What is the point of "Bitcoin Lightning" and "Bitcoin Liquid"?

Question

Even having been "into" Bitcoin since almost since the start, I constantly find new weird things mentioned which are just apparently taken for granted and exist suddenly and somehow have tons of support and users.

Today I learned about the existence of "Bitcoin Liquid". I had not heard of it ever until today (2021-01-21). Apparently, it's the same thing as "Bitcoin Lightning", in that it's not a separate "altcoin", but somehow "attached to" Bitcoin yet not using the Bitcoin blockchain. This makes no sense to me.

I do know that "Lightning" was touted as a solution when the Bitcoin network was all clogged up with waiting times for transactions a few years ago, but since then, I've not heard one peep of it. Never heard it mentioned at all. I assumed that it was dead. But apparently it still exists, and now "Liquid" also exists. Are they competing against each other?

I find it utterly impossible to figure anything out by reading their official websites, because they always use bombastic wording and list how many groups support them and they are the future and blablabla... Useless information. I want to know neutral, real information. I can't find it anywhere.

What exactly are "Bitcoin Lightning" and "Bitcoin Liquid"? Why do they exist? Why aren't these "BIP"s put into Bitcoin itself? How can they be attached to Bitcoin yet be separate? Is one of them objectively better than the other? Do they solve different problems? Is one of them dead now? Should I be using/bothering with them? Are they an attempt to take over Bitcoin slowly by not being an "altcoin" upfront, but slowly turning away from Bitcoin?

I swear, I could probably sit there and spend my entire life doing nothing but trying to read up on Bitcoin-related stuff and still never have any clue what's going on. It seems like not one day passes without some "revolutionary" and "fantastic" new invention which seems to be little more than a slick website with nonsensical sales talk on it.

I'm looking to get a grasp of the state of Bitcoin and its development. I have no idea how these weird "sidechains" fit into that or why I should pay any attention to them. Maybe it's the best thing ever and makes perfect sense?

Answer 1

The lightning-network (LN) is an instant payment system built on top of Bitcoin. Its relationship to Bitcoin is akin to that of Visa card payments and the US banking system. The LN is a convenient and efficient way to pay directly from one user to another, especially for smaller amounts. Under the hood, the Lightning Network works by spanning payment channels between users and providing cryptographic guarantees to prevent abuse. Compared to on-chain payments, the LN trades off different privacy properties, lower transactions fees, and manifold increased transaction throughput with different security assumptions and the opportunity-cost of staging funds in payment channels.

The liquid sidechain is an alternative blockchain protocol whose native currency is "Liquid Bitcoin" (L-BTC). Users may convert Bitcoin to L-BTC 1:1 by paying into the custody of the federated peg or withdraw BTC by returning L-BTC back to the peg on Liquid. The Liquid sidechain operates with different consensus rules that give it better privacy (via confidential-transactions), greater throughput, and the ability to issue other assets. This comes at the cost of trusting that the majority of the Federation remains honest. Being closely related to Bitcoin, Liquid has its own Lightning Network.

LN and Liquid are sufficiently separate from Bitcoin's protocol development that they are not covered by the Bitcoin Improvement Proposal process even though LN is widely considered to be part of Bitcoin, while Liquid is more distinct. LN and Liquid solve different problems and are optional.

Answer 2

Lightning Network:

TLDR: If you are sending 50,000 sats to your coffee shop 100 times in a week, not all these transactions need to be on-chain and works better off-chain. Example: I want to use a service online, pay with bitcoin and and it involves micro payments. I will lock 0.1 BTC in multisig and we keep record of all the things I use and payments for each. Once I want to settle payments, total amount from multisig goes to service and rest I can use elsewhere.

Positives: I was able to avoid paying fees for 10-20 transactions involving small amounts on-chain. The payments were quick as we didn't have to wait for confirmations.

The Lightning Network scales blockchains like Bitcoin and enables trustless instant payments by keeping most transactions off-chain and leveraging the security of the underlying blockchain as an arbitration layer.

This is accomplished primarily through “payment channels”, wherein two parties commit funds and pay each other by updating the balance redeemable by either party in the channel. This process is instant and saves users from having to wait for block confirmations before they can render goods or services.

Payment channels are trustless, since any attempt to defraud the current agreed-upon balance in the channel results in the complete forfeiture of funds by the liable party.

https://docs.lightning.engineering/conceptual-overview/overview-overview/lightning-network

There are so many other usecases for LN and one of them which I find interesting is LNURL-AUTH which can be used to login with LN wallet or node.

