21 June 2023

Ark Layer 2: A Groundbreaking Development in Bitcoin Transactional Landscape

Discover Ark, the innovative Layer 2 solution for Bitcoin, redefining transactions for speed, privacy, and liquidity.

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Ark Layer 2: A Groundbreaking Development in Bitcoin Transactional Landscape

    Index

    Why Ark?
    So What is Ark, and What Improvements Can It Provide?
    Ark's Future: An Exciting Horizon
    TL;DR

There's a palpable sense of excitement coursing through the Bitcoin space. For years, developers, coders, and thinkers have been grappling with a conundrum: how to make Bitcoin, the world's premier cryptocurrency, more efficient, scalable, and private. And now, Burak Keceli, a name that could soon be well-known in Bitcoin circles, might have found the answer.

Keceli, a computer engineer and stalwart Bitcoin developer, is the architect behind Ark, an innovative Layer 2 protocol poised to redefine Bitcoin transactions. Envisioned as the highway for rapid, secure, and scalable Bitcoin transactions, Ark has a unique value proposition - it empowers users to conduct off-chain transactions that preserve privacy, all without needing inbound liquidity. This distinctive edge differentiates Ark from its Layer 2 peers.

The inception of Ark was driven by Keceli's dissatisfaction with the existing Layer 2 solutions. As he dove into Blockstream's Liquid sidechain and the Lightning Network, he found them limiting. The permissioned federation model of Liquid and the liquidity constraints handcuffing the Lightning Network left Keceli disillusioned. This disillusionment, however, sparked a pursuit for betterment - to construct a Layer 2 solution that offers enhanced privacy and scalability without the restrictions of its contemporaries.

Why Ark?

In examining the rationale for Ark, it's important to first consider the current challenges surrounding Bitcoin and the Layer 2 solutions.

Hurdles in Bitcoin's Path

Despite being the progenitor and de facto leader of the cryptocurrency market, Bitcoin isn't immune to issues that impede its mainstream adoption. Chief among these hurdles are the following:

  1. Scalability and Speed: The Bitcoin network, in its current form, can process only a finite number of transactions every second. This limitation can trigger sluggish transaction times and steeper fees when demand surges. Consequently, Bitcoin's utility for routine transactions and its effectiveness as a medium of exchange are compromised.
  2. Privacy: Bitcoin operates on a public ledger, meaning transactions conducted are open to scrutiny by anyone tracking the flow of funds between addresses. While it doesn't directly reveal users' identities, the shortfall in privacy can still unsettle certain users.

Pitfalls of Lightning Network and Liquid

The Lightning Network and the Liquid sidechain were conceived as Layer 2 solutions to ameliorate some of Bitcoin's limitations. However, they come with their own set of issues:

Lightning Network:

Primarily, the biggest issue with Lightning is liquidity constraints. The Lightning Network operates by establishing payment channels, where a predetermined amount of Bitcoin is locked up for transactions between two parties. This requires users to allocate funds in advance for any potential future transactions, which essentially means 'sequestering' their digital assets.

However, the challenge arises when the allocated funds or liquidity in these channels are exhausted, and there are still pending transactions. This can limit the total volume of transactions that can be processed at a time, thereby reducing the overall capacity of the Lightning Network to handle transactions.

Liquid Network:

  1. Permissioned Federation Model: Unlike Bitcoin's decentralized ethos, the Liquid Network operates as a private network managed by a consortium of trusted entities. While this model ensures particular efficiencies, it can deter users who advocate for a more open, decentralized, and equitable structure since the decision-making process and overall control are confined to this limited consortium.
  2. Network Security: Sidechains like the Liquid Network generally trail behind the primary Bitcoin blockchain in terms of security, which may pose a disadvantage for users prioritizing security. While they provide additional functionality and capacity, sidechains generally lack the robust security infrastructure inherent to the base chain.

So What is Ark, and What Improvements Can It Provide?

In-Depth Explanation of Ark's Technical Aspects

To provide a more in-depth understanding of Ark's technical aspects, let's break it down into the following sections:

  1. Virtual UTXOs (vTXOs)
  2. Ark Service Providers (ASPs)
  3. Absolute Time-Locked Contracts (ATLCs)
  4. Privacy and CoinJoin
  5. Integration with the Lightning Network

Virtual UTXOs (vTXOs)

Central to Ark's functioning are these vTXOs - ephemeral notes disappearing after 4 week's lifespan. The ephemerality of vTXOs in the Ark protocol contributes to liquidity improvements by creating a dynamic and flexible transaction environment. Since vTXOs expire after four weeks, funds are returned to users automatically instead of being locked up in inactive channels. The automatic return of funds encourages continued user engagement and transactional activity, creating a vibrant, self-sustaining ecosystem. With funds perpetually circulating, users are stimulated to actively participate in transactions, thereby fostering a robust market and contributing to the overall health and stability of the Ark network.

