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Six differences between Liquid Network and Lightning Network



The Layer 2 protocol broadens the options for Bitcoin users. They enable Bitcoin's scalability enhancements, 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 different applications. The Lightning Network can be used in retail, allowing merchants to receive small payments from customers quickly and at low cost. Liquid is primarily a tool developed for traders and exchanges who need to transfer large amounts of bitcoin (or other tokens) quickly and privately. Lightning and Liquid support payments with other digital assets such as Tether, but for the purposes of this article we will focus on their application as a layer-two solution to Bitcoin. Below, we examine six key differences between Liquid and Lightning, and how to choose a different network for different applications. The table below summarizes these differences. 1. Transfer scale Lightning Network The Lightning Network was developed for micropayments. Users can transfer money to each other by finding a Lightning Network channel between the sender and the recipient. There are 2.8 billion US dollars in outstanding loans on Genesis' balance sheet, about 30% of which are issued to related parties such as the parent company DCG: On November 23, according to people familiar with the matter, Genesis Global, an encryption trading and lending institution, has 28 billion dollars on its balance sheet. billion in outstanding loans, about 30% of which were issued to related parties, including its parent company, Barry Silbert's Digital Currency Group. Among them, a lending subsidiary called Genesis Global Capital has been lending money to Genesis Global Trading. In a letter to shareholders on Tuesday, Digital Currency Group Inc. founder and CEO Barry Silbert said the intercompany loan was made in the ordinary course of business. As previously reported, Barry Silbert, the founder and CEO of DCG, the parent company of Genesis, revealed that DCG has approximately US$575 million in liabilities to Genesis Global Capital, which will mature in May 2023. Silbert also reminded investors of a $1.1 billion promissory note due in June 2032, noting that it was tied to liabilities related to defaults by Genesis and Three Arrows Capital. Beyond that, Silbert said, DCG's only debt is a $350 million line of credit from several lenders led by Eldridge. DCG has raised just $25 million in equity capital and is on track to generate $800 million in revenue this year. (Bloomberg) [2022/11/23 7:59:16] The figure above shows Lightning Network user A paying G. However, the amount of payment each Lightning Network channel can handle is limited by the amount of its initial funds. In this way, as the transaction size increases, the probability of finding the complete path from buyer to seller decreases, which makes the Lightning Network less suitable for processing large transactions. Data: 2,500 BTCs were transferred from Coinbase to Binance: Jinse Finance reported that, according to Whale Alert data, 2,500 BTCs were transferred from Coinbase to Binance. [2022/8/12 12:21:40] For frequent large-scale transactions, both the sender and the receiver need to perform a large amount of channel management to ensure that there is sufficient liquidity to meet their payment needs. In part, this requires the users involved to predict their consumption behaviour. As the Lightning Network develops, its ability to handle large payments will improve, but large payments may not be reliably sent over the Lightning Network. Liquid Network The Liquid Network is optimized for medium and large transfers. Unlike the Lightning Network, the Liquid Network is a sidechain on which users can exchange Bitcoin (BTC) and L-BTC one-to-one. There is no limit to the amount of transfers on the Liquid network (technically, the maximum limit is the total amount of 21 million bitcoins). Users can lock up as many bitcoins as they want and start transferring money instantly. Receivers also do not need to participate in setting up any channels, they can receive all assets that the sender is able to send. Since the Liquid Network runs on its own blockchain, the number of transfers it can process is limited by the block size. Fees are currently very cheap (0.1 sats/vbyte for the next block confirmation), but as more and more liquid network users, fees will increase, which will make small transactions on the chain uneconomical . However, Lightning and Liquid are compatible and can run Lightning payments on Liquid, allowing users to take advantage of Liquid's unique properties when processing micropayments. 2. Interaction with the Bitcoin main chain From April 1 to now, ARK Fund has sold a total of 112,470 shares of GBTC: Jinse Finance reported that ARK Fund’s holdings data shows that since April 1, ARK Fund has sold a total of 112,470 shares of Grayscale GBTC. In previous news, Grayscale sent a letter to the US SEC, seeking its approval to convert GBTC into a Bitcoin ETF. [2022/4/24 14:44:42] The lightning network channel completes the interaction with the main chain by opening and closing the channel. In order to establish a channel, two bitcoin users need to fund a multisig address on the bitcoin network. After the funds are transferred to this address, the signatures synthesized by the private keys of the two channel users are required for access. To transfer money on the Lightning Network, a user needs to be running a fully synchronized Bitcoin node and a Lightning Network node at the same time. 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 transaction is 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 the channel. Non-custodial wallets like Breez and custodial wallets like Blue Wallet offer an easier but less trust-minimized option for using the Lightning Network. Custody-based Lightning wallets are very popular, but often come with trade-offs, including counterparty risk and weaker privacy. Liquid network users have two main ways to interact with the Bitcoin main chain: 1. Lock in and unlock 2. Conversion of Bitcoin and L-BTC through exchanges and swap platforms is the same as creating a Lightning Network channel, creating an L-BTC The process of BTC is also started by on-chain transactions. 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 protocol rules of the Liquid network. "NFT held by Jay Chou was stolen" ranked 7th in Baidu's hot search: Jinse Finance reported that "NFT held by Jay Chou was stolen" ranked 7th in Baidu's hot search. Today, Jay Chou posted on social media that his NFT was stolen, and attached the tags "Everyone, please be careful" and "This is not an April Fool's Day joke" after the post, which attracted everyone's attention. It is reported that Jay Chou's stolen NFT belongs to one of the hottest projects in the current circle, "Boring Ape Tour" BAYC. According to the current price, the NFT is worth more than 3.2 million yuan. [2022/4/1 14:32:02] To convert L-BTC back to Bitcoin, the user can either solve the operation through the liquid alliance members, or find another liquid that is willing to exchange L-BTC for Bitcoin Network users conduct P2P transactions. Like the Lightning Network, using the Liquid Network in this way will require at least two main chain transfers. In addition, many companies such as Liquiditi, SideShift AI, SideSwap, and Bitfinex provide services for quickly swapping BTC and L-BTC. After exchanging Bitcoin for L-BTC, users can conveniently use non-custodial wallets (AQUA, Blockstream Green, SideSwap) or hardware wallets (Blockstream Jade, Ledger NanoS) to store their assets. 