Binance revealed on its official Twitter account on June 20 that many netizens have discovered that Binance has completed the construction of Bitcoin Lightning Network nodes. And just after Binance announced that it had completed the deployment of Bitcoin Lightning Network nodes, Binance CEO Zhao Changpeng also responded that the relevant construction is in progress.
Going back a few months, it can be speculated that Binance's involvement in the Bitcoin Lightning Network is actually related to the BRC-20 craze in early May, which caused the Bitcoin network to be congested and transaction fees to skyrocket. On the 7th and 8th of the same month, Bitcoin withdrawals were suspended for the second time.
In the previous research report (Can BRC-20 bring new prosperity to the Bitcoin ecosystem? What is the use of Bitcoin NFT? What is BRC-30?), we mentioned many concepts of BRC-20, and at the end, we also mentioned that the next article will focus on the Lightning Network. First, I will explain the relationship between the two? Then I will introduce the Bitcoin expansion plan, and finally conduct in-depth research and discussion with the Lightning Network as the main axis.
Previously, applications such as NFT and BRC-20 in the Bitcoin ecosystem have become increasingly popular, which has led to more and more congestion in the Bitcoin network. From a technical point of view, if the circulation of BRC-20 is supported on the Lightning Network, it will help to achieve faster and more efficient transactions and unlock new possibilities for BRC-20. However, this has also become the key to Binance's construction of the Bitcoin Lightning Network. According to the blockchain data platform Glassnode, the average fee for Lightning Network transactions is US$0.00013. If transactions are conducted directly using the Bitcoin network, the average transaction fee of the Bitcoin network is about US$18.9, and the price difference between the two is huge.
It can be seen that this benefit has allowed Binance to begin integrating the Bitcoin Lightning Network to realize deposit and withdrawal functions. However, Binance also emphasized that there is still some technical work to be completed before the Lightning Network integration is completed, and promised to continue to update everyone with the latest news.
Next, we will take a closer look at the Bitcoin expansion plan and the technical knowledge of the Lightning Network.
Blockchain Challenges
Let’s start with the challenges of blockchain. Moving bitcoins around on a blockchain is a slow, expensive, and inefficient process. This is because the Bitcoin blockchain can only handle a certain amount of transactions (and data) in a certain amount of time. If Bitcoin is to remain competitive with other blockchains, innovative measures must be taken to increase the utility of the network.
We must first distinguish between two key concepts: "Bitcoin as an asset (BTC)" and "Bitcoin as a blockchain". Bitcoin as an asset has been widely adopted in the past few years and has great potential for digital assets today and in the future. However, for BTC to achieve large-scale application, it must have a seamless transaction environment (that is, the Bitcoin blockchain). Bitcoin's blockchain is highly secure, decentralized, and stable, but Bitcoin has an obvious flaw: it has limited ability to handle large amounts of transaction data. To confirm transactions on the Bitcoin blockchain, they must be approved through the Proof of Work (PoW) consensus. Once a certain number of miners have verified the transaction, it can reach the state of final settlement of the blockchain and generate a new block system.
There are currently several key factors that limit the Bitcoin blockchain: first, block size, a Bitcoin block can only hold 1 megabyte (MB) of data; second, block time, a new Bitcoin block is generated approximately every 10 minutes; third, throughput, due to Bitcoin's block size and block time limitations, it can only process about three to seven transactions per second; fourth, transaction costs, limited throughput leads to high demand for limited block space, which in turn causes fees to soar when the Bitcoin network is congested; and finally, programmability, Bitcoin's language functions are limited, making smart contract logic difficult to implement. This also makes creating decentralized applications on Bitcoin far less simple than on Ethereum.
