Will the Lightning Network lead to fractional reserve banking?

is fractional reserve banking possible on lightning

Is fractional reserve banking possible on Lightning?

There are many negative articles claiming that the Lightning Network will lead to fractional reserve banking on Bitcoin. This would mean that the limited supply feature will be destroyed and Bitcoin will eventually fail to be better than fiat. Is fractional reserve banking on Lightning possible?

Is fractional reserve banking on Lightning possible?
Why do many people think it is?
A list of stores where you can pay with Lightning
Specialised hardware for the Lightning Network

Is fractional reserve banking on Lightning possible?

Lightning transactions happen when balances in a payment channel are updated between two parties. When Alice send BTC to Bob over the Lightning Network the amount to send will be subtracted from the balance in the Lightning wallet of Alice and added to the wallet of Bob. This happens through updating a not yet broadcasted Bitcoin transaction. Bitcoin can only be send when they really exist on the blockchain. 

This means that a Lightning transaction can only be created with the amount of Bitcoin that is used to open the channel or received from someone else. The Bitcoin that is used by opening a channel is 100% existing because now you can’t spend them in your onchain wallet anymore. The Bitcoin received comes from another person who brought this Bitcoin from his onchain wallet in a Lightning channel and thus is 100% real Bitcoin too. 

Long story short:

Bitcoins send on the Lightning Network are real bitcoins and it is impossible to create more of them without backing on the blockchain. When a bitcoin is locked up in a payment channel you can’t use it onchain until the channel is closed. After it is closed you can’t use it in the Lightning Network anymore. A Bitcoin is always OR ready to use onchain OR in a lightning payment channel. Thus fractional reserve banking on the Lightning Network is NOT possible.

Why do many people think that fractional reserve banking on Lightning will happen?

Lightning is quite complicated and not many people really understand it. The lack of knowledge among the public is often misused to attack the Lightning Network because many rich entities will lose a lot of money when it succeeds.

Lightning will make many altcoins, centralised exchanges and other services obsolete. By spreading FUD people that feel threatened try to stop or delay the rise of the Lightning Network in an effort to rescue their business. There is a lot of misinformation about Lightning around. Educate yourself through multiple sources and never believe one individual article.