Lightning vs Liquid: The New Bitcoin Scaling War

Wait, what? Are the Bitcoin scaling wars back? Do we have a new Roger Ver in town? Is Lightning here to eat Liquid’s lunch by setting up large channels that make the pegged sidechain redundant? Is Blockstream trying to limit Lightning’s use case to microtransactions so that their Liquid pegged sidechain gets adopted by exchanges and big traders?

Is this feud just a marketing scheme designed by the guy who made Roger Ver rage quit and flip the finger, so he promotes his new company? Is Blockstream actually evil and plays the game of controlling the opposition like some sort of mastermind? What’s going on?

Back in September 2019, I interviewed exchange owner Francis Pouliot about Bull Bitcoin’s adherence to Liquid and his views on Bitcoin scaling solutions. At the time, he made an interesting statement: [9:07] “there’s nothing really that is more cutting edge than Liquid in the Bitcoin space, other than CoinJoin and Lightning. Elements is the other big project”. 

During the interview, he hinted that Bull Bitcoin would support anything that is able to scale Bitcoin in a way that brings more privacy and lowers the transaction fees. Check out the video for more information.

But this detail is relevant because today it seems like most exchanges act exactly the same: they keep an open mind on scaling technology for Bitcoin. They appreciate the innovation in both Lightning and Liquid, and proceed to adapt technical breakthroughs to their own infrastructure. Unfortunately, there is only one exchange which supports Lightning Network: Bitfinex. On the other hand, there are dozens of exchanges that joined the Liquid sidechain as members or functionaries.

At this point, it seems like the competition between the Lightning Network and Blockstream’s Liquid pegged sidechain is fiercer than ever. And I wasn’t aware of the tensions and animosities involved until I wrote an article for the BTSE Academy, in which I tried to compare Lightning and Liquid. Former Bitrefill CCO and long-time bitcoiner John Carvalho has called it my worst article, and his remark left me confused for a little while.

You see, Lightning and Liquid seem to be complimentary if you only focus on their narratives and technical descriptions: as a second layer, Lightning is truly decentralized, more private and faster than both the Bitcoin base layer and the Liquid sidechain. In a nutshell, Lightning is better suited for small payments and commerce. Yet its initial design to enable microtransactions is not necessarily its upper limit: thanks to large channels opened by ACINQ, OpenNode, LNBig, and Bitrefill, you can move up to 77 BTC in a single transaction. At today’s price, that’s more than $700.000, which far exceeds the amount of money that most people own. 

And as time goes by and the network becomes more robust, there’s going to be more liquidity available so that even fiat millionaires can move their wealth in just one transaction – though it would probably be a better idea to divide it in multiple smaller transactions, which can already be done today with the capacity that we have.

On the other hand, Liquid is essentially a token-issuing blockchain that creates L-BTC amounts in a trusted setup that is governed by a federation of exchanges. It’s not a layer which locks your bitcoins to enable transactions elsewhere, but a sidechain which issues its own assets on a 1 to 1 peg with the incoming bitcoins. It’s not as fast as Lightning because it mines new blocks every 1 minute. Liquid also doesn’t offer the same kind of onion routing-like privacy, as you can only hide your amounts via Confidential Transactions. 

And given its design, it’s clearly not decentralized or permissionless – if you want to participate in governance as a functionary, you’re going to need Blockstream’s permission. There is also the KYC factor involved, as Liquid participants doing peg-outs will have to rely on a federation member that undergoes KYC and which most likely also KYCs their customer. And if you don’t want to do a peg-out but want your BTC on the main chain, you can also use an exchange like Shapeshift or Changelly, but pay a fee to the third party service. 

Actually, you can even use Blockstream’s c-lightning to exchange L-BTC for base layer BTC through the chain-agnostic and decentralized Lightning Network. Though this makes the situation a lot more complicated, it allows for the Lightning Network to be a cross-blockchain highway which performs atomic swaps. This means that peg-ins and peg-outs can be completely bypassed by using Lightning, which is a huge privacy enhancement for those who wouldn’t agree with KYC/AML procedures.

But John Carvalho would probably ask right now: Why complicate the situation and not use Lightning for everything by opening larger channels? Well, for starters, there is no way Blockstream would throw away years of research and development on a their sidechain project. It’s the only product of theirs that can really bring revenue to the company, and it has the capacity to transfer all 21 million bitcoins in one Confidential Transaction. Its more centralized design also does the work that Lightning watchtowers normally would, while the vetting process for new members guarantees a geographical distribution that makes the entire network more robust.

This inevitably leads to the question: is Blockstream evil and wants to destroy Lightning? Well, no. They have their own development team that does Lightning Network work, and one can only claim that they have a self-interest to make a profit from their development by charging membership fees for using the Liquid infrastructure. Furthermore, everything that they develop is open source, verifiable, and transparent. They have given us the satellite, the Green wallet, Lightning research and development, a truly private Bitcoin blockchain explorer, transaction malleability fix via SegWit, and soon enough we’ll get Schnorr signatures, Taproot, Grafroot and all that good stuff.

So is John Carvalho the bad guy then? Is he turning into Lightning’s own Roger Ver? Nah, he’s alright. It’s good that he remains critical and independent on some matters, and it’s also useful that he questions the usefulness of Liquid. These tense exchanges only keep everybody more accountable, perpetuate the skeptical spirit implied by the “don’t trust, verify” slogan, and generate better services for us. 

Also, the thought that Lightning is everything that Bitcoin needs is really interesting because it dismisses any narrative that other blockchains are necessary. If anything, this Lightning maximalism is the real extension of the original spirit of the Bitcoin maximalism – no other blockchains should exist, everything can be built on top of Bitcoin as a layer.

While Liquid is trying to replace Ethereum, Lightning seeks to strip it down to a bare minimum which includes application-specific layers such as RGB tokens. One tries to create a better blockchain that is backed by assets pegged to Bitcoin, the other one is all about eliminating the need for other blockchains. One is conservative and delivers to the status-quo, the other one is like punk rock and wants to revolutionize everything.

And the best news it that we all benefit from the development of both. If exchanges settle their trades on Liquid, we’re going to be able to transact on the base layer with lower fees. And to get better privacy and speed for our purchases, we switch to Lightning. The incentive for lower fees might always be there, or it may fade. The fact that we get to choose where to transact to get the best fee, speed, and security is very empowering for us as users.

I’ll let Marvin Gaye draw the conclusion here.