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What is Ark Protocol? A Guide to a New Layer-2 for Bitcoin

August 7, 2023

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Ark Protocol is a new layer-2 solution that aspires to scale the Bitcoin network using an innovative model. Read on to learn more about Ark and what it aims to bring to the Bitcoin ecosystem. 

What is Ark Protocol?

Ark protocol is a Bitcoin layer-2 scaling solution that aims to enable private, cheap, and off-chain payments via Ark Service Providers (ASPs). ASPs are entities that provide liquidity to the network and charge fees for this service.

Ark and the Lightning Network, another Bitcoin layer, function similarly, but their protocol designs differ. 

Ark addresses Lightning’s inbound liquidity problem by allowing recipients to receive funds without the need to commit funds and make outbound Bitcoin payments. In May 2023, Burak Keceli, the developer behind Ark, introduced the Ark protocol, which provides a solution by enabling 24/7 connected ASPs.    

However, Keceli doesn’t see Ark as a “Lightning killer” but rather as a protocol that complements it. The goal is to make the two protocols interoperable. He envisions a future scenario where Lightning service providers also function as ASPs.

How Does the Ark Protocol Work? 

Ark uses off-chain unspent transaction outputs (UTXOs) called virtual UTXOs or VTXOs in short. VTXOs have a lifespan of four weeks, and users need to redeem them within this period or send them back to themselves to reset the four-week timer.

Users can obtain VTXOs from someone who owns them or through something called “lifting,” a two-way peg process of “lifting” an on-chain UTXO outside the chain for a 1:1 VTXO. To put it another way, on-chain UTXOs are represented by off-chain VTXOs (existing on Ark) on a ratio of 1:1. Any VTXO can also be redeemed for an on-chain UTXO without an ASP. 

Initially, users deposit BTC into an ASP via a 2-of-2 multisig wallet. A VTXO is then created and “lifted” off-chain into the Ark protocol. When sending funds, a user must redeem their VTXO and create a new one for the recipient in a Coinjoin round. 

Coinjoins offers enhanced privacy by consolidating multiple VTXOs into a single shared transaction output. This bundling effectively conceals the ownership and transaction history, thereby ensuring private payments. Upon receipt, the recipient can then claim the VTXO for on-chain BTC within the first two weeks. To further enhance privacy, Ark systematically destroys existing VTXOs and generates new ones during the payment process. 

Ark is relatively fast, settling payments every five seconds. A payment is considered final when an on-chain confirmation is received. Nonetheless, users can still pay invoices with their zero-conf coins before the on-chain confirmation is made. 

Besides providing liquidity, ASPs coordinate and fund Coinjoins with their own on-chain BTC in return for VTXO redemptions. Moreover, an ASP acts as a middleman between the sender and the recipient. However, an ASP cannot link a sender and recipient or steal funds because users retain self-custody over their money. Users can also exit their funds to the Bitcoin base layer if something goes wrong on the layer-2 network at any time.

Similarities & Differences Between Ark and The Lightning Network

What Challenges Does Ark (Still) Face? 

While Ark offers seemingly efficient solutions to Lightning’s problems, it’s still far from becoming a practical layer-2 solution that Bitcoin users can take advantage of. 

Without a proof of concept or any implementation thereof, the Ark protocol remains just an idea for now. Fortunately, Keceli is working on the first version of Ark with help from the community.

Furthermore, Ark needs covenant primitives proposed in BIP 118 or BIP 119 to constrain spending transactions. The two proposals suggest different ways to designate how Bitcoin is spent. However, it’s still being determined when (or whether) these proposals will be implemented as the Bitcoin community typically takes a long time to deliberate proposed soft forks.   

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How Is Ark Different Than Lightning?

Unlike the Lightning Network (LN), Ark doesn’t require users to commit funds to use the protocol. Ark also is not dependent on opening and closing payment channels like Lightning. Therefore, it has less on-chain footprint than LN. Furthermore, Bitcoin payments on Ark are anonymous, while Lightning payments are pseudonymous. 

Although the two networks differ in a few ways, Ark is not a “Lightning killer.” Instead, it is supposed to complement Lightning in such a way that the two networks are interoperable and can work together to make the Bitcoin network more performant.

How Does Ark Enable Increased Privacy for Bitcoin Transactions?

Ark uses Coinjoins to bundle payments from multiple users into a single transaction whose ownership and history are obscured. Ark Service Providers (ASPs) are in charge of coordinating Coinjoins, a process that makes Bitcoin payments private. 

ASPs also fund Coinjoins with their own BTC in exchange for virtual UTXO (VTXO) redemptions. Conversely, Lightning offers semi-private Bitcoin payments, but it could improve privacy in the future.