Solving Lightning’s ‘Inbound Liquidity’ Problem Is Focus of New Layer 2 Bitcoin Protocol, Ark

The new protocol’s 24-year-old creator says Lightning’s inbound liquidity requirement - requiring users to commit funds to the protocol even when they're just receiving payments – “doesn’t make any sense.”

AccessTimeIconJun 2, 2023 at 12:52 p.m. UTC
Updated Jun 2, 2023 at 1:11 p.m. UTC
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Burak Keceli, the 24-year-old self-taught Bitcoin developer and researcher who disrupted a large chunk of Bitcoin’s Lightning Network last year, is now proposing a new layer 2 protocol dubbed Ark that he says will solve Lightning’s “inbound liquidity" problem.

Inbound liquidity is the ability to receive funds on Lightning – a layer 2 payment network introduced in 2016 that enables cheaper and faster bitcoin transactions. But that receiving capacity must first be established by committing funds and making outbound payments.

Keceli says that, much like the Lightning Network, Ark will make the dominant cryptocurrency’s transactions cheaper and faster, but the new protocol will eliminate the need for a recipient to commit funds.

“Lightning has many problems. But number one to me is the inbound liquidity problem,” Keceli told CoinDesk in an interview. “Imagine a payment system where you need money to receive money. This doesn't make any sense.”

Novices of the Lightning Network running non-custodial setups quickly realize one thing: The system works more like an abacus than a bank account. Users must commit bitcoin to a channel to create liquidity (the ability to transact on the network). Sending bitcoin (outbound liquidity) reduces your funds as expected, but receiving bitcoin (inbound liquidity) also reduces your capacity to receive additional funds, much like the limited space on an abacus.

The model makes sense for users who want to send Lightning payments (outbound liquidity), but not for users who simply want to receive them (inbound liquidity). They too must pony up funds and either send payments to generate that inbound liquidity or acquire it through other means like liquidity marketplaces.

That burdensome requirement for all Lightning users to acquire liquidity before using the system “simply should not exist,” Keceli says.

This objection, he explains, is what inspired him to create Ark.

The Turkish-born wunderkind says he has been working on Ark mostly solo and hasn’t incorporated or raised capital, choosing to keep the project open-source and donation-funded, but Ark is already receiving significant attention from prominent bitcoiners.

“​​Excited to see new ideas like Burak's, come to Bitcoin,” tweeted longtime bitcoiner and Human Rights Foundation Chief Strategy Officer Alex Gladstein.

Wrong side of the block size war

Keceli says he went down the Bitcoin rabbit hole circa 2017 after watching a YouTube video about the cryptocurrency’s mining process. He was fascinated by how a network could generate value from electricity and decided to dive in head first.

“I dug deeper into the details of how Bitcoin works under the hood,” said Keceli. “I built a bitcoin wallet based on what I had learned, and then over time, I realized Bitcoin doesn't scale.”

This all happened during Bitcoin’s contentious block size war, where part of the community, known as big blockers, called for an increase to the standard 1 megabyte size of Bitcoin blocks in order to scale network capacity. Another faction, the small blockers, who eventually prevailed, argued that blocks should be kept small to maintain decentralization.

The big blockers eventually created Bitcoin Cash, a version of Bitcoin with enormous 32 megabyte transaction blocks and additional functionality that Keceli thought would be useful in creating a Uniswap-like automated market maker (AMM).

“I thought it could scale on the base layer so I joined the big blocker camp – the Bitcoin Cash camp – and I hung out there for a few years,” Keceli said. “I wanted to build the AMM on Bitcoin Cash first.”

“But it turns out Bitcoin Cash is not expressive enough to build an AMM,” he said.

So he turned to Liquid – a federated sidechain or secondary blockchain that interacts with a primary blockchain, created by “small blocker” Bitcoin infrastructure company Blockstream. It’s a fork of Bitcoin but with additional features that Keceli and a friend used to finally build the long-envisioned automated market maker, which they eventually branded “Bitmatrix.”

Bitmatrix didn’t garner the success Keceli had hoped for, so the young developer took his talents to the Lightning Network.

“I shifted my focus to Lightning, to improve Lightning, and that's how Ark got started,” Keceli explained.

Ark in a nutshell

After Keceli turned his attention to Lightning, he confronted the myriad of problems currently besetting the network, as he describes them: poor user experience, suboptimal privacy, payment routing challenges – and then the onerous liquidity requirements.

He began working on a Lightning wallet about six months ago to address these issues, he says, and what began as an attempt to create a best-in-class Lightning wallet, morphed into a standalone protocol now known as Ark.

“At some point I realized, this doesn't look like Lightning at all,” Keceli explained. “You can pay invoices, you can get paid from invoices. It's a Lightning wallet, yes, but internally at its core, it's a different kind of design.”

Keceli says Ark is much like Lightning in that it scales Bitcoin by transacting off-chain. However, instead of requiring users to commit funds at the outset as a way of establishing liquidity, the new protocol uses Ark service providers (ASPs) who are “always on” and provide 24-hour liquidity services for a fee.

Lightning off-chain channel payments are like a game of ping-pong; coins change hands within a 2-of-2 multisig indefinitely until the channel is closed. A 2-of-2 multisignature or “multisig” transaction requires two parties to sign for the transaction to be valid.

Ark’s off-chain payments replace traditional channels with a shared unspent transaction output (UTXO) model that uses virtual unspent transaction outputs (VTXOs), which facilitate unidirectional, one-time-only payments.

“It's like an atomic single hub payment,” explained Keceli. “So it's me, I'm the sender, my partner is in the middle – my ASP, and the recipient is on the other end. We collaboratively sign the 2-of-2 to push my money to the service provider. The service provider pushes the funds minus the liquidity fee, to the recipient.”

That final push by the ASP is actually an on-chain CoinJoin – a way of combining several bitcoin payments from multiple spenders to produce a single transaction whose history and ownership are obfuscated. Keceli says CoinJoin gives Ark a privacy edge over Lightning.

If Ark succeeds, will that spell doom for Lightning? Not really, according to the developer; the two systems would complement each other.

“An Ark service provider is also a Lightning service provider,” said Keceli. “To be an Ark service provider, you run a Bitcoin node, you run the Ark service provider node, and also, you run a Lightning node.”

What’s next?

Ark’s development is still in the early stages. Keceli is currently focused on answering questions from the Bitcoin community and finalizing technical specifications. After that, he plans to put on his entrepreneurial hat and shift to prototyping and raising capital.

“The mid or long-term vision for me is to build a company like Lightning Labs, like Blockstream,” said Keceli. “So I'll be building Ark Labs, to build the key Ark infrastructure, build the client, the daemon, the CLI [command line interface], the SDK [software development kit] – the tooling around it. So I’ll be building an infrastructure company for profit, and I'll be raising for that.”

Edited by Bradley Keoun.


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Frederick  Munawa

Frederick Munawa was a Technology Reporter for Coindesk. He covered blockchain protocols with a specific focus on bitcoin and bitcoin-adjacent networks.

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