So why can't developers just improve Bitcoin's performance? Because improving the Bitcoin protocol is not as simple as you think. First of all, Bitcoin was intentionally designed to be a simple blockchain. Without complex coding and applications, Bitcoin has proven to be a highly secure, stable and decentralized blockchain today. Therefore, making sudden and substantial changes to Bitcoin would be counterproductive to the core rules of the protocol. While Bitcoin upgrades will certainly continue, no transformative solutions will be implemented overnight. Therefore, it will be difficult for blockchains to achieve scalability on their own in the near future. However, since Ethereum has an L2 solution, the Bitcoin blockchain must also have other solutions that can help expand the network to accommodate billions of users and millions of transactions per day.
While Bitcoin has its limitations, it can still scale by implementing layered solutions, bringing enhanced performance and functionality to the entire network. By building on top of Bitcoin, developers can create scaling solutions without modifying Bitcoin itself. This approach can improve the performance of regular Bitcoin transactions while benefiting from Bitcoin's liquidity and network effects.
Is stratification ETH L2?
Layers enable Bitcoin (and other assets) to be transferred without using the blockchain directly. While each Bitcoin layer has its own unique consensus mechanism to connect to Bitcoin, the goal is the same: to move transactions off-chain to make them faster, cheaper, more programmable, and scalable. Next. Let's dive into the relationship between Bitcoin and these layers.
First, let's assume that Bitcoin can serve as the final settlement layer for transactions, which prioritizes stability, decentralization, and security. These characteristics make Bitcoin the best foundation for building a wider range of economic activities. In addition, its native currency BTC acts as a long-term store of value. At the same time, layered solutions can bring higher scalability and productivity to Bitcoin without compromising the security of its base layer.
Since these layers are built on top of Bitcoin, they do not impact the base layer and do not pose a risk to it from a security perspective. The layered approach enables Bitcoin to adopt new, faster and more efficient processes without sacrificing the durability or decentralization of the base layer. In simple terms, Bitcoin layering has multiple advantages: first, faster transaction speeds, transactions on the layers can be processed within seconds, which is more suitable for Bitcoin users who need faster confirmation; second, higher throughput, transactions take up less data, and each new block leaves more space; third, lower transaction fees, more efficient throughput means lower fees; fourth, the addition of smart contract functions, smart contracts with a complete execution environment make the development of decentralized applications possible, which greatly expands the application scenarios of Bitcoin, including decentralized finance (DeFi), non-fungible tokens (NFT) and decentralized autonomous organizations (DAO).
Finally, Bitcoin tiering also helps simplify settlement, where micropayments and small transactions do not require the full security of the Bitcoin blockchain. Instead, they can be moved to tiers where transactions can be confirmed almost instantly at a small cost, and eventually bundled and sent to Bitcoin for final settlement.
What are the layered solutions?
There are currently four main layered solutions that help improve Bitcoin’s scalability:
1. Stacks
Stacks is a Bitcoin Layer 2 that supports "decentralized applications" and "smart contracts." The technology uses a programming language called "Clarity" for writing smart contracts. If you look at the system as a whole, Stacks actually has its own chain, compiler, and programming language, and runs in sync with Bitcoin to ensure its transactions and integrity.
The core concept of the project is that "because there is a basic settlement layer (Bitcoin) at the bottom to ensure consensus and security, users can add smart contracts and programmability on top of Stacks to achieve scalability and transaction speed." Among them, their core technology is to use the proof-of-transfer (PoX) consensus mechanism to closely connect the Stacks block with the Bitcoin block.
In proof of transfer, miners on Stacks do not use mining equipment and electricity to mine Stacks, but instead use BTC to mine new STX tokens and earn transaction fees. In order to win the chance to mine a block, miners submit BTC to a qualified Stacks address participating in the consensus, thereby transferring the promised cryptocurrency to some other participants in the network, thereby winning the chance to mine a block and then earning STX reward tokens. Through this system, miners earn STX coins and transaction fees, while STX stakers earn Bitcoin.
