Table of Contents
Introduction
When people discuss scaling Bitcoin, they are typically referring to increasing its transaction throughput beyond the current ~7 transactions per second. While the Lightning Network might not be a perfect solution, it is already available and can process an unlimited number of transactions. For this reason, I consider the throughput problem largely solved.
While scaling for transactions is the primary goal, Bitcoin’s utility can also expand far beyond storing and moving satoshis. Other blockchains, like Ethereum and Solana, have shown their ability to host assets such as stocks, bonds, and stablecoins. These use cases drive demand for their native tokens, demand that I would like to see redirected to Bitcoin.
It’s worth acknowledging that any use of Bitcoin beyond storing and moving satoshis is controversial, and many in the community are firmly opposed. However, I believe adding new use cases to the Bitcoin network is beneficial, provided they do not interfere with its primary function: storing and transferring value. For instance, while I support the idea of Bitcoin-powered assets, their transactions should not occur onchain where they could compete with normal payments.
Scaling is Secondary
Scaling a system that fails its core promises is dumb. Bitcoin’s primary value proposition is its lack of a central authority. To ensure it remains truly decentralized, we must first solve critical challenges, most notably, the geographical and geopolitical diversification of mining and chip manufacturing. Progress on this front must take priority over less critical efforts.
Bitcoin Blockchain is for Savings
Bitcoin’s inherent scarcity makes it undoubtedly suited for savings above all else. The blockchain itself was never designed for retail, as on-chain transactions are inherently slow and costly. These limitations are permanent, precluding the use of Bitcoin for day-to-day spending like fiat. Even onchain asset issuance, while possible, should be discouraged as it competes with the network’s core financial transactions.
Political Risks of Savings-Only Narrative
While many current bitcoiners are content with a savings-only use case, I believe it is a mistake to ignore Bitcoin’s other practical applications. We must remember that most people are not in a position to save significant amounts, and it is crucial to understand how Bitcoin is perceived outside of our own social bubbles. Bitcoin should be viewed as an instrument of freedom, not a manifesto of greed. If we remain fixated solely on savings, politicians will eventually convince the public that Bitcoin is useless for anything but “hoarding”. This narrative would grant them the public approval, whether silent or vocal, to launch a full-scale attack on the network.
Onboarding as many people as possible is crucial for Bitcoin’s long-term survival. Different people have different needs, and the number of individuals who require neutral, seizure-proof payment rails and financial instruments far exceeds the number of hardcore maximalists who only want to hold. To survive an inevitable confrontation with the extremely powerful entities that oppose these freedoms, Bitcoin must evolve to address this broader range of needs.
L2: Beyond Savings
We have already established that onchain scaling for Bitcoin is not feasible. This is why various spending and decentralized finance solutions position themselves as Layer 2s (L2s), they rely on separate systems built at a higher level of abstraction.
The core concept is to shift activity off-chain while maintaining the security guarantees of the base layer. A fundamental rule for any true Bitcoin L2 is that it cannot create a new token, doing so would make it just another altcoin. If a system does not natively use bitcoin, it is not a Bitcoin scaling solution.
Current Solutions
Using bitcoin on a Layer 2 requires first locking the coins on the main chain to prevent double-spending. Examining the capital committed to major L2s reveals the scale of this activity:
- Lightning Network - 5,090 BTC (per https://1ml.com/)
- Liquid Network - 3,850 BTC (per https://liquid.network/)
This total of under 9,000 BTC, representing a mere 0.05% of all bitcoin ever mined, is currently servicing the entire non-savings economy. This clearly demonstrates that retail bitcoin transactions are still a niche, albeit growing, market. The fact that such a small fraction of the total supply can facilitate this demand is a powerful insight.
Lightning Network
Risks
Because Lightning Network nodes must remain online to function, they are inherently hot wallets. Therefore, they should only be used for small sums, much like cash in a physical wallet, amounts you can afford to lose if a software vulnerability is ever exploited.
Benefits
The Lightning Network offers three key advantages:
- Low Cost: A single onchain transaction can enable hundreds of offchain payments, making microtransactions like buying a $5 coffee feasible.
- Speed: Payments are settled instantly.
- Privacy: Unlike onchain transactions, which are fully public, Lightning payments are not individually broadcast to the entire network, helping to obscure your financial activity.
Summary
The Lightning Network is ideal for spenders, enabling unlimited, fast, and private transactions for a fraction of the cost of on-chain payments. However, due to its protocol design and the need for interactivity, Lightning is not well-suited for storing or transferring large amounts of capital.
