Introducing Ark, A Layer-2 Protocol: Bitcoin’s Inbound Liquidity Problem Solved?

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Ark presents a promising solution to Bitcoin's inbound liquidity problem by offering cheap, anonymous, and user-friendly off-chain transactions. By leveraging virtual UTXOs and prioritizing privacy, the layer-2 protocol aims to enhance the scalability and usability of Bitcoin while providing a viable alternative to the Lightning Network. As the project gains traction in the crypto world, it remains to be seen whether Ark can truly deliver on its potential and revolutionize the way we transact with Bitcoin.

Burak Keceli, a self-taught 24-year-old Bitcoin (BTC) engineer and researcher, is now proposing Ark, a new layer-2 protocol that he claims could fix Lightning’s “inbound liquidity” problem. 

Inbound liquidity refers to the ability to accept funds via Lightning, a layer-2 payment network created in 2016 that allows for cheaper and quicker Bitcoin transactions. However, the receiving capability must be built first by committing funds and making outbound payments.

Burak claims he’s been working on Ark primarily alone and hasn’t incorporated or solicited cash, preferring to keep the project open-source and donation-funded. Still, the idea is already gaining traction in the crypto world. 

At 21:00 on October 6, Singapore time, Ark will begin the unified exchange of super node subscription shares.

What Is Lightning Network? 

The Lightning Network aims to address Bitcoin’s scalability concerns, causing smaller transactions to clog the blockchain. Each block on the blockchain takes around 10 minutes to process, and only a few transactions may occur. Thaddeus Dryja and Joseph Poon, two developers, offered an approach in 2016 that could allow quick and cheap network transactions without increasing the block size. It was dubbed the “Lightning Network.”

The Lightning Network adds a second layer to the Bitcoin blockchain, employing user-generated micropayment channels to speed up transactions.

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Given that they do not need to be broadcast to the entire network, these transactions can be significantly faster compared to regular Bitcoin transactions. The absence of miners requiring incentives also results in minimal transaction costs, with fees being low or even non-existent.

As a result, scaling solutions such as the Lightning Network provide the feasible potential for exploring new Bitcoin use cases. For example, the ability to conduct quick Bitcoin transactions might aid in resolving the long-standing issue of “buying coffee with BTC.”

Lightning payments are connected along the route by a hash lock identity. Hubs in the middle can work together to collect payment information and disrupt the relationship between the sender and the recipient.

Lightning is not scalable in terms of on-chain footprint either. Lightning is a layer two that relies significantly on the base layer. Recent fee-market events, which rendered major lightning infra unreliable, demonstrated this to some extent.

According to the numbers, it would take more than 100 years to enroll the whole population into Lightning in a non-custodial manner, assuming four channels per person and an average channel opening using a few hundred vBytes (units of measure for the weight of blocks and transactions). 

What is Ark? 

Ark is a layer-2 protocol that can pay and receive Lightning bills. It enables receivers to accept payments without gaining incoming liquidity while maintaining recipient anonymity. 

Ark enables protocol users to send and receive coins without adding any of the following limitations: 

  • Liquidity limits;
  • Interactivity requirements;
  • A direct relationship between senders and receivers.

Meaning that a receiver is paid without the need for:

  • Requiring any onboarding setup;
  • Maintaining an always-on server;
  • Disclosing users’ identities to outside observers. 

These make it comparable to the way Lightning service providers operate. Since there is no idea of opening and shutting channels, Ark uses orders of magnitude less on-chain footprint than Lightning. 

Features of Ark Protocol 

Ark has a UTXO (the amount of cryptocurrency remaining after a transaction is executed)  set that operates independently of the chain. These UTXOs (transaction outputs) are virtual transaction outputs or VTXOs. Virtual UTXOs function similarly to four-week-long notes. Users must spend their VTXOs within four weeks after obtaining them or return them to themselves to reset the four-week timer. 

Ark payments are final in every block and settle every 5 seconds. To consider a payment ‘final,’ users must wait for on-chain confirmations. People still need to pay bills with their zero-conf coins. Ark is immediately available but has a delayed finality. 

BTC can be handled using virtual transaction outputs (vTXOs) on Ark. When a payment is performed on the protocol, vTXOs are destroyed, and new vTXOs are produced, similar to how on-chain money moves to increase coin ownership anonymity. vTXOs values are limited to a range of sats ranging from one sat to a million sats.

Users can obtain vTXOs from someone who already has them or by a procedure known as lifting, which is an atomic two-way peg mechanism that does not involve trust. Lifting allows users to lift off-chain UTXOs for a 1:1 virtual UTXO. Users can redeem virtual UTXO for an on-chain UTXO without assistance from ASP (Application Service Provider).

When transmitting funds, users coin-select and destroy their BTC before creating new ones (plus change) for the receiver in an off-chain mixing round. Each new coin has a shared secret that, when used, shows evidence of payment. Like quiet payments, the payment destination is a well-known public key. However, the payment trail is disguised using simple tinkering and blinded mixing.

The coinjoin (combines all user inputs and outputs into a single transaction) round’s freshly produced VTXOs are combined and nested beneath a common transaction output. This shared output expires four weeks after its creation. Once it does, the ASP who sponsored the shared output in the first place can sweep the shared output entirely. 

All nested VTXOs beneath this common output will be redeemed during this window.

Why Ark Is a Preferred Layer-2 Protocol

Ark protects the recipient’s privacy, has no entrance barrier to onboarding, and is simple to use. In principle, it could self-custodial onboard the whole population to Bitcoin. 

There are certain drawbacks to the Bitcoin Lightning Network. With minimal routing expenses, the Lightning Network opens the door to harmful attacks. Due to the reduced Transaction fees, miners avoid smaller Transactions, forcing traders to pay routing fees and wait for Transaction confirmation. Malicious actors, on the other hand, might immediately establish and stop payment channels, causing network congestion and eventual breaches.  

Ark’s on-chain wallet UX is similar to a dedicated address, async receiving, and no inbound liquidity limits. As Ark is an off-chain system, transactions do not corrupt the on-chain. The relationship between transmitter and recipient is obscured by simple adjusting and blindfolded mixing. 

The sole disadvantage is that Ark requires users to come online every few weeks and “refresh” their coins, or the ASP can sweep the cash.

Benefits of Ark Protocol

  • Ark is a trustless, separate layer-2 protocol with the option to depart unilaterally;
  • ASPs cannot steal funds from users or connect senders and receivers;
  • Users retain self-custody and can withdraw their cash to the base layer if something goes wrong on the second layer;
  • Users can accept and transmit funds without waiting for confirmation;
  • Ark gives orders of magnitude more privacy than Lightning;
  • Every transaction on the protocol occurs in a coinjoin round, obscuring the path from sender to recipient. As such, everyone who participates in payment has their anonymity established.

The Bottom Line

Ark is a liquidity network that functions similarly to Lightning but without adding liquidity limits or a direct relationship between sender and receiver. It makes anonymous, scalable, off-chain payments possible by utilizing virtual UTXOs. ASPs offer network liquidity and collect fees for their services. 

Ark provides customers with additional avenues for quick and efficient payments. 

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Emmanuel Baiden
Editor

Emmanuel is an experienced sales manager and trader with a nine-year tenure in the financial markets. Throughout his career, he has managed the accounts of institutional companies, professional and retail traders, and high net-worth individuals making six-figure profits in the process and having millions in AUM. In addition to his practical experience, Emmanuel has actively engaged in writing about the crypto realm, covering topics such as crypto market analysis, advancements in Web3 technologies, and the transformative potential of blockchain.