In addition to using anchor blocks in the final link with Bitcoin to help ensure the security and reliability of Stacks, Stacks also introduces the concept of micro-blocks, which can be used between two Bitcoins. Thousands of transactions are published between blocks. In this way, Stacks’ scalability is significantly improved and can handle higher transaction volumes, making it a more efficient and practical blockchain solution.
We have previously explained BRC-20 and Ordinals technology in a previous research report (Can BRC-20 lead the Bitcoin ecosystem to a new prosperity? What is the use of Bitcoin NFT? What is BRC-30?), and this happens to be an application case of Stacks.
With the growing popularity of Ordinals and the craze for BTC NFTs (Ordinals technology), NFT activity on Stacks has also increased, which can be said to be a direct benefit from Stacks' lower costs and faster NFT minting speeds.
（二）RSK（Rootstock）：
RSK (also known as Rootstock) is a universal smart contract platform secured by the Bitcoin network. Founded by RSK Labs, RSK aims to address Ethereum’s shortcomings by leveraging Bitcoin’s stability, security, and economic foundations. By moving its smart contracts from Ethereum to RSK, RSK makes all Ethereum applications compatible with the Bitcoin blockchain. RSK creates a new block approximately every 33 seconds, which is much faster than Bitcoin’s 10-minute block time, and can also process approximately 10-20 transactions per second, which is more efficient than Bitcoin’s processing capacity of approximately 5 transactions per second.
The RSK sidechain design has some unique designs compared to other Bitcoin layering solutions. First, merged mining. The RSK blockchain uses the same Proof of Work (PoW) consensus algorithm as Bitcoin, but miners can generate blocks faster than the Bitcoin base layer. These RSK blocks are mined through a process called "merged mining". Since both blockchains use the same consensus, miners can merge mine and mine for both the Bitcoin and RSK blockchains at the same time, but let Bitcoin and RSK consume the same mining computing power, so the computing power contributed by miners can also mine RSK's blocks, which allows merged mining to significantly increase the profitability of miners without investing additional resources.
Merged mining allows RSK to verify transactions, generate blocks and send them to Bitcoin. Through this mining process, users can rest assured that RSK's smart contracts benefit from the security of the Bitcoin blockchain.
The second unique design is Powpeg Powpeg is a two-way bridge between the RSK blockchain and Bitcoin. The Powpeg protocol is implemented through RSK's asset smartBTC (RBTC). Technically, the RSK platform does not have its own native token. So RSK uses smartBTC (RBTC), which is a token issued by locking BTC on Bitcoin at a 1:1 ratio. This means that the value of RBTC is always the same as BTC to pay transaction fees on RSK.
There are two main mechanisms to bridge funds between RSK and Bitcoin: vaults and smart contracts. When we want to transfer Bitcoin to RSK, this process is called "pegging-in", which requires users to lock a certain amount of Bitcoin in the vault on the Bitcoin network. This will unlock the corresponding amount of Bitcoin on RSK. Conversely, when we want to return Bitcoin from RSK to the Bitcoin network, this process is called "pegging-out", which requires users to send a certain amount of RBTC (RSK's asset) to the smart contract on RSK. Then, the corresponding amount of Bitcoin will be unlocked from the vault on the Bitcoin network.
The last unique design is the RSK Virtual Machine (RVM), one of the advantages of RSK is its interoperability with Ethereum smart contracts. The RSK Virtual Machine (RVM) is based on the Ethereum Virtual Machine and can execute Ethereum smart contracts on RSK. Developers can seamlessly use the same code, tools when building RSK applications. This provides the Ethereum community with a cheaper and faster option to interact with their favorite decentralized applications (dApps). This means that RSK developers can program in Solidity, the smart contract programming language used on Ethereum, and users can also send their RSK assets to Metamask.
3. Liquid Network
Liquid Network is a Bitcoin sidechain developed by Blockstream to facilitate fast settlement of Bitcoin transactions. The network’s consensus mechanism is similar to Bitcoin, but it has a centralized governance structure.
