

  • Layer 6: “FinTech” application like PayPal, Venmo, GPay, AliPay, or ApplePay
  • Layer 5: traditional banking relationships between the “Fintech” applications
  • Layer 4: network of international corresponding banks
  • Layer 3: local central banks acting in legal monopoly
  • Layer 2: federal reserve notes
  • Layer 1: gold (←this no longer exists)

Our existing system scales through credit, and Venmo effectively acts as a sidechain to the banking system creating and facilitating transactions with Venmo-dollars. The Fintech layer increases speed of transactions, as sending money is now done instantly and free of cost.

Zucco expands the money layering to technical layering focusing on abstraction. That is, the separation of a system into subsystems allowing the separation of concerns. With layering, each layer can exist without the layer above but crucially needs the layer below it to function.

The classic models for this in computing is the hardware → software stack and the OSI and TCP/IP model

Figure 1 represents the technical OSI model and the corresponding conceptual TCP/IP layer

Bitcoin Scaling Methods

Bitcoin scaling was the very first comment made to Satoshi’s publication of the white paper on the cryptography mailing list. Later in 2010, Hal Finney (original-bitcoiner and cypherpunk) defined the term “Bitcoin Banks” in his post on bitcointalk:

Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the block chain. There needs to be a secondary level of payment systems which is lighter weight and more efficient. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for medium to large value purchases. Bitcoin backed banks will solve these problems.

Bitcoin is not suitable for retail payments. We seem to have departed from the narrative that Bitcoin is a better version of Visa/PayPal/MasterCard/name-your-payment processor. This is good. Bitcoin has historically been plagued with unfulfilling and rather rudimentary visions for its utility as a mature system that only now seem to have settled. The future of Bitcoin does not lie within an instant, centrally controlled, payment system, the future of Bitcoin lies within a system of property rights that exist and are enforced without a monopoly on violence, which can be leveraged at will. Accepting that assertion, what can one do with these types of property rights? What should the system enable for the rights I have on my property?

One of the wonders of Bitcoin is that the money is programmable. You can construct what your money does and what it can either do, or can be allowed to do, in quite novel ways. This gives us a few different interpretations of how the bitcoin asset can be used and represented. Back to Zucco:

Reinterpretation Method: The economic asset bitcoin (with a lowercase “b”) is not necessarily reused, while the technological infrastructure Bitcoin (with an uppercase “B”) is leveraged in order to move more assets around.

Omni and Counterparty are both protocols that reinterpret Bitcoin transactions to mean something else at a higher level. This is done by leveraging the OP_RETURN Opcode when creating Bitcoin transactions — a feature implementation in 2014 to account for the market demand of using Bitcoin’s finality and censorship resistance for anchoring data in a transparent way. Something that other blockchains have attempted to replicate.

Omission Method: The technological infrastructure Bitcoin (with an uppercase “B”) is not necessarily reused, while the economic asset bitcoin (with a lowercase “b”) is leveraged in order to mediate more value transfers.

Lightning and, to a certain extent Liquid, leverage Bitcoin by omitting activity on the base layer and instead reuse bitcoin transactions at a layer above, or at a layer in parallel (Liquid — sidechains). When bitcoins are being transferred over Lightning, the asset (bitcoin) is being transacted with in a separate layer altogether, omitting the base layer (Bitcoin) while reusing the asset (bitcoins). In effect, the Venmo-like asset (HTLC’s — bitcoins over Lightning) are being instantly sent back and forth in this separate network (Lightning or Liquid), completely apart from the layer 1 of Bitcoin.

In effect, this is no different to how your Venmo-dollars are moving back and forth. Bitcoin over Lightning is happening instantly, at a fraction of the cost of settling bitcoins — just as your Venmo payments are happening instantly, at a fraction of the cost of sending wires back and forth between banks — except that you are skipping all the layers in between, layers 2–5, and settling directly to bitcoin (or gold in Zucco’s layered mental model above).

Credit Method: The asset being used is bitcoin-denominated credit, not the bitcoin asset itself.

  • Exchanges

Bitcoins held by customers at many exchanges are entries in the liabilities of the exchanges’ balance sheets and are in no way the physical bitcoins they represent. When a customer holds bitcoin on an exchange, the customer does not own the bitcoin, but rather a claim against the exchange’s bitcoin⁴. Most exchanges keep their bitcoins in custody grouped in a few addresses in some combination of hot and cold storage and many have notoriously been under-collateralized. Much to the chagrin of technical scaling proponents, exchanges have historically been the go-to scaling method as users can send transactions back and forth on a given platform (representing movements in the exchange’s database) without actually touching the Bitcoin base layer until the customer withdraws funds.