Liquid Network
Risks
The Liquid Network is a custodial system because all user bitcoins are held by a federation via an 11-of-15 multisig wallet. This means it is an undeniable fact that your funds can be seized, and you relinquish control while using the network. Consequently, I believe Liquid should only be used for small amounts of money, where the utility of fast, cheap transactions might justify the significant custodial risk.
This risk is inherently lower for regulated, KYC-based assets, as their legal structure offers investor protections. While I have no personal interest in such traditional assets, their existence within Liquid’s framework makes sense.
Benefits: Trustless Swaps
A Liquid “swap” is a single transaction that finalizes a trustless exchange of assets between two or more parties. It is much safer than having to trust the other person to complete their part of a traditional two-step exchange after you have completed yours.
A swap on Liquid is done using the Partially Signed Elements Transaction (PSET) standard, whereby the parties involved sign an input and output each and pass around the transaction until all inputs and outputs are accounted for and signed, whereupon the transaction become fully signed and valid for broadcast.
A key feature of Liquid is the ability to perform non-custodial swaps between any assets on its network. While L-BTC is the foundational asset, the system also hosts tokenized stocks, bonds, and stablecoins. This enables peer-to-peer trading without the need for trust in an additional counterparty or a central exchange.
Benefits: Non-Custodial Order Books
Although Liquid enables peer-to-peer order matching, a service is still required for order discovery, a role often filled by a trusted third party like an exchange.
This means an exchange interface is still needed, but its role is fundamentally different. Because these platforms facilitate non-custodial swaps, they cannot access user funds, eliminating the risk of fraud or collapse that plagues traditional custodial exchanges. This is a critical advancement.
Going a step further, an open-source public order book could be developed, paving the way for minimal or even zero trading fees.
Benefits: Confidential Transactions
Although Bitcoin’s base layer has transparent transactions, this doesn’t preclude privacy at higher layers. Early developers considered confidential transactions but found the data overhead too great for the main chain. Liquid sidesteps this limitation by implementing confidential transactions by default on its Layer 2.
This confidentiality extends beyond just amounts to also obscure the types of assets being transferred. As a result, you can receive a specific asset on Liquid with complete privacy, even from the governing federation.
Liquid Federation
The Liquid Federation governs the network, and its most powerful members are the 15 “functionaries.” These entities control the multisig keys for all user bitcoins, act as miners, and require an 11-of-15 majority to sign blocks or release funds. The central security challenge is preventing this majority from colluding.
The model’s viability depends on a geographically and geopolitically diverse federation. Currently, this is not the case, significant overlap in VC funding and the concentration of members within the US sphere of influence creates a central point of failure.
For the federation model to be truly sound, it must decentralize further, ideally by incorporating members from emerging sovereign nations. The theory is robust, but the current implementation has room for improvement.
AQUA
After using the Liquid-based AQUA wallet for several months, I have a largely positive impression. It stands out as the most feature-complete Liquid wallet, effectively demonstrating core functionalities like peg-ins/outs, confidential transactions, and asset swaps. Its ease of use is a major advantage. For Bitcoin merchants in particular, it could be a game-changer, as receiving payments on Liquid does not require managing inbound liquidity, a common hurdle on the Lightning Network.
Liquid Assets
Liquid’s ability to host multiple assets, including Bitcoin, makes it useful for a variety of purposes. For instance, despite my reservations about USDT, I find Liquid USDT to be the most practical and cost-effective way to send USD to Russia.
The network also supports tokenized securities, such as MicroStrategy stocks and El Salvador bonds, enabling 24/7 peer-to-peer trading without brokers. This opens the door for many new financial products, albeit most will be subject to KYC regulations.
Summary
While both Liquid and Lightning provide cheaper, faster transactions than the base chain, a key distinction is that Liquid assets can be held in cold storage, unlike funds in a Lightning channel. This advantage comes with a critical trade-off: reliance on the Liquid Federation. This makes Liquid a custodial system. Although it is more secure than a custodial Lightning wallet, the ever-present risk of the Federation acting maliciously limits its use to small transaction amounts.
Conclusion
While both Liquid and Lightning enable faster, cheaper, and more private bitcoin transactions, along with the issuance of assets like stocks and bonds, each Layer 2 comes with its own trade-offs. My approach is to use both for small, everyday amounts, as I would not trust either with significant savings.