Bitcoin Scalability

In my last article I explained how the bitcoin currency (btc) could capture the value of everything that was going to be built in the network on which it is based (Bitcoin), the digital asset being the key piece to achieve the balance of Nash equilibrium that allows the correct alignment of incentives and makes technological, social and economic aspects converge in an almost magical way.

This can lead us to the next question: if Bitcoin allows to process only 7 transactions per second, if we need at least 10 min. per confirmation for each payment, if the fees can become high, if the network does not allow creating complex smart contracts or creating tokens that represent stablecoins, collectibles (NFTs) or company shares, how are we going to be able to build on top?

SETTLEMENT LAYER

In this new internet, Bitcoin is the layer that shows us in real time what the current accounting situation of all network participants is, what the balance of each wallet is and what transfers have been made to date.

But a Bitcoin transaction is not only used to show a balance change between wallets. Each record in the blockchain can also be used as a notary that attests that something existed at a certain point in time. You can prove the existence of a particular file or a secondary chain status. This is what is known as proof of existence, and they are made through hash records in Bitcoin blocks, leaving immutable proof through digital signatures and time stamps.

In this way, Bitcoin becomes a settlement layer on which other protocols can rely.

Since 2012 there have been different protocols and architectures taking advantage of the qualities of Bitcoin as a settlement network. The whole idea is to increase the functionalities of the main chain without putting it at risk.

New proposals can use Bitcoin for different purposes like registering the state of its chain or by taking advantage of the enormous Bitcoin computing power to provide security to its network. The most important point is that They can do it without the need of creating an alternative coin.

No hay texto alternativo para esta imagen

Although some of the proposals have become obsolete, the main idea remains strong: building on top of Bitcoin.

We are going to analyze some of the projects that, with this vision, are still in force and growing.

LIGHTNING NETWORK

Lightning Network is a layer 2 protocol designed to improve scalability in BTC transfers. It was proposed in 2016 by Joseph Poon and Thaddeus Dryja (see whitepaper).

The idea of LN is to allow two people to block a series of bitcoins in a multi-signature address controlled by themselves, thus establishing a collaboration agreement governed by the protocol itself. The creation of this new address is done through a real transaction on the Bitcoin network and is known as ‘opening a payment channel’. From now on, the BTC transactions carried out between the two participants will not be registered in the Bitcoin block chain, but rather the Lightning node will store the states. If at any time the relationship is terminated by the will of the parties, the participants will generate a new transaction in Bitcoin, registering the final balance of their wallets after discounting all the transactions made in between.

This allows interested parties to carry out infinite transactions between them at zero cost, with instant settlement (without waiting for confirmations) and without the need to saturate the blocks on the main chain. It is estimated that the number of transactions per second (tps) of the network can increase from 7 tps of Bitcoin to (literally) millions of tps, greatly surpassing traditional systems such as Visa or Mastercard, which claim to be able to manage around 50,000 tps.

In addition, these channels have the ability to connect with others, creating a network that establishes different routes so that users do not need to open a channel with every people they want to transact. In this way, if Antonio has an open channel with Bruno and Bruno has, in turn, an open channel with Carolina, Antonio could send a payment to Carolina without having to open a channel with her, passing through Bruno. In this case, Bruno could establish a fee for the service offered.

At the time of this writing, the Lightning network has 17,661 public nodes and 84,437 open channels. The capacity of the network is already close to 4,000 bitcoins.

Finally, it should be noted that some protocols are already working on to allow tokenization on the Lightning Network (Taro), taking the ability to transfer personalized digital assets to levels never seen before.

No hay texto alternativo para esta imagen

LIQUID NETWORK

Liquid Network is a project that was born in 2018, from one of the reference development companies in the ecosystem: Blockstream, headed by Adam Back. (see white paper)

Blockstream had already elaborated the sidechain concept in 2014.

A sidechain, unlike payment channels like Lightning, does have its own blockchain anchored to the main Bitcoin chain.

No hay texto alternativo para esta imagen

Original Blockstream vision on sidechains

Liquid is a federated network that has +60 validators, although only 15 participants are required to confirm transactions. This gives it a high degree of centralization.

Its purpose is to increase the scalability of Bitcoin and offer the possibility of creating alternative digital assets.

Liquid has its own native coin (L-BTC), a stablecoin pegged to BTC (1:1). In order to create L-BTC, you must first lock its equivalent in BTC in a multisignature account (11 of 15) controlled by the federation.

The advantages of Liquid are mainly these:

1- Network transfers do not interfere or saturate the Bitcoin block chain since all its data is on a separate chain.

2- Tokens (fungible and non-fungible) can be created.

3- Transactions are faster than Bitcoin (1 min. per block).