The team behind Blockstream consists of several Bitcoin core developers, and some foreign media believe that they are an all-star development team in the industry.
Here is a brief description of Liquid Network’s unique features and functions:
Fast Settlement: Liquid Network’s block time is only 60 seconds, which is much faster than Bitcoin’s 10 minutes, which means that transactions on Liquid Network can be confirmed and settled faster.
Low transaction fees: Liquid Network transaction fees are only about one-tenth of Bitcoin’s on average. This makes micropayments and daily transactions more cost-effective.
Centralized Structure: Unlike Bitcoin’s decentralized structure, Liquid Network has a more centralized structure. This is a compromise made to improve performance, allowing for faster transaction confirmation and higher throughput.
The main purpose of Liquid Network is to provide a solution that is more suitable for dealing with the fast and high-frequency trading needs of Bitcoin. It can be widely used in cryptocurrency exchanges, payment services and other financial applications to make these transactions more efficient and convenient. It should be noted that Liquid Network is still built on the basis of Bitcoin blockchain, so it inherits the security and reliability of Bitcoin. At the same time, Liquid Network also provides faster and cheaper transaction methods to meet the growing transaction needs.
4. Lightning Network
The Lightning Network is a new system for off-chain Bitcoin transactions that allows users to trade with each other without the need for a central institution like a bank. As Bitcoin's L2 solution, it can be used to scale micropayments and daily transactions, and by using smart contracts and payment channels, two parties can quickly conduct Bitcoin transactions at almost zero cost.
Earlier we talked about the relationship between BRC-20 and the Lightning Network. Next, let’s take a closer look at the technical principles, applications, and future development of the Lightning Network.
Lightning Network Technology Principles and Origins
The Lightning Network leverages Bitcoin’s multi-signature wallet and offline transaction capabilities to allow participants to establish payment channels outside the blockchain. These payment channels allow for fast and low-cost transactions between participants without having to record every transaction on the Bitcoin blockchain.
In the Lightning Network, payment channels are established by two-way multi-signature wallets between participants. For example, suppose there are participants A and B who want to conduct transactions on the Lightning Network. They can create a multi-signature wallet under their joint control and lock a certain amount of Bitcoin in it as funds for the payment channel. Once the payment channel is established, A and B can conduct multiple transactions within the channel without submitting each transaction to the Bitcoin blockchain. These transactions are only recorded and verified within the payment channel. Only when they want to end the payment channel and submit the final settlement result to the Bitcoin blockchain, they need to transmit the latest channel status to the blockchain.
Payment channels in the Lightning Network use a technology called "offline transactions", which allows participants to conduct transactions without a blockchain network connection. This is done by using transaction data previously confirmed on the blockchain to verify the validity of the transaction. Offline transactions allow transactions within the payment channel to be completed quickly without waiting for confirmation from the blockchain.
If A and B want to trade in a payment channel in the Lightning Network, but there is no direct payment channel between them, they can use relay nodes to trade. Relay nodes are participants in the Lightning Network that allow funds to flow between payment channels. Through relay nodes, A and B can establish an indirect payment channel to achieve transactions. The Lightning Network also uses a mechanism called "routing" to ensure the smooth transmission of payments in the network. When a payment needs to be transmitted through multiple relay nodes, the router will choose the best path to ensure that the payment reaches the destination smoothly.
Anyone who has used Google Maps for navigation can imagine that the navigation function of Goolge Maps provides drivers with driving route suggestions for the "fastest route" between point A and point B. It also uses big data and its own algorithm to help users estimate the fastest route and estimated time required for the recommended navigation. This is the role of the router, which uses a concept called "lightning path" to specify the routing of the payment channel.
Finally, in addition to providing fast and cheap transactions, the Lightning Network also has good scalability. Because transactions on the Lightning Network do not need to be confirmed on the Bitcoin blockchain, it can support millions of transactions while maintaining the characteristics of fast and low cost. In summary, the Lightning Network is an innovative technology that provides an efficient, fast and low-cost transaction method by establishing payment channels on top of the Bitcoin blockchain. It solves the scalability problem of Bitcoin and opens up new possibilities for the application scenarios of the Bitcoin blockchain.