In contrast, the Lightning Network relies on static channels that require users to manage inbound and outbound liquidity. This can lead to funds being locked up in channels, making it difficult for users to access and utilize their funds efficiently.

Ark Service Providers (ASPs)

In Ark, the Ark Service Provider (ASP) serves as a cornerstone, donning a trio of crucial hats: liquidity provider, CoinJoin coordinator, and Lightning service provider.

  1. As a Liquidity Provider: In an echo of the role played by Lightning service providers in the Lightning Network, ASPs act as ever-present servers, injecting liquidity into the veins of the Ark ecosystem. This role tackles a persistent pain point in the Lightning Network head-on: the often elusive inbound liquidity.
  2. In the Role of CoinJoin Coordinator: Tasked with orchestrating rapid, blinded CoinJoin sessions (or 'pools') every five seconds, ASPs serve as the guardians of atomicity in payment schedules. This coordination is more than just managerial; it's a safeguard for privacy, effectively cloaking the transactional trail between sender and recipient.
  3. Wearing the Lightning Service Provider Hat: Beyond their roles as liquidity dispensers and CoinJoin maestros, ASPs also function as Lightning service providers. In practical terms, this means they serve as facilitators for transactions on the Ark Layer 2 protocol.

The genius of the ASP function is in its trustless nature. The protocol prevents ASPs from making off with users' funds or drawing any transactional connections between senders and receivers. This ensures private custody of funds, an assurance as vital as it is reassuring.

Absolute Time-Locked Contracts (ATLCs)

A significant update in the Ark protocol involves switching from Hashed Timelock Contracts (HTLCs), commonly used in many Layer 2 systems, to Absolute Timelock Contracts (ATLCs). This might seem like just tweaking the technical details, but it's a change that makes transactions much faster and more efficient.

Let's break this down: ATLCs and HTLCs are both types of smart contracts, digital agreements that automatically execute transactions if certain conditions are met. They're designed to ensure a series of transactions happen at once (called 'atomicity') or none happen at all.

Traditionally, HTLCs make this work using two mechanisms: hash locks and time locks. Hash locks are like digital seals that are only broken when everyone involved fulfills their part of the deal, while time locks cancel the contract if it's not completed in a certain time. HTLCs require both criteria.

ATLCs are different. All they require is a time constraint that assures a transaction either happens within a specified period, or not at all. The absence of a hash lock means that there's no need for all parties to fulfill their obligations before the transaction proceeds. This means that transactions can be received and forwarded without waiting for each previous transaction to be confirmed on the blockchain. By reducing this requirement, ATLCs make transactions faster and smoother, driving the speed and efficiency of the Ark protocol to new heights.

Privacy and CoinJoin

CoinJoin is a digital veil, merging several Bitcoin payments from various participants into one transaction. This process successfully obscures the coin's ownership and transaction history, similar to a shuffling deck that blurs individual card movements.

With Ark, every monetary exchange takes place within this CoinJoin procedure. This system heightens transactional privacy, masking the trail from sender to recipient. Ark Service Providers (ASPs) orchestrate frequent CoinJoin rounds or 'pools,' launched every five seconds. The execution of these pools safeguards transactional anonymity.

Here's a quick overview of how a CoinJoin works:

  1. A group of users who want to make separate Bitcoin transactions come together.
  2. Instead of initiating their transactions separately, these users combine them into a single, large transaction. This single transaction includes multiple inputs from the different users, and multiple outputs, which are the destination addresses for the Bitcoin.
  3. Each user receives the same amount of Bitcoin they intended to send, but it's now coming from this larger pool of Bitcoin, instead of directly from their own wallet. The recipients also get their intended amount of Bitcoin, but it's not clear from whom in the group the Bitcoin originated.
  4. The result is that to an outside observer, it becomes significantly harder (but possible) to trace the movement of any specific Bitcoin from sender to receiver. However, this method has faced criticism for potentially undermining the transparency that a public ledger like Bitcoin's blockchain provides, as it can complicate the process of detecting and investigating illicit transactions.

Integrating with the Lightning Network

To further understand Ark, it's important to clarify that it isn't here to compete with the Lightning Network but to augment it. By addressing some of the underlying issues that the Lightning Network currently grapples with, Ark seeks to enhance its capabilities, pushing the overall potential of Bitcoin transactions to new frontiers. This cooperative synergy can be best visualized through a transport network analogy.