102 Bitcoin main chain block confirmations are locked in, and 2 liquid network block confirmations can be unlocked 3. Speed Payment through the Lightning Network is almost instantaneous. Since Lightning Network payments don't require confirmation on the blockchain, they can happen as quickly as an internet connection allows, potentially even supporting millions of transactions per second. Li Lihui: my country's financial technology innovation has shown specific advantages leading the world: On October 18, Li Lihui, the former president of the Bank of China and the head of the blockchain working group of the China Internet Finance Association, held a monetary and financial roundtable on October 16. According to the conference and seminar on digital finance and commercial bank management, a new pattern of digital finance is emerging in China, and the digital financial architecture poses new challenges to financial data security, which requires the improvement of data governance capabilities. my country's financial technology innovation has shown specific advantages leading the world. For example, big data technology was first applied to establish digital trust, discover credit through data mining, explore credit value, and promote credit popularization; digital process reengineering with efficiency as the focus, financial institutions transform the centralized architecture into a "centralized + distributed + data cloud” architecture, promoting digital process reengineering with financial service efficiency as the focus; launching digital RMB for the public, etc. (Shanghai Securities News) [2021/10/18 20:36:47] As long as you find a channel that can handle the required payment amount, transaction speed is one of the main advantages of the Lightning Network. The lightning speed makes Bitcoin usable 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 makes its transfer speed slightly slower. Even so, 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 Bitcoin's average block production speed, and the liquid network requires two confirmations to consider the transfer as final settlement. This means that the transfer takes about two minutes. This timeframe is usually long enough for traders to move funds between exchanges and private wallets, but is too slow for retail transactions such as buying coffee. The average transfer speed of the liquid network is ten times that of the bitcoin main chain, and two blocks can finally confirm the account. 4. Privacy Compared with the transfer on the bitcoin chain that can be viewed in real time, the lightning network provides users with higher degree of privacy. 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 leave no permanent trace on the blockchain, so a deanonymization attacker would have to participate in forwarding the transfer—they won’t be able to recover that information later. Typically, the level of privacy provided by the Lightning Network is sufficient for smaller and less sensitive consumer transfers or payments. However, a degree of surveillance is still possible using the Lightning Network, since individual nodes can record information about the transfer channels and directions they have been requested to process. Although this surveillance method has limitations, it still has privacy issues to a certain extent. However, neither Bitcoin nor Lightning nodes use any real-name identifiers, so you can still remain anonymous by protecting your identity and the link between addresses you control. In contrast, the Liquid network protocol is designed so that the amount of funds and the type of asset transferred are not revealed to anyone other than the sender and receiver. This is made possible by a cutting-edge encryption protocol called Privacy Transfer developed by Blockstream. Liquid's high level of privacy brings important benefits to traders. Since on-chain analysis makes others aware of the massive movement of funds on the Bitcoin blockchain (see example "whale alert" below), the market can react ahead of time to cause a price change that traders may not be able to trade in Trade at the right price. Due to the privacy of the Liquid network, traders can conduct transactions without worrying about other users reacting in advance. However, users should keep in mind that it is necessary to choose between KYC and non-KYC solutions when converting L-BTC back to Bitcoin. KYC will provide the bitcoin address information of L-BTC users to third parties, but no third party can track the transfer history of L-BTC other than depositing funds to the platform. 5. Custody method Usually, Lightning Network users must hold the private key online until the channel is closed. Lightning nodes also require constant monitoring and rolling backups. Although no hacks have occurred to date, while nodes are online, it is theoretically possible for attackers to steal sensitive information, even private keys. Additionally, 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 institutions that store large amounts of bitcoin or do not want one person to hold all the funds. Using the Liquid Network, private keys can be stored cold offline, making it impossible to steal funds without physical access to the private key. Through the Blockstream Green wallet, Liquid network users can also use hardware wallets to keep their L-BTC private keys permanently offline. The Liquid network also supports multi-signatures in the form of Bitcoin. This provides greater security for individual users and also enables institutions to share control of L-BTC wallets. The Blockstream Green wallet enables users to use 2-of-2 multi-signature to ensure the security of the wallet. 6. 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 the Lightning Network channel will co-sign every change in the channel balance, any user can choose to broadcast the transfer at any time for settlement. As long as both parties are constantly monitoring the channel state (via their node or wallet services), this minimizes trust in the Lightning Network since none of the channel's users need to trust each other to transfer money. Liquid's trust model is based on a federation of 15 hardware security modules (HSMs) connected to host servers (called hosting nodes). Bitcoin and L-BTC's lock-in and unlock functions depend on two-thirds or more of the custodian nodes acting honestly. Although a certain amount of trust is required, the distributed alliance model is still far superior to the trust model faced by most traders, such as many times they will put funds in a single exchange.


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