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Progress Report: How Lightning Network, Liquid Network and Stacks are Tackling the Scalability Challenge?




Lightning Network Falling on Bitcoin

A key challenge in the world of cryptocurrency is scalability, specifically when it comes to transaction processing speed. Blockchains, for example, often struggle with low scalability or capacity. 

To put it into perspective, the Bitcoin blockchain can only handle a maximum of seven transactions per second (TPS), a stark contrast to the robust processing capability of a company like Visa, which can handle up to 24,000 TPS. 

This remains a big issue in crypto due to what is known as the blockchain trilemma. What this means is a blockchain can only achieve two out of the three things; decentralization, scalability, or security, at a time. As such, tradeoffs are inevitable!

When it comes to the largest cryptocurrency Bitcoin, transferring the crypto asset on-chain can be a slow, expensive, and inefficient process. This is because its pseudo-anonymous creator Satoshi Nakamoto limited its block size to 1 Megabyte (MB) to prevent people from spamming the network, which also limited Bitcoin's scalability.

Bitcoin blockchain uses the Proof-of-Work (PoW) consensus mechanism to confirm transactions. And only after a certain number of miners have verified the transactions the final settlement occurs, and a block is generated. Because a block takes an average of 10 minutes to process, only a small number of transactions can go through at a time. On top of it, an increase in demand leads to an increase in fees, which limits Bitcoin's utility.

This unleashed a scaling debate, resulting in a wave of technological innovation in the Bitcoin community.

The most obvious solution to this problem is increasing the block size. However, it's not that simple, as doing so could weaken the protocol's decentralization, the main ethos of crypto space. 

One of the earliest solutions to the issue was proposed in 2015 by developer Pieter Wiulle called Segregated Witness (SegWit). This process alters how the transaction data is stored to increase block capacity without changing the size limit. 

SegWit was deployed on the Bitcoin blockchain in August 2017, which altered the limit to 4MB without compromising decentralization. However, most Bitcoin blocks remain around 1.3MB in size. This hard fork also led to the split of the network and the creation of Bitcoin Cash (BCH).

Another way to scale Bitcoin is through additional networks, called layers, that allow BTC to be transferred without directly using the blockchain. It essentially means building on top of Bitcoin and not making any modifications to the original blockchain itself. 

Under layered scaling solutions, Bitcoin serves as the ultimate final settlement layer for transactions to ensure stability, decentralization, and security. Meanwhile, the second layer handles a large number of payments in batches. To achieve this, the layered solution connects with the blockchain but does not broadcast every single transaction to the blockchain, saving on fees and enabling more rapid settlement.

Today, we'll look at some of the most prominent Bitcoin scaling solutions, so let's get started!

Lightning Network (LN) 

One of the most popular Bitcoin scaling solutions, the Lightning Network, was originally envisioned in a whitepaper written by Joseph Poon and Tadge Dryja in 2015. Its testnet was released in May 2016, and its first implementation was released in January 2017 though the first real-world transaction over a Lightning Network channel didn't occur until 2017-end.

LN is designed to make Bitcoin transactions as fast and cheap as possible by introducing a “layer 2” blockchain. It uses smart contracts to establish off-blockchain payment channels between pairs of users, and once established, funds can be transferred between them almost instantly. 

To create a payment channel, the payer must lock a certain amount of BTC onto the network. Users can close their payment channels and settle their final balances on the Bitcoin blockchain at any time.

The L2 only records the opening and closing of payment channels on the Bitcoin blockchain, allowing it to move faster and offer more privacy.

This way, the “leading technological development in multiparty financial computations with Bitcoin” provides the native blockchain with the benefit of speed, scalability, micropayment support, and low energy requirements. However, LN is not without its downsides, the key ones being; counterparty risk during transactions and a lack of functional scalability.

According to data provided by 1ML, currently, there are over 4,670 BTC locked into LN and 69,000 channels being used.

Bitcoin Lightning in Europe

Over time, the Lightning Network has grown in popularity and is now an ecosystem of products, projects, and solutions across verticals ranging from gaming, wallets, and payments to node management, infrastructure, and rewards. For instance, Pool helps manage LN's liquidity needs, and Taro helps mint assets on LN.

Most recently, Binance announced the successful integration of Bitcoin on the LN, promising a more scalable solution for BTC deposits and withdrawals, joining the likes of Kraken, OKX, Bitfinex, and River Financial, which have already adopted this scaling solution.

Lightning Labs, one of the companies working on the Lightning Network, released several features in 2020, such as Keysend and Wumbo Channel, the latter increased the transaction size that can be performed over the LN. 

Lightning Labs New Features

As Artificial Intelligence (AI) took the world by storm this year, Lightning Labs announced a new set of developer tools that can integrate Bitcoin with AI applications and Large Language Models (LLMs) like ChatGPT, allowing them to send, receive, and hold Bitcoin payments on-chain and on LN. 

Liquid Network 

Launched by Blockstream in 2018, Liquid Network is yet another layer-2 sidechain that improves the functionality and performance of Bitcoin. It is designed to enable fast, secure, and private issuance, transfer, and exchange of stablecoin, security tokens, and crypto assets on the Bitcoin blockchain. 

