Layer 2 protocols broaden the options available to Bitcoin users. They can make Bitcoin more scalable, including lower transaction costs, increased speed, and increased anonymity.
This article compares two different but complementary Bitcoin Layer 2 payment solutions: the Lightning Network and the Liquid Network.
Each of these two networks has a different application. The Lightning Network can be used for retail, allowing merchants to receive small payments from customers quickly and inexpensively. The Liquid Network is primarily a tool developed for traders and exchanges that need to transfer large amounts of bitcoin (or other tokens) quickly and privately.
The Lightning Network and the Liquid Network support payments using other digital assets such as Tether, but for the purposes of this paper, we will focus on their application as a Layer 2 solution for Bitcoin.
Below, we examine six key differences between the Liquid and Lightning networks, and how to choose different networks for different applications.
- Transfer Scale
The Lightning Network was developed for small payments. Users can transfer money to each other by finding a Lightning Network channel in the sender and recipient.
The diagram above shows a payment from Lightning Network user A to G
However, the amount of payment each Lightning Network channel can process is limited by the amount of its initial funds. This makes it less likely that the full path from buyer to seller will be found as the size of the transaction increases, making the Lightning Network less suitable for handling large transactions.
For frequent large transactions, a lot of channel management is required from both the sender and the receiver to ensure that there is enough liquidity to meet their payment needs. To some extent, this requires the users involved to predict their spending behavior.
As the Lightning Network evolves, its ability to handle large payments will improve, but large payments may not be reliably sent over the Lightning Network.
The Liquid Network is optimized for medium to large value transfers. Unlike the Lightning Network, the Liquid Network is a sidechain where users can swap Bitcoin (BTC) and L-BTC on a one-for-one basis.
There is no limit to the amount of money that can be transferred on the Liquid Network (technically, the maximum limit is a total of 21 million Bitcoins). Users can lock in as many bitcoins as they need and start transferring immediately. The recipient also does not need to be involved in setting up any channels, and they can receive all the assets the sender is able to send.
Since the Liquid Network runs on its own blockchain, the number of transfers it can handle is limited by the block size. The processing fee is currently very cheap (0.1 sats / vbyte for the next block confirmation), but as the Liquid Network gets more users, the fee will increase, which will make small on-chain transactions not cost effective.
However, the Lightning Network is compatible with the Liquid Network and can run Lightning Network payments on the Liquid Network, thus allowing users to take advantage of the unique properties of the Liquid Network when processing small payments.
- Interaction with the Bitcoin Main Chain
Lightning Network channels accomplish interaction with the main chain by opening and closing channels.
In order to establish a channel, two Bitcoin users need to fund a multi-signature address on the Bitcoin network. Once the funds are transferred to that address, a signature synthesized from the private keys of both channel users is required for access.
To transfer funds on the Lightning Network, users need to run both fully synchronized Bitcoin nodes and Lightning Network nodes. These nodes must remain online as long as the channel is open.
To move bitcoins from the Lightning Network back to the main chain, the channel needs to be closed and a single transaction needs to be made on the main chain. This means that using the Lightning Network will always require at least two main-chain transaction fees, one to open the channel and another to close it.
Unmanaged wallets like Breez and hosted wallets like Blue Wallet offer an easier but less trust-minimizing option for using the Lightning Network. Hosted Lightning Network wallets are very popular, but often require trade-offs, including counterparty risk and weaker privacy.
Liquid Network users have two primary ways of interacting with the Bitcoin main chain.
- lock-in and unlock-out
Bitcoin and L-BTC conversions via exchanges and swap platforms
As with creating a Lightning Network channel, the process of creating L-BTC is opened by an on-chain transaction. Bitcoins are transferred to Bitcoin addresses and temporarily locked. The output of these transfers is used to unlock an equivalent amount of L-BTC on the liquid network, which can then be traded according to the liquid network’s protocol rules.
To convert L-BTC back to bitcoin, users can either perform an unlock-out operation through a Liquid Alliance member or find another Liquid Network user willing to exchange L-BTC for bitcoin in a P2P transaction. As with the Lightning Network, using the Liquiditi network in this way will require at least two main-chain transfers.
In addition, Liquiditi, SideShift AI, SideSwap, and Bitfinex are among the many companies that offer a quick swap of BTC and L-BTC.
After swapping Bitcoin for L-BTC, users can easily store their assets using an unmanaged wallet (AQUA, Blockstream Green, SideSwap) or a hardware wallet (Blockstream Jade, Ledger NanoS).
102 Bitcoin mainchain blocks confirmed to complete lock-in, 2 liquid network blocks confirmed to unlock out
Payments over the Lightning Network are virtually instantaneous. Because Lightning Network payments do not require confirmation on the blockchain, they can happen as fast as the Internet connection allows, and may even support millions of transactions per second.
Transaction speed is one of the main advantages of the Lightning Network, as long as a channel can be found that can handle the required payment amount. The lightning speed allows Bitcoin to be used for everyday purchases, such as buying coffee. It also opens the way for new payment applications, such as payments for online services.
Unlike the Lightning Network, the Liquid Network confirms transactions by generating blocks, which can make its transfers a little slower. Nevertheless, transfers are still much faster than on the Bitcoin main chain. The liquid network generates new blocks every minute, which is ten times faster than the average bitcoin block, and the liquid network requires two confirmations before a transfer is considered final. This means that transfers take about two minutes. That timeframe is usually sufficient for traders to transfer funds between exchanges and private wallets, but is too slow for retail transactions (such as buying coffee).
