Ark - Protocol to Scale Bitcoin by Sharing UTXOs
Ark is an open-source protocol to scale Bitcoin.
It was initially proposed in May 2023 by Burak @brqgoo.
Many in the Bitcoin community found the proposal interesting and promising, but since implementing the protocol would have required covenants (soft forks), Bitcoin builders kinda brushed it off for the moment.
A year later in June 2024, "Ark v2" saw daylight, when a new company Ark Labs was founded to build Bitcoin scaling solutions on the Ark protocol.
Not a Competitor to the Lightning Network
Although a scaling solution, Ark is NOT designed to be a competitor to the Bitcoin Lightning Network!
It can be better seen as a complementary tool.
On-chain fees are expected to be unaffordable for most people in the future.
It's also economically unfeasible to open self-custodial Lightning channels for everybody.
Self-custodial Lightning might not be the easiest way to onboard new users either.
You need existing inbound liquidity to receive payments (you need to have bitcoin before you can have bitcoin! 🙁)
Scaling UTXO Ownership
Ark scales UTXO ownership.
UTXO (Unspent Transaction Output) is essentially a portion of a Bitcoin transaction, a bit like a physical $5 bill is a portion of a fiat cash transaction.
Your Bitcoin balance consists of UTXOs.
Sending on-chain bitcoin (an UTXO) might be very expensive in the future for many Bitcoin users.
But what if a single Bitcoin output could have shares from 30 different people?
It's a bit like having roommates because you can't afford your Manhattan rent!
"Virtual UTXOs" (VTXOs) and Ark Service Providers (ASPs)
To share on-chain transaction costs, Ark users can be onboarded to Bitcoin with Virtual Transaction Outputs (VTXOs).
These VTXOs are managed by Ark Service Providers (ASPs).
To use Ark, a user would deposit on-chain BTC to a boarding address, and receive VTXOs.
Or another user of the same ASP could send her some VTXOs to get started.
UTXO Renting Services
For a fee, ASPs periodically organize VTXO transactions in rounds and settle these new UTXOs on the Bitcoin blockchain.
This is to prevent a fractional reserve of creating unlimited "Ark-BTC".
These rounds can last 15-60 minutes, but can vary from ASP to ASP.
You could think of ASPs as "UTXO renting services".
To be interoperable with the wider Bitcoin payments ecosystem, Ark uses Lightning Network gateways.
Use Case for Daily Payments
Technically, Ark is non-custodial.
An ASP can't run away with users' funds, except when the user is not online once in a 4-week period (the time period can vary from ASP to ASP).
After the time period has passed without the user logging in, an ASP can take the unused funds to manage stale liquidity.
Maybe an honest ASP could still roll the funds over for the inactive user for a fee?
However, the use case of Ark is more directed towards daily payments, not necessarily for the storage of funds.
If you don't use your ASP in 4 weeks, maybe Ark is not for you then!
Use Lightning!
Trustless Bank Checks with an Expiration Date
VTXOs are connected to each other atomically: if Alice is sending a VTXO to Bob, the ASP will create an on-chain output with Alice's share in it, going to Bob!
Alice only loses funds if Bob gets them.
Existing VTXOs are destroyed and new ones are created on an ongoing basis.
The ASP can't redeem senders' VTXOs if it double-spends recipients' VTXOs.
Atomicity!
In a way, ASPs work a bit like Bitcoin miners that process transactions.
But instead of processing transactions to blocks, they process users' requests to send VTXOs to someone else.
You can also think of a VTXO as a trustless bank check with an expiration date.
Every time you want to transact with somebody within an ASP, you will ask the operator (ASP) to create a new check for the receiver.
Unilateral Exit
Technically, you can also "unilaterally exit" from Ark to the main chain.
Exiting might be expensive though in a high-fee environment.
Will exiting be economically feasible only for larger amounts?
If you can afford the UTXO fees, then why use Ark in the first place!
There are some benefits for onboarding on an Ark though.
Within the same ASP, transactions are fast, cheap and private (Ark could also be used as a coinjoining tool).
More Efficient Out-of-Round Payments
Payment speed could be increased with "out-of-round" payments, where users don't have to wait payments to be included in rounds.
This could make the user experience less clunky for senders.
However, with out-of-round payments, the recipient needs to trust the sender and ASP not to collude.
Once the recipient gets the VTXO payment, he can take it to the ASP who includes it in a new round, and the user will again be in complete control of his funds.
The trust model in that regard is not forced and it's up to the user.
All these Ark concepts may seem complicated, but hopefully all actions will be abstracted away nicely for the end user by the wallet software!
Ark scales Bitcoin horizontally, and theoretically you could "virtualize" components of the Bitcoin protocol and bring smart contracting primitives to Bitcoin this way.
"Virtual channels", "virtual PSBTs" (Partially Signed Bitcoin Transactions), or "virtual HTLCs" (Hashed Timelock Contracts).
A simpler, more imminent use case could be saving in fees when dollar-cost averaging (maybe you could withdraw from an exchange directly to an ASP)
This way you could avoid small "dust UTXOs" on-chain and avoid the need to consolidate UTXOs when fees are high.
If you're unfamiliar with consolidating UTXOs, I wrote a post about it earlier: #664880
Ark could also save fees when rebalancing Lighting channels.
This feature could improve the reliability and cost of using the Lightning Network.
Trust-Minimized Lending
For institutions or large holders of bitcoin, being an ASP can provide a place to get trust-minimized yield.
Maybe players like e.g. MicroStrategy could be liquidity providers.
ASPs are by nature bigger and bulkier than LSPs (Lightning Service Providers).
This might incentivize centralization, and ASPs might become money transmitters in the eyes of the regulators even if they don't custody users' funds.
However, ASPs could be federated or P2P to mitigate regulatory concerns.
Or maybe the Ark round builders could be separate entities from the liquidity providers.
clArk vs. Ark
Ark v2 doesn't need covenants, but covenants would make the protocol much better and scalable.
The clArk version ("covenantless Ark") emulates covenants by requiring Ark round participants to sign m-of-n multisig transactions.
Instead of having clear spending conditions in the script for the Ark rounds (covenants), in clArk the participants need to sign every part of the VTXO tree making up the round.
You can think of it as signing a contract with multiple clauses, whereas with covenants you would only sign those clauses that affect yourself.
ClArk without covenants has much more overhead and storage and bandwidth requirements.
With covenants, end users wouldn't have to be online all the time either.
Covenants could also improve ASPs' liquidity management and help them optimize for worst-case scenarios such as many users wanting to withdraw on-chain at the same time.
Future Products
It's still very early for Ark, and there's no consumer app or wallet yet.
The first go-to-market product from Ark Labs will be a liquidity management dashboard Ark Node that is currently seeking Lightning node operators to test out the product.
There is also a proof-of-concept wallet by Ark Labs called Arkade that uses out-of-round VTXO payments for senders:
Recently Ark Labs announced a partnership with the Bitcoin bridge Boltz @boltz in order to make Ark interoperable with the rest of the Bitcoin ecosystem.
You can learn more about Boltz in this X thread I wrote in October 2023.
Another company building software on Ark is called Second.
They recently gave Bitcoin the first taste of Ark!
What do you think about Ark?
Is it a good scaling solution for Bitcoin?