Analyizing the impact of second layers on Bitcoin’s ecosystem

Nearly 15 years aft Bitcoin instigated the integer monetary revolution, its cognition is present nestled arsenic dependable money. Following dozens of hard forks and developer attempts to tweak Bitcoin’s halfway code, the pioneering cryptocurrency settled connected decentralization and dependable inducement operation for miners.

Both were captious for Bitcoin to powerfulness done marketplace crashes, media attacks, and authorities attempts to prohibition it. Yet, adjacent with the effectual summation of its artifact size to 4 MB successful 2017 via the SegWit upgrade, Bitcoin’s wider adoption arsenic regular currency cannot trust connected its mainnet:

• Larger artifact size would trim transaction fees arsenic much transactions per artifact could beryllium processed. But this would pb to larger computing and retention demands, triggering web centralization.
• By the aforesaid token, larger block size would summation Bitcoin mainnet throughput supra the contiguous 7 transactions per second. Therefore, this would little fees arsenic web enactment (adoption) increases.

In different words, Bitcoin’s presumption arsenic decentralized dependable wealth is innately opposed to its presumption arsenic frictionless currency with negligible transaction fees and precocious tps throughput. However, this is lone existent if we absorption connected Bitcoin’s mainnet – the archetypal web layer.

The Lightning Network (LN) emerged arsenic the 2nd furniture to code Bitcoin’s scalability occupation successful 2015. Enabling near-instant and low-cost payments connected apical of Bitcoin’s mainnet, LN is paving the roadworthy to scaling Bitcoin from store-of-value into frictionless currency. With AI successful the mix, much refined trading strategies could travel into play.

Nonetheless, conscionable arsenic Bitcoin’s artifact size determines the level of web decentralization, truthful bash person to separate betwixt types of 2nd layers possible. Whether they are unfastened oregon closed, they connection antithetic advantages and drawbacks.

Understanding Second Layers successful Bitcoin

The presumption of “sound money” contains a grade of fragility. To beryllium regarded arsenic such, Bitcoin has to support a blimpish attack to changes. In turn, this regulation has to beryllium neutralized via second-layer solutions.

Bitcoin Sidechains

From sidechains and drivechains to Lightning Network, they are complementary successful their effort to widen Bitcoin’s astute declaration functionality and scalability. Case successful point, Rootstock (RSK) is simply a sidechain that uses Ethereum Virtual Machine (EVM) to larboard Solidity-written Ethereum contracts into RSK.

Developers could past make decentralized applications (dApps) connected Bitcoin, which has mostly been delegated to proof-of-stake (PoS) blockchains similar Ethereum, Avalanche, Solana, Cardano, etc. RSK brings the committedness of DeFi but without forsaking Bitcoin’s mainnet security.

Another sidechain called Liquid Network, created by Blockstream, focuses connected accelerated settlements of integer assets, from stablecoins to information tokens. This confidential signifier of colony and issuance has its ain method to interact with Bitcoin mainnet:

• Liquid Network issues its ain autochthonal plus Liquid Bitcoin (L-BTC), a pegged, wrapped mentation of BTC.
• Without calling for intermediaries, users tin past swap Bitcoin for different assets connected P2P exchanges.
• Not lone is L-BTC auditably backed 1:1 by BTC, but last settlements tin hap 10x faster.

Just similar Polygon for Ethereum, these sidechains are autarkic with their ain miners but inactive anchored to the Bitcoin blockchain. Therefore, they tin standard independently of Bitcoin mainnet. In opposition to this second-layer scalability approach, drivechains are straight linked to Bitcoin blockchain.

Bitcoin Drivechains

As a subtype of sidechains, experimental drivechains usage Blind Merged Mining (BMM) to facilitate web consensus. For example, a tiny concern wants to usage BTC for its operations but Bitcoin mainnet is excessively dilatory (10-min artifact confirmation time) and excessively costly for predominant BTC transfers. Yet, the task doesn’t privation to renounce mainnet’s information benefits.

Here travel drivechains. The entrepreneurs would make their ain Bitcoin sidechain (drivechain) for their circumstantial needs. They would bash truthful by depositing immoderate BTC into a astute declaration that funds the drivechain’s operations. This magnitude could beryllium withdrawn astatine immoderate point.

Once established, drivechain’s astute declaration issues a corresponding magnitude of drivechain tokens to beryllium utilized among the concern staff. With each transfer, parties tin retreat drivechain tokens backmost to Bitcoin.

This is each made imaginable with Blind Merged Mining (BMM) that anchors drivechains to the Bitcoin mainnet. Effectively, drivechain miners piggyback connected existent Bitcoin miners, participating successful Bitcoin statement and ensuring that each transactions are arsenic secured.

Lightning Network

As antecedently noted, Lightning Network is astatine the forefront erstwhile radical deliberation of scaling Bitcoin. It’s a web of outgo channels that enables off-chain transactions. These channels unfastened by backing astute contracts with BTC. As agelong arsenic they are funded, the channels stay open.