The Lightning Network originated from a 2015 paper by researchers Thaddeus Dryja and Joseph Poon. Their research was based on a discussion of payment channels by Satoshi Nakamoto, the creator of Bitcoin. The paper described an off-chain protocol consisting of payment channels that aims to solve Bitcoin's scalability problem.
As recently as 2016, Dryja and Poon co-founded a company called Lightning Labs to develop Lightning Network technology. Lightning Labs has been working to ensure that the protocol is compatible with Bitcoin’s core network.
With the SegWit soft fork of Bitcoin in 2017, the way was paved for the implementation of the Lightning Network. SegWit increased the capacity of Bitcoin transactions, providing more space in each block while solving the long-standing transaction malleability issue. During testing prior to the launch, developers have begun building applications on the Lightning Network. These applications include simple use cases such as wallets and gambling platforms that take advantage of the Lightning Network's micropayment capabilities.
Supplement: SegWit (Segregated Witness) is an important soft fork upgrade designed to improve the scalability and security of the Bitcoin blockchain. The goal of this upgrade is to solve the problem of limited Bitcoin transaction capacity while increasing the network’s throughput and reducing transaction fees.
The main change of SegWit is to separate the transaction signature (witness data) from the transaction body and place it in a new block called a "segregated witness block". This can reduce the amount of data in each transaction, thereby freeing up more space to accommodate transactions. Specifically, SegWit changes the transaction data structure, moving the signature data out of the transaction itself and storing it in a new block. In this way, the amount of transaction data in the block is reduced, and more transactions can be accommodated.
At the same time, this change also provides greater flexibility for introducing more transaction types and features. The implementation of SegWit requires participants on the network to upgrade their Bitcoin software to support the new transaction format. Although SegWit is a soft fork, it was widely accepted by the Bitcoin community and successfully activated in August 2017. In addition, SegWit also provides the necessary foundation for the subsequent Lightning Network implementation, enabling it to function better.
In 2018, Lightning Labs launched a beta version of the Lightning Network on the Bitcoin mainnet and began to put it into practical use. Since then, many well-known people, including Twitter founder Jack Dorsey, have also begun to participate in the Lightning Network project. Since then, the Lightning Network has continued to develop and attract more developers and users. It is considered an important solution to Bitcoin's scalability problem, providing Bitcoin with a faster and lower-cost transaction method and opening up new possibilities for a wider range of application scenarios.
Lightning Network Limitations and Challenges
Currently, the Lightning Network is considered by many to be the most effective solution to the problem of Bitcoin transaction fees, but this is not the case. First of all, although the Lightning Network can reduce transaction fees by moving transactions from the main blockchain to the off-chain, there are still other costs and challenges. When using the Lightning Network, you need to pay a fee equal to the Bitcoin transaction between opening and closing channels. These fees are the cost of using the Lightning Network. In addition, in addition to the cost of opening and closing channels, there is an additional routing fee for transferring payments between channels. Even if the fee of the Lightning Network is low, this may not have enough incentives for nodes to participate in the payment routing process.
(In the Lightning Network, nodes play the role of processing payments and are responsible for transferring payments from one channel to another. However, due to the low routing fees, nodes may be unwilling to bear these costs or provide corresponding services. This may cause nodes to be unwilling to participate in the payment routing process, resulting in delays or failures in payments.)
In contrast, there are some cryptocurrencies on the market that reduce payment costs by providing free software plug-ins or through special nodes. For example, Dash allows users to pay extremely low fees when making payments. Its system is designed with Masternodes, which need to deposit a certain amount of Dash coins in order to be able to process transactions quickly.