These different methods and approaches need not work in isolation and none of these methods necessarily reigns supreme. In fact, the interplay between different scaling methods can work in tandem across one another and, in practice, we will likely see some combination of the above approaches. The unifying theme is that bitcoins (capital) are being locked up and used in some other way.

Why Lightning Matters

One of the defining characteristics of this asset is the ability for single individuals to hold this asset themselves, instead of a holding it with a custodian. This allows individuals to express a level of agency that was unthinkable before Bitcoin. In your hardware wallet or air-gapped computer, you can hold as many satoshis or bitcoins as you wish (measuring anywhere from a few cents to hundreds of millions of dollars). This feature that makes transport trivial is also the feature that makes Bitcoin seizure resistant. In this specific regard, gold cannot hold a candle to Bitcoin. “Being your own bank” is becoming less of a meme and more of a reality as we research and develop creative ways to build capital markets on top of this asset.

A fundamental difference between Bitcoin and the existing monetary standard is that scaling (growth) does not need to happen through credit. Every single Lightning transaction is a valid Bitcoin transaction. Scaling is instead achieved by deferred settlement, which allows for auditability of Lightning transactions and uses the assurances provided by the network at a later date. This model is similar to the relationship between parties to a commercial contract — goods and services and payments move back and forth pursuant to the terms of the contract, without involvement of the legal system. Yet, the arrangement rests on the legal foundation that dictates which sorts of arrangements are permitted, how terms will be interpreted and provides a venue — the courts — when necessary to settle disputes, enforce terms, or compel an audit. In Lightning, users lock funds with another party and can send unlimited numbers of transactions between each other in what is called a payment channel, only moving funds back into Bitcoin when the engagement(s) / relationship is over. This method uses Bitcoin as the settlement (judgement) layer for updating the new balance at the close of the relationship or series of transactions. Furthermore, Lightning creates a further way to monetize the underlying bitcoin holding, in that the network of nodes that compose the topology and infrastructure of the Lightning network earn a return for facilitating the movement of capital

This capital structure that Lightning facilitates is inherently different from what we have today, as final settlement with dollars looks and functions differently from final settlement of bitcoin. With dollars, final settlement always presents an amalgam of counterparty risk as transactions work their way through and across the balance sheets of various financial institutions. Leveraging Bitcoin through Lightning incarnates a world where holders of bitcoin can earn yield on their holdings without counterparty risk. This is novel and has the potential to greatly expand financial access and create more efficient capital markets.

Lightning gives the, otherwise limited, Bitcoin system a way to “scale.” And, more importantly, a way to scale in a trust-minimized way, one that is done without counterparty risk and one that is done without credit. When you use Lightning, you are using Bitcoin.

Lightning is still in its infancy and we’ve already seen a swell of interest, companies, and improvements that will solidify its place in the Bitcoin stack and may greatly improve Bitcoin’s ability to function globally at scale.


  1. Bitcoin exhibits all the properties of gold as money in addition to absolute audibility. Gold is hard money because it can be stockpiled over time, and has the lowest inflation rate of all metals. Bitcoin can be stockpiled over time and wont ruin, has an inflation rate under 2.5% and will be 1% in 2024. It is also auditable all the way to its smallest unit. This auditability is also democratized — you can audit Bitcoin’s entire hard-capped supply at home without trusting an intermediary.
  2. “gold layering” refers to the deconstruction of gold (as money) into its different representations and functions. A gold certificate is not the same as a gold bar.
  3. The holder of a gold certificate trusts that the issuer of the certificate is holding the gold that the certificate is claimed against. The holder of the gold certificate does not audit the integrity of the gold and independently verify its purity. That happens a few layers down at the level of the custodian of the physical gold coins or bars. So, trust is segmented across all the different relationships that makes gold gold.
  4. When a customer initiates a trade or, in the case Bitfinex, engages in derivatives trading, they are using Bitcoin-denominated credit to do so. Bitcoins are not moving or facilitating any kind of activity, the new synthetic instruments that the customers are engaged with are facilitating that activity. Bitcoins are used for settlement purposes when a customer withdraws or deposits onto the platform.

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