Consequently, galore BTC transactions tin beryllium conducted betwixt the parties, without each being broadcast to the Bitcoin mainnet for miner settlement. This off-chain attack leads to near-instant transfers, adjacent to mainstay Visa oregon MasterCard in-store payments.

RACE OF THE RAILS

Bitcoin #Lightning payments vs #fiat contactless payments astatine the #Gibraltar Bakery.

£2.20 loaded up connected some PoS.

WHO WINS??

⁦@CoinCorner⁩ ⁦@CoinCornerMolly⁩ pic.twitter.com/b3ezy7FIeq

— Joe Nakamoto (@JoeNakamoto) July 25, 2022

When LN outgo channels close, LN’s hashed timelock contracts (HTLC) rotation each the conducted transactions into a azygous one, to beryllium broadcasted backmost to Bitcoin mainnet. Using payment-focused HTLC alternatively of regular astute contracts makes LN much businesslike and secure. After all, astute contracts are known for their complexity which tin pb to bug/exploit vulnerability.

Open vs Closed Second-Layers

From knowing Bitcoin sidechains and drivechains, we tin already spot the implications. If an entity, oregon a radical of entities, tin make a sidechain for their circumstantial needs, it is simply a closed second-layer scalability solution.

Given the quality of concern itself, closed 2nd layers connection sizeable advantages:

• Greater flexibility compared to Bitcoin mainnet, some successful little fees and transaction speed.
• Greater privateness compared to Bitcoin mainnet, by offering confidentiality.

On the different hand, unfastened second-layers person their ain pros:

• More decentralized, which leads to greater absorption to censorship.
• Greater transparency which leads to unfastened audits, which successful crook leads to greater nationalist assurance and adoption.

However, unfastened second-layers are much susceptible to disagreements successful the balance, which could pb to forks. Additionally, they are little scalable by the quality of their openness. After all, closed second-layers are brought into beingness for circumstantial tasks.

Yet, the precise advantages of unfastened 2nd layers whitethorn present systemic vulnerabilities. For example, what happens if Bitcoin miners determine to tally sidechains themselves? If astir miners enactment successful merged mining (BMM), they would instrumentality power of drivechains, starring to nonaccomplishment of decentralized governance.

By the aforesaid drivechain token, BMM could pb to transaction censorship. Instead of providing a Bitcoin-powered DeFi ecosystem, drivechains could past signifier a centralized closed infrastructure mimicking TradFi.

Impact connected the Base Layer and Bitcoin’s Ecosystem

Bitcoin’s dominance arsenic the starring cryptocurrency is predictable, but its aboriginal remains uncertain, adjacent to experts. When a novelty plus pops into existence, first-mover vantage takes hold. This is further amplified by the quality of integer assets themselves. While anyone tin transcript Bitcoin’s open-source code, the worth derived from Bitcoin’s computing web makes this irrelevant.

This unsocial spot built Bitcoin into a $732 cardinal asset. Moving forward, successful which absorption volition this committedness of “sound money” turn?

Bitcoin scalability offers 2 choices: unfastened oregon closed 2nd layers. Just similar Bitcoin mainnet itself, unfastened ones are accessible to anyone. Yet, if anyone tin entree them, including miners, unfastened systems could beryllium gamed by miners.

Bitcoin miners could complaint higher fees for transactions connected immoderate drivechains which they cognize the marketplace perceives arsenic much valuable. They could arsenic take to garbage to excavation blocks, either with oregon without outer pressures. Those drivechains would past beryllium near without confirmed transactions.

On a much granular level, Bitcoin miners could adjacent collude with each different to select-mine approved transactions, efficaciously installing implicit drivechain control. At the halfway of these issues is simply a caller inducement structure.

Because Bitcoin miners tin extract drivechain worth without returning worth successful kind, Bitcoin’s sound wealth status would nary longer look arsenic shiny.

Conclusion

The request to standard Bitcoin is not successful question. While the block-size wars person seemingly ended, a caller battlefront is opening. Multiple avenues prevarication ahead:

• Lightning Network is the slightest gameable system, arsenic lone outgo channels hosting dApps tin impact it. In turn, they tin easy beryllium recognized arsenic such.
• In contrast, sidechains alongside drivechains permission gamification open-ended. The existing inducement operation for Bitcoin miners could connect itself to unfastened second-layer sidechains and drivechains.

Counter-intuitively, this translates to a closed-approach arsenic a preferable scalability pathway for Bitcoin. It would pb to little gamification by miners, leaving Bitcoin’s dependable wealth estimation intact.

In practice, we volition astir apt spot decentralized Lightning Network arsenic the dominant, much neutral second-layer scalability solution. LN’s reliance connected hashed timelock contracts alternatively of much analyzable astute contracts makes this neutrality possible.

On a smaller scale, drivechains volition play their role, but connected a case-by-case basis. At the extremity of the line, adoption is ever constricted by complexity. In this too, LN has an vantage implicit some sidechains and drivechains.

The station Analyizing the interaction of 2nd layers connected Bitcoin’s ecosystem appeared archetypal connected CryptoSlate.