draft of nifty's talk

mit_talk_draft.txt

WELCOME to Nifty's Presentation on LAYER-2s







Today we're talking about layer-2s







Big thank you to Trey de Bonis the content organizer

for inviting me to present on layer-2s; this is one of my

favorite topics to nerd out about.














let's start with the "obvious" question:



what is a layer-2?





















generally speaking, a layer-2 is a accounting system

which lets you transact with a "layer-1" asset independent

of the 'native' layer-1 accounting system


















in bitcoin, the native accounting system is the

block ledger.  to transact on layer-1 in bitcoin

you make a transaction and get that transaction

into a block. viola, you have transacted on layer-1


















ok so layer-2 uses some other system for doing accounting




















quick aside here, what is an "accounting system"?






















it's a system that tracks who owns how much of an asset.




















ok so a layer-2 is an accounting system (ledger)

that isn't the same as the layer-1\*























common examples:

- lightning
- fedimints
- liquid sidechain 
- proposals: spacechains, statechains, rollups
- eth: optimism + arbitrum + aztec?














what are the accounting systems these use?

- lightning: cached layer-1 txs
- fedimint: chaumian tokens
- liquid federation: a whole 2nd blockchain
- rollups: ???
- state/space: cached layer-1 txs ??

- eth rollups: a whole 2nd blockchain























every once in a while you get a wise-guy who asks:

"What about CoinBase?"

"Aren't they also a layer-2?"



















Well let's look at the facts.


You send your bitcoin on layer-1 to Coinbase. they put it

into their onchain multisig, and in return they issue you

an entry into their database which says how much bitcoin

you own.















this .. passes the test of "a secondary accounting system

that lets you transact in the layer-1 object"


like if i have a bitcoin in coinbase and i want to send it

to a friend also on coinbase, coinbase can just update their

database entries for our accounts and badda bing badda BOOM.


bitcoin has been transacted without needing to touch a blockchain.















but this is... unsatisfactory?


who thinks this is unsatisfactory?

















ok so clearly a "real" layer-2 definition needs a 

bit more than "a separate accounting system"












here's what i've come up with:

- a layer-2 is a separate accounting system where the

authorization to execute a transaction must be granted

by the holder of the account primitive



in other words, you can't make a valid transaction on a 

layer-2 without a valid signature of the party that owns the

layer-2 asset.















in this sense, coinbase's database would NOT be a layer-2, since

anyone who works at coinbase can validly update their database















ok i think we've neatly resolved that. nice.
















there's a bit more we could go into about

how layer-2s are related to layer-1s; like where

does the "authority" to transact the layer-1 asset come from?
















generally speaking, you have to lock up the asset in the 

layer-1; you've got to put it into a separate account,

sort of "earmarking it" like "ok this segment of layer-1 asset

value will be transacted not here but in a different layer-2

system"













in bitcoin this typcially means you put your layer-1 bitcoin

into a multisig contract. and it stays there for the duration

of its "layer-2 lifetime".  then you transact with some

'option' on your claim to some portion of the bitcoin

held in this multisig, and these claims are negotiated using

whatever "accounting system" the layer-2 is using















liquid bitcoin, this means you peg-in (eg lock up your layer-1

bitcoin into the federation's multisig) and in exchange you're

issued "liquid-bitcoin" credits on the liquid blockchain.

you can then transact 'in bitcoin' over on the liquid blockchain

(faster and less expensive than on mainchain?) maybe more confidential?
















similarly, with an e-cash mint you lock your bitcoins into

the mint federation's multisig, and in exchange they give you

"e-cash tokens". hard to audit, but hard to track. double sword of

privacy etc etc.

then you can trade these e-cash tokens, which are "as good as bitcoin";

e-cash tokens require signatures from the person who was granted them 

to be spent. (layer-2 requires auth from holder to validate txs)

















so we have a decent understanding of a layer-2 now...

let's talk a little bit about "why layer-2s"












the general idea is that layer-2s allow for "batching" of

transactions in a different accounting medium; this increases

the number of people that can transact with bitcoin primitives,

but distributes the load of the "transaction processing" to a variety

of accounting ledgers.




in other words, it makes it cheaper and more people can change the state

of their bitcoin claims (eg transact) at the same time; far exceeding the

'native capacity' of the layer-1. ok that's pretty cool.






























ok so let's do a little bit of comparison of existing layer-2 proposals?















let's make a list! maybe we'll update it later..