4- The network, to work, does not need its own currency that competes with BTC.

Liquid Network currently has a capacity of 3,561 BTC.

No hay texto alternativo para esta imagen

Liquid.net

RSK

Rootstock (RSK) is a layer 2 solution that aims to emulate the Ethereum Virtual Machine (EVM). The original source code and programming language are the same as its Ethereum counterpart. Therefore, RSK allows programming all the solutions that can be carried out on said network: creation of smart contracts, tokenization, DeFi, etc.

RSK originates from developer Sergio Demian Lerner and was released into production in 2018 (see whitepaper).

The main differences with respect to Ethereum are two:

1- The RSK network has a native currency called RBTC. This is a stablecoin pegged (1:1) to BTC. To generate RBTC you first have to lock real bitcoins in what is known as a two-way-peg. This mechanism is controlled by a system with a certain degree of centralization called PowPeg, which combines hardware modules with the RSK consensus layer to sign transactions. Like Liquid, the network does not issue an altcoin that can compete with BTC.

2- RSK takes advantage of the computing power of Bitcoin to provide security to its network. Bitcoin miners can contribute their computing power through what is known as ‘merge mining’. This allows miners, with practically no additional effort or energy expenditure, to use the energy used to mine blocks on Bitcoin to mine blocks on the RSK chain, giving them the option to obtain additional income from the fees that this new network offers them. This system could be one of the possible answers to the question of what will happen when the block rewards do not cover the needs of the miners. Bitcoin miners can merge mine not one, but many sidechains at once, which can provide them with revenue from different protocols.

RSK is currently backed by 47% of the miners on the Bitcoin network and has more than 3,000 BTC of capacity.

No hay texto alternativo para esta imagen

rsk.co/openfinance

STACKS

Stacks is a project founded by Muneeb Ali and Ryan Sea, it was launched in 2017 as Blockstack. In 2021 they pivoted the project and carry out a rebranding (see whitepaper).

The idea of this proposal is to expand the capabilities of Bitcoin by offering an alternative network that allows the creation of smart contracts and decentralized applications.

It works as a parallel chain to that of Bitcoin but, unlike Liquid or RSK, the Stacks protocol is not considered a side chain, since in this case, Stacks works in a different way. It registers the states of its own chain in each Bitcoin block, leaving constancy through a hash. So, it has an independent infrastructure, its own native token (STX), its own miners and even its own programming language (Clarity).

The incentive system in this network is somewhat more complex. They use a mechanism called Proof of Transfer (PoX) that forces miners who want to aspire to close a block to send a series of BTCs from the main network, which will finally be distributed among the network users who are staking (locking their SXT to generate rewards). Finally, the miner will receive STX from the established block subsidy and also from the commissions paid by users in that same period.

STX currently has a capitalization of almost 600 million dollars.

NOMIC BITCOIN

Nomic is a new solution (today July 1, 2022 is the official launch), based on the Tendermint protocol, which allows you to block BTC on the main chain to unlock its equivalent (N-BTC) on the new network. This will allow the development of more complex business logic through smart contracts. (see whitepaper)

Parallel to the consensus mechanism used (PoS), records of the state of the chain in Bitcoin will be made periodically, using time stamps.

The greatest innovation of this project lies in the fact that it will use the latest update of Bitcoin (Taproot and specifically Mast) to guarantee the decentralization of the entry and exit of new BTCs, through multisignature accounts controlled by the users according to their voting power.

We will be very attentive to see how it evolves.

No hay texto alternativo para esta imagen

CONCLUSION

Bitcoin and different alternative projects are showing us the desire and the need of society for changing how things work.

We are living through exciting times, with an unprecedented increase in investment in decentralized technology. This helps us understand and visualize where we are headed: new governance models, new ways of understanding money, new mechanisms for cooperation and new ways of searching the truth.

It is indisputable that this boom in alternative coins and projects beyond Bitcoin has brought some new ideas, new visions and new developments that will serve us well in the future.

Despite this, I believe that the global vision will eventually be built by starting from a layer 1 (Bitcoin) that is strong, solid, simple and resilient enough and with a monetary incentive considered as hard money (btc) backing it. Everything else is going to be built on top of it, without the need to create alternative currencies that compete with the one in the first layer.

Everything we are seeing in Ethereum, Solana, Cardano, etc. can be built on Bitcoin.

So #HODL #BITCOIN

• In 2017 I conducted an interview for the newspaper ElEconomista where I already talked about this topic (see interview)

• For this article I have relied on the latest document released by The Block where more up-to-date data and some interesting graphs appear. I share the full document here (see document)

KEEP IN TOUCH & SUBSCRIBE TO OUR MARKET NEWS

This us the World Wide Investor Site, are you resident of the United States of America?