Liquid network transfers are on average ten times faster than the Bitcoin main chain, with final confirmation of arrival in two blocks
The Lightning Network provides users with a higher degree of privacy than Bitcoin on-chain transfers that can be viewed in real time. Because Lightning Network payments are routed through a series of nodes, neither the recipient nor the relay node can determine the origin of the transfer.
Unlike on-chain payments, lightning network payments do not leave a permanent trace on the blockchain, so de-anonymization attackers must participate in forwarding the transfer – they will not be able to recover that information later.
Typically lightning networks provide a level of privacy sufficient for smaller amounts, and less sensitive consumer transfers or payments.
However, a certain level of surveillance is still possible using the Lightning Network because individual nodes can record information about the channel and direction of the transfers they are requested to process. Despite the limitations of this surveillance method, there are still some degree of privacy concerns.
However, neither Bitcoin nor Lightning Network nodes use any real name identifiers, so it is still possible to remain anonymous by protecting your identity and the link between the addresses you control.
The Liquid Network
In contrast, the Liquid Network protocol is designed so that the amount of funds and the type of assets transferred are not revealed to anyone other than the sender and the recipient. This is made possible by a cutting-edge encryption protocol developed by Blockstream called Privacy Transfer.
The high level of privacy of the liquid network provides important benefits to traders. Because on-chain analytics makes others aware of the large amount of money flowing on the Bitcoin blockchain (see the “white alert” example below), the market can react in advance causing prices to change and traders may not be able to trade at the right price. Due to the privacy of the liquid network, traders can trade without worrying about other users reacting in advance.
However, users should keep in mind that when converting L-BTC back to bitcoin, it is necessary to choose between KYC and non-KYC solutions. KYC will provide third parties with the bitcoin address information of L-BTC users, but no third party will be able to track the transfer history of L-BTC other than the funds deposited to the platform.
- Depository Method
Typically, a Lightning Network user must hold the private key online until the channel is closed. Lightning network nodes also require constant monitoring and rolling backups. Although there have been no hacking attacks to date, when nodes are online, it is theoretically possible for an attacker to steal sensitive information, even private keys.
In addition, since multi-signature bitcoin storage is not possible on the Lightning Network, funds need to be controlled by a single-signature private key. This is not ideal for organizations that store large amounts of bitcoins or do not want one person to hold all the funds.
Using the Liquid Network, private keys can be stored offline and cold, making it impossible to steal funds without physical access to the private key. With the Blockstream Green wallet, Liquid Network users can also utilize a hardware wallet to keep their L-BTC private keys permanently offline.
The Liquid Network also supports multiple signatures in the form of Bitcoin. This provides a higher level of security for individual users and also allows organizations to share control of L-BTC wallets.
Blockstream Green wallets enable users to secure their wallets with 2-of-2 multi-signatures
- Trust Model
The Lightning Network allows transfers to be secured by the Bitcoin network without being broadcast directly to the Bitcoin network. Since the users of a Lightning Network channel co-sign every change to the channel balance, either user can choose to broadcast the transfer for settlement at any time. As long as both parties are always monitoring the channel status (through their nodes or wallet services), this minimizes trust in the Lightning Network, as none of the channel’s users need to trust each other to make a transfer.
The trust model of the Liquid Network is based on a federation of 15 Hardware Security Modules (HSM) connected to a host server (called a hosting node). The lock-in and lock-out functionality of Bitcoin and L-BTC relies on two-thirds or more of the hosting nodes acting honestly. Despite the need for a certain level of trust, the distributed federation model is still far superior to the trust model that most traders face, for example, many times they will place their funds in to a single exchange.
Affiliate members have no incentive to collude in their misdeeds, as doing so would put their assets stored on the liquid network at risk. Like exchanges, affiliate members are known to be legal entities that are subject to repercussions should they attempt to do evil.
Liquid Network’s hosting nodes are distributed worldwide to enhance network security and resilience
The Lightning Network and the Liquid Network are complementary Layer 2 solutions that can make Bitcoin more widely available and used by more people. Of course, there are trade-offs to be made when using any Layer 2 solution, so it is important to understand what Layer 2 solution should be chosen for different situations.
The Lightning Network provides an excellent way to make small transfers quickly and cheaply, in which case there is no need for the Bitcoin backbone to provide a high level of security. It is often suitable for applications such as retail and gaming.
The liquid network allows medium to large bitcoin transfers to be made with a high degree of privacy and security and at a reasonable speed. This makes it suitable for trading and lending applications.
For users who wish to take advantage of the unique properties of the Liquid Network and Lightning Network, it is also possible to build the Lightning Network on top of the Liquid Network, which will allow the sidechain to scale further.
Getting Started with the Lightning Network
Download Breez or Blue Wallet to deposit some bitcoins and then find a merchant that supports the Lightning Network to make payments.
Get Started with the Liquid Network
Download AQUA Wallet, Blockstream Green Wallet or SideSwap and convert some BTC to L-BTC, try the transfer feature with your friends or find an exchange that supports the Liquid Network to try a transaction.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/six-differences-between-liquid-and-lightning-networks/
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