Liquid:

TLDR: A federated Bitcoin sidechain with various tradeoffs and different levels of decentralization.

Why do we need sidechains?

https://youtu.be/ZIugzFygviw - Greg Maxwell

Positives:

Easier to create new assets if you need them in a bitcoin project, confidential transactions (amounts are hidden), less fees, helpful for traders especially when using USDt and L-BTC to move funds between exchanges etc.

You can read the details here: https://docs.blockstream.com/liquid/technical_overview.html

Answer 3

What exactly are "Bitcoin Lightning" and "Bitcoin Liquid"?

Those are protocols built upon Bitcoin. They are responsible for their stuff to be both Lightning/Liquid spec AND Bitcoin compatible while Bitcoin nodes are only responsible for Bitcoin-side validation.

Why do they exist?

Reason 1: scalability: Instead of keeping everything on-chain, by moving stuff off-chain we make the blockchain more easy to store and easier to process for on-chain nodes. (Liquid, Lightning)

Reason 2: timestamping: Instead of creating a separate PoW blockchain and node network, they could use Bitcoin's infrastructure. Same nodes, same miners. (Omni)

Why aren't these "BIP"s put into Bitcoin itself?

Because the Bitcoin protocol, mostly doesn't care about when they work. If they require changes to the Bitcoin protocol, then these will be implemented with BIPs. (See OP_CHECKLOCKTIMEVERIFY and SegWit)

How can they be attached to Bitcoin yet be separate?

By having a separate (consensus) protocol, yet also satisfying Bitcoin's rules.

Is one of them objectively better than the other?

This is outside of my expertise

Do they solve different problems? Is one of them dead now? Should I be using/bothering with them? Are they an attempt to take over Bitcoin slowly by not being an "altcoin" upfront, but slowly turning away from Bitcoin?

???

Answer 4

The other answers here are great, but I thought I would add a more meta look at the situation:

Money systems seem to benefit from hierarchical architectures. The modern system of money is very complicated in this regard: there is a worldwide reserve currency ($USD), and then a whole plethora of financial instruments that exist above it! These financial instruments can be seen as 'higher layer' of money, which depend on the base layer ($USD) as their anchor of value.

To give an example, its probably easier to rewind to a simpler time, back to an age where metals were used as hard currency (gold, silver, etc). If you wanted to settle a debt in those times, then you would likely make a payment in the form of gold coins. This was perhaps cumbersome (you had to transport the gold to the recipient, etc), and so over time a 'higher level' system of paper notes was developed, with each note representing a claim to some amount of gold, as issued by some trusted third party. These paper notes proved much easier to transact with, though they perhaps also had more risks involved than just gold (eg, what if the issuer of the paper couldn't make good on the promise for gold?). People adopted the paper money for convenience, and thus a 'second layer' of money was born, that exists above the base layer of gold (and/or other metal monies).

In this example, we see that a higher level money system, which calls back to a base layer, can provide benefits in various ways. The citizen no longer needs to carry around a heavy bag of metal coins to buy their daily goods at market, they can instead carry around the much more portable paper notes. In modern times, we see all sorts of higher layer financial instruments, each crafted to provide some benefit to the users of it. These instruments range greatly, from more basic things like online banking services or government savings bonds, to complicated financial derivatives that are used to hedge against risk.

So now we can return to bitcoin, and consider networks like lightning or liquid as 'higher level' monies built on top of bitcoin. Both of these networks come with additional risks/considerations, but also with their own potential benefits and use-cases. Higher-level systems built on bitcoin are not necessarily engaged in some sort of 'winner take all' battle, it is more likely that each network (lightning, liquid, OMNI, etc) will find its own place in the hierarchy, according to its usefulness to the end user. They may compete in some aspects, but each of these technologies comes with its own benefits and risks, and it is up to the free-market to decide which of them is indeed valuable. It is hard to imagine that none of them will be found valuable though, as they will ultimately serve to increase the utility of the bitcoin network as a whole.

Building this utility out in a safe way will take time, and adoption can only come after that, so I do understand your frustration as an observer, waiting for the 'next big jump' in bitcoin adoption/usability. Smart people working on these problems often talk of grand ideas and end-goals that they see down the line, and that can create a disconnect between the eventual idea, and the current situation. Where we end up remains to be seen, but the general approach being used (a hierarchical monetary system) is nothing new, it is something we have seen develop in legacy financial systems for hundreds, if not thousands or years already. Likewise, many people are hopeful that this approach will also achieve a good balance of security and utility for bitcoin users.