  1. Creating HTLCs/PTLCs in Ark Pools: Ark network can use HTLCs or Point Timelock Contracts (PTLCs) to interact with Lightning. This is like building specific types of intersections or junctions on our new highway (the Ark network). These specialized intersections are designed to allow traffic to flow from our new highway to the existing city roads (Lightning Network) and vice versa. They are created by users who want to make a payment on the Lightning Network.
  2. Ark Service Provider's (ASP) Role: The ASPs function as the traffic management authority or highway patrol on our new highway. They monitor traffic flow, ensure safety, and handle maintenance, including managing these special intersections (HTLCs/PTLCs). The ASPs must also be able to interact with the existing city's traffic management, meaning they need to run their own nodes on the Lightning Network and maintain good connections or channels on that network.
  3. Forwarding HTLCs to Lightning Network: Once the intersections (HTLCs/PTLCs) are set up and the routes established, the ASPs take on the role of directing traffic from the highway (Ark network) to the city roads (Lightning Network). They do this by forwarding the HTLCs to the broader Lightning Network. In essence, this means that they ensure the payment locked in the HTLCs/PTLCs reach their intended recipients on the Lightning Network.
  4. Paying Lightning Invoices with Ark: This part of the process allows for payments to be made from the highway (Ark network) to destinations on the city roads (Lightning Network). This is similar to drivers being able to reach specific destinations in the city by using the highway. The flexibility of Ark's design also allows for the equivalent of carpooling in the form of multi-part payments. This is like breaking up a large group of passengers into smaller groups that can travel in multiple cars. In the Ark network, this would involve splitting a large payment into smaller parts that can be routed through multiple channels or pools.

Remember, the goal of this integration is to allow for faster, more efficient transactions (or traffic flow) and the ability to handle higher volumes of transactions (or vehicles). The way Ark integrates with the Lightning Network is designed to achieve this goal.

Ark's Future: An Exciting Horizon

Let's be clear: Ark is still embryonic, a proposal yet to be brought to life. However, even as an idea, it's causing quite a stir in the Bitcoin community. Ark's potential to tackle the longstanding tribulations of Bitcoin, such as scalability, privacy, and liquidity bottlenecks, is indeed stirring up significant optimism.

Nonetheless, like all technologies breaking new ground, the triumph of Ark is far from certain. Its prospective success rests on its capacity to find acceptance and integration within the wider crypto ecosystem. If it manages to navigate these waters successfully, Ark could play a crucial role in accelerating Bitcoin's further adoption, enhancing its accessibility, and bolstering its suitability for day-to-day transactions.

The unveiling of Ark could mark a pivotal moment in Bitcoin's history. As Keceli's vision transitions from a mere proposal to a tangible piece of technology, Ark Layer 2 may emerge as a critical instrument in shaping the future of Bitcoin transactions and ultimately influencing the trajectory of the cryptocurrency market.

TL;DR

  1. Ark Layer 2 Proposal: Developed by Burak Keceli, Ark Layer 2 is a groundbreaking development in the Bitcoin transactional landscape that offers potential improvements in efficiency, scalability, and privacy.
  2. The Motivation: Keceli's dissatisfaction with existing Layer 2 solutions like the Lightning Network and Liquid sidechain, due to their limitations, drove him to propose Ark.
  3. Bitcoin's Challenges: Two key issues hindering mainstream Bitcoin adoption are scalability (limited transaction capacity leading to slow processing times and high fees) and privacy (transactions are publicly visible, compromising anonymity).
  4. Current Layer 2 Solutions' Drawbacks: The Lightning Network suffers from liquidity constraints, requiring users to allocate funds in advance and potentially limiting transaction capacity. The Liquid Network uses a permissioned federation model that contrasts with Bitcoin's decentralized ethos and generally offers less security than the primary Bitcoin blockchain.
  5. Virtual UTXOs (vTXOs): Ark employs ephemeral notes, vTXOs, that expire after 4 weeks. Their ephemerality contributes to liquidity improvements, stimulating user engagement and transactional activity.
  6. Ark Service Providers (ASPs): ASPs play crucial roles as liquidity providers, CoinJoin coordinators, and Lightning service providers. They help tackle liquidity issues, safeguard privacy, and facilitate transactions on the Ark Layer 2 protocol in a trustless manner.
  7. Absolute Time-Locked Contracts (ATLCs): ATLCs make transactions much faster and more efficient compared to Hashed Timelock Contracts (HTLCs) used in many Layer 2 systems, as they eliminate the need for all parties to fulfill their obligations before proceeding with the transaction.
  8. Privacy and CoinJoin: Ark enhances privacy by utilizing CoinJoin, a method that merges several Bitcoin payments into one single transaction, making it harder to trace the movement of any specific Bitcoin from sender to receiver.
  9. Integration with Lightning Network: Ark is not a competitor to the Lightning Network but rather complements it by addressing its underlying issues. Through creating specific intersections (HTLCs/PTLCs) on the Ark network and forwarding them to the Lightning Network, it ensures a smooth flow of transactions.
  10. Ark's Future: Currently in the proposal stage, Ark has the potential to significantly improve Bitcoin's scalability, privacy, and liquidity. However, its success will depend on acceptance and integration within the wider crypto ecosystem. If successful, Ark could enhance Bitcoin's accessibility and suitability for daily transactions, influencing the future trajectory of the cryptocurrency market.
Please be aware that: Cryptocurrencies are unregulated in the UK; Cryptocurrencies are not protected under Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS); Profits may be subject to capital gains tax; The value of investments can go down as well as up.

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