- broadcast scope of state changes
	"who finds out about ledger changes"

- liveness requirements
	"who needs to be available/participate for me to make a tx"

- cost of transactions
	"what's this gonna cost me?"

- granulatrity of transactions
	"what's the minimum transaction size i 
			can make on this accting ledger"

- ruggability
	"who's got keys to the multisig i put my L1 assets into"

- exitability
	"who do i need to ask to get my L1 tokens back"












broadcast scope!


layer-1: everyone needs to know


lightning: everyone along the payment path needs to know
	- if this is just one-hop, 2 people
	- max of 20 hops, so 21 people MAX


e-cash: you, person you're paying, the bank



liquid: everyone on liquid needs to know\*
	- confidential txs hides the amts/destinations
	- but the data gets broadcast to everyone, encrypted


rollups: ??











liveness requirements:

layer-1: miners, really
	- eventually everyone on the network validates tx
	  but at that point it's already been "effectuated",
	  the state has already irrevocably updated



lightning: everyone on the path, max 21
	- note that this gets complicated for multiparty channels,
	  and is honestly the biggest blocker at 'scaling LN'
	  in a layer-1 efficient manner...


liquid: federation signatories
	- same as layer-1 wrt lazy validation of all participants



e-cash mints: the mint needs to be online; 
	federation signatories or single mint 
	- iiuc cashu has single mint, can't go down/offline
	- fedimints have a federated mint, so some quorum of the mint


btc rollups: ???


eth rollups: central tx processor/blockbuilder













cost of tx:

layer-1: depends on your time horizon, current competing tx congestion,
	and 'size' of your transaction


lightning: number of hops used and volume of payment made


liquid: same as layer-1, with the caveat that there's more
	blockspace (faster blocks)


e-cash mints: no idea; free-ish?


eth rollups: fraction of the cost, iiuc it's a function
	of cost of committing batched txs to main-chain?


btc rollups: ???
















granularity:


layer-1: dust-limit, ~150 satoshis


lightning: 1/100ths of a satoshi


liquid: ???, probably similar to layer-1


e-cash mints: issue tokens in denominations, so would depend on the mint
	TODO: look up cashu/fedimint's default values


btc rollups: ??


eth rollups: same as the layer-1 network












ruggability:

- layer-1: non-existant (not your keys not your coins)


- lightning: current lightning, maintaining your state history;
	     eltoo/future LN, maintaining most recent state


- liquid: federation defects


- e-cash: depends on mint configuration; 
	- fedrated mints: federation defects
	- cashu: ??? 

- btc rollups: ??

- eth rollups: multisig on mainchain bridge contract?
	- did they use a multisig? 
	- is the bridge contract safe from hacking?










exitability:


layer-1: where you going exactly?


lightning: any time you want (layer-1 fees depending)
	- unilateral (no permission required)


liquid: must ask federation to peg out your funds


e-cash: 
	- federations: must ask federation to de-peg funds
	- cashu: ask the mint to de-peg funds


btc rollups:  ???


eth rollups: 
	- ask the contract operator to send you back funds on mainchain
	- 3rd parties that'll do it for you faster (trust required?)

















i am way out of time. here's some things we didn't talk about.


- non-bitcoin assets using bitcoin ledger as their accounting
	mechanism. these aren't layer-2s because they're not
	new accounting systems for bitcoin; in some ways 

	they're making *bitcoin's* layer one into a layer-two for
	whatever asset (generally held elsewhere... or not!?)
	nifty-coin anyone? anyone?


- ordinals.
	not an accounting system; but is a *numbering* system
	eg. gives greater granularity to existing accounts
	held on bitcoin



















ok if you liked this, and want more nifty content:

- twitter @niftynei
- teach bitcoin protocol @base58btc

	~~	https://base58.info 	~~

	- taproot class in june (prague/nyc)
	- lightning this july   (nashville!)
	- more stuff online + coming this year!


- sometimes i write things
	- chainfail.substack.com
	- basicbitch.software
	- book on bitcoin txs .. sometime TM