In addition to the fact that the Lightning Network is mistakenly believed to be the most effective way to reduce transaction fees, there is another point that needs to be clarified. "Nodes that are always online are vulnerable to attacks." In Bitcoin's Lightning Network, nodes must always be online to send and receive payments. This means that if the two parties involved in the transaction are not online or their computers are hacked, funds may be stolen.
However, the Lightning Network also allows for the use of cold storage to protect funds, which is a method of storing funds offline and is considered one of the safest ways to store cryptocurrencies. In addition to this, there are also some problems if offline operations are performed on the Lightning Network. For example, when one of the two parties to a transaction closes a payment channel and withdraws the funds while the other party is not online, this is called a fraudulent channel closure. Although there is a period of time to object to the closure of the channel, if one party is not online for a long time, the opportunity to object may be missed. In addition, malicious attacks also pose a risk to the Lightning Network. If a payment channel is congested and suffers a malicious attack, participants may not be able to retrieve their funds in time because the channel is congested. Therefore, while the Lightning Network provides faster payments and low-cost transactions for Bitcoin, the requirement that nodes are always online and the risks associated with offline operations and malicious attacks still need to be considered and paid attention to by users.
Finally, the advent of the Lightning Network was meant to be a medium for everyday transactions. Users could open payment channels with businesses or individuals they frequently transact with. For example, they could open a payment channel with their landlord or an e-commerce store they shop at from time to time and use Bitcoin to make transactions. However, Bitcoin still has a long way to go before it becomes a mainstream payment method. Its increase in transactions is mainly attributed to an increase in trading volume. In other words, Bitcoin's popularity is a double-edged sword, as the increased attention attracts investment, but it also attracts more traders, increasing the cryptocurrency's volatility, or price fluctuations.
Price volatility makes it difficult for merchants to use Bitcoin as a payment method when pricing products to sell to customers or purchasing inventory from suppliers. For example, let’s say a company needs to pay an invoice to a supplier in Bitcoin. Typically, suppliers give customers a certain amount of time to pay, such as 30 days. If the price of Bitcoin increases by 10% during those 30 days, the business will need to prepare an additional 10% in fiat or other cryptocurrencies to convert to Bitcoin to pay the invoice. This exchange rate risk exists because the business may receive fiat currency from the customer instead of Bitcoin. For consumer transactions, exchange rate risk also exists because most people do not get paid in Bitcoin, so transactions need to be converted from fiat to Bitcoin. Therefore, the overall impact of the Lightning Network on reducing Bitcoin transaction fees and scaling up may be limited because Bitcoin is not yet widely accepted as a payment method.
Latest applications and news
On July 6 this year, Lightning Labs launched a new developer tool that enables the Lightning Network and AI developer community to build inclusive, out-of-the-box, cost-effective LLM (Large Language Model) tools that seamlessly integrate the Lightning Network and Bitcoin.
Built on the L402 protocol, Lightning Network native authentication mechanisms, and Langchain, these tools simplify the use of AI agents by adding external data, allowing more advanced features to be enabled.
Conclusion
It can be seen that Bitcoin's Lightning Network still faces some challenges, whether it is to increase its scale or reduce transaction fees. However, the core team of this technology has also developed some new application scenarios and invested a lot of research to help improve the performance of the network.
The Lightning Network now supports larger payment amounts than before. Previously, it limited the channel size to 0.1677 bitcoins, but now these restrictions have been lifted, allowing users to create larger channels. These new designs, called "Wumbo" channels, are intended to increase the application and practicality of the Lightning Network among consumers and businesses.
In addition, the Lightning Network is also being adopted by cryptocurrency exchanges such as Kraken and Block’s Cash App, which have also integrated the Lightning Network to allow users to trade more conveniently.
Finally, Bitcoin’s Lightning Network still has great potential to provide a faster, lower-cost way to transact. As the technology continues to develop and improve, we can expect the Lightning Network to bring more convenience and widespread application possibilities to the use of Bitcoin and cryptocurrency in the future.