Thread by @Liquid_BTC

How is Bitcoin scaling?

Our new article compares two different, but complementary, layer-2 solutions for Bitcoin: the Lightning Network and the Liquid Network.

blog.liquid.net/six-difference…

Here's a brief summary of their differences👇🧵

1/ Transaction Size

Lightning is optimised for processing micro to small-sized transactions, whereas Liquid is optimised for processing medium to large-sized transactions.

There are no limits to transaction size on Liquid (technically 21 million BTC would be the limit!).

2a/ On- and Off-Ramps

Lightning’s on- and off-ramps are the opening and closing of Lightning channels.

Lightning users can also swap out of their channels with submarine swaps.

2b/ Liquid Bitcoin (L-BTC) are created via a peg: BTC are transferred to the federation and temporarily locked, and this process releases an equivalent amount of L-BTC on Liquid.

However, most users will prefer to swap BTC for L-BTC (and vice-versa) through exchange platforms.

3/ Speed

Payments via Lightning can be made almost instantly.

In contrast, Liquid produces one-minute blocks to confirm transactions, which makes the process slower, but sufficient for trading applications.

4a/ Privacy

A degree of monitoring is possible with Lightning since individual nodes can record the channel and direction information from transactions they are asked to process.

While this method of surveillance has limitations, it still represents a privacy concern.

4b/ Liquid’s protocol is designed so that the amount of funds and type of asset transferred are not revealed to anyone other than the sender and recipient.

This is made possible by a cutting-edge cryptographic protocol developed by @Blockstream called Confidential Transactions.

5a/ Custody

Generally, Lightning users must hold their keys online until a channel is closed.

Although hacks are not known to have happened to date, when nodes are online it is theoretically possible for attackers to steal sensitive information and even private keys.

5b/ With Liquid, keys can be held offline in cold storage, making it impossible for funds to be stolen w/o physical access to the private keys.

Through Blockstream Green, Liquid users can also take advantage of a hardware wallet, keeping L-BTC private keys permanently offline.

6a/ Trust Model

The Lightning Network allows for transactions to be secured by the Bitcoin network without being directly broadcast to it.

As long as both parties are regularly monitoring the channel state (via a node or wallet), this makes Lightning highly trust-minimised.

6b/ Liquid’s trust model is based on a federation consisting of 15 hardware security modules.

Whilst some trust is required, the distributed model is significantly superior to the trust model that most traders are exposed to, whereby funds are entrusted to a single exchange.

7a/ Conclusions

The Lightning and Liquid Networks are complementary layer-2 solutions that allow Bitcoin to be used for a greater range of applications, and by a greater number of people.

7b/ The Lightning Network provides an excellent means for making small transactions quickly and cheaply, where the very high levels of security provided by on-chain transactions is not required.

Typically, this will be in applications such as retail and gaming.

7c/ Liquid allows for medium to large Bitcoin transactions to be undertaken with a high degree of confidentiality and security, and a reasonable degree of speed.

This makes it suited to trading and lending applications.

8/ The table below shows a summary of the key differences between Lightning & Liquid.

For users wanting to take advantage of the unique properties of both Liquid and Lightning it is possible to build Lightning networks on Liquid, which will allow the sidechain to scale further.

Guest writer @petermiyoung worked with @Liquid_BTC on the creation of this article and thread.

You can follow Peter on Twitter for more #Bitcoin-related content.