This layered solution builds technologies and applications on top of Bitcoin. It operates independently of the largest network through Liquid Federation, a group of crypto-native organizations that confirm new blocks and secure and manage Bitcoin funds held in the network's multi-signature wallet. The Federation member also votes on board representatives who lead decision-making regarding the platform operations and maintenance.

As a sidechain, Liquid allows users to transfer BTC to and from the mainchain through a two-way. Here, assets are pegged 1:1 to the value of the native asset they represent, allowing anyone to use their tokens on another blockchain. The Liquid network issues its own native asset, a “wrapped” version of BTC called Liquid Bitcoin (L-BTC), which is always created and burned by an equal amount of BTC locked by the Liquid governance.

To get started, users must initiate a “peg-in,” a process that gets completed by sending BTC to a Bitcoin address managed by the Liquid Federation, which in return sends out an equivalent amount of L-BTC to be used in the Liquid ecosystem. L-BTC can also be obtained from centralized exchanges (CEXs), OTCs, and swap platforms. 

Now, to swap L-BTC back to BTC on the Bitcoin network, the user must initiate a “peg-out,” which involves sending L-BTC to a burn address to be permanently removed from the Liquid Network, and once done, the Liquid Federation sends an equivalent amount of BTC back to the user.

Praising Liquid Network

With just a 60-second block time and two-block finality, the Liquid Network can offer a much higher transaction throughput compared to Bitcoin. And block signing not only increases transaction speed, but users don't have to pay extra to process transactions quickly, either. Moreover, with the asset type and amount of tokens hidden from the public ledger, Liquid transactions have native confidentiality.

Using the Liquid Swap tool, one can trade any two Liquid assets (such as L-BTC and L-USDT). It also has atomic swaps, allowing peer-to-peer exchanges across Bitcoin and Liquid without relying on a trusted intermediary. 

However, this network not only allows for trustless swaps using non-custodial order books but also enables the issuance of security tokens and other digital assets, something not possible on the Bitcoin mainchain layer due to its limited programmability. These new tokens can represent various digital assets, including stablecoins, utility tokens, NFTs, and securities.

But, of course, the Liquid Network is not without its concerns, such as 15 Functionaries being controlled by a few parties, which gives rise to issues like single points of failure and censorship, and malicious attacks.

Stacks (STX) 

This layer 2 blockchain might have gained traction in 2023, but its groundwork began as early as 2013 by Muneeb Ali and Ryan Shea when it was known as Blockstack. The testnet of Stacks, however, wasn't launched until the bear market of 2018, only for its mainnet to go live a few months later in October 2018. 

With a significant update to the network in January 2020, Stacks 2.0 mainnet natively connected and anchored the platform to Bitcoin and introduced a new era of innovation for building on the largest blockchain network. 

The company raised $21.2 million in the first Securities and Exchange Commission (SEC)-qualified token sale in 2017. Its native token, STX, is used to pay for transactions on the Stacks blockchain as well as to power Stack's smart contracts. 

Stacks uses a novel consensus mechanism called Proof-of-Transfer (PoX), which requires miners to send BTC to other network participants. The Stacks protocol then randomly selects a winning miner and rewards them with STX as well as fees. In addition to this, the network uses a reward system called “stacking,” under which BTC is distributed to users for supporting the network and locking away STX tokens for a period of time.

PoX runs in parallel with Bitcoin's Proof-of-Work (PoW) consensus, using it as a settlement layer. This means Stack transactions are bundled and then sent to be verified and validated on the main network. 

This ability to leverage the Bitcoin blockchain's security for the settlement of transactions can help build the Bitcoin DeFi ecosystem on Stacks, which aims to have ‍sBTC tokens become the foundation for a more secure Web3. 

sBTC is a “trust-minimized” two-way Bitcoin Peg that will allow Bitcoin capital inflows to contracts in Stacks layers as well as allow smart contracts to programmatically write back to Bitcoin L1. Stacks 2.1 activation in March has officially paved the way for the upcoming Nakamoto and sBTC releases.

For smart contracts, Stacks uses its own specifically designed coding language known as “Clarity,” which is optimized for predictability and security. This language has the ability to read Bitcoin state and helps mitigate bugs with its preview functionality, allowing developers to test code before running any smart contract. In 2Q23, its smart contracts surpassed the 60,000 milestone.

The Stacks community is rapidly expanding, with several DeFi, NFT, DAO, Games, and other types of dApps emerging on the platform. For developing apps, Stacks offers Gaia to save and obtain data, the ability to register and sign in with separate identities, and for users to sign and show transactions. These functions together allow developers to build powerful and feature-rich user experiences.

Overall, Bitcoin scalability is a work in progress, with L2 solutions still in their early stages of development and adoption. As these solutions gain traction, they would bring more attention and value to the core network, which in turn, would lead to the increased usage and popularity of the L2s, creating a feedback loop.

Click here to learn all about investing in Stacks (STX).

Gaurav started trading cryptocurrencies in 2017 and has fallen in love with the crypto space ever since. His interest in everything crypto turned him into a writer specializing in cryptocurrencies and blockchain. Soon he found himself working with crypto companies and media outlets. He is also a big-time Batman fan.