Bitcoin Wallet Specter Integrates Liquid Sidechain Network

Specter Solutions has integrated the Liquid Bitcoin sidechain network into its desktop and hardware wallet solutions and added support for Blockstream’s hardware wallet Jade, according to a release sent to Bitcoin Magazine. The integration will enable Specter users to transact in the Liquid Network with Jade and Specter hardware wallets.

“At Blockstream, we believe self-custody is a fundamental element of Bitcoin,” said Samson Mow, Chief Strategy Officer at Blockstream. “Running a node, whether it is Bitcoin itself or a layer-2 solution like Liquid or Lightning, unlocks the full potential of the asset and the ability to self-bank. We look forward to continuing our work with Specter to help make running a node more accessible and enjoyable for the everyday Bitcoiner.”

Liquid is a federated sidechain of Bitcoin, meaning it is a separate blockchain network, different from Lightning which runs on top of the Bitcoin blockchain as a layer-2 solution. Blockstream created Liquid to empower traders and exchanges with faster and confidential transactions and the ability to issue digital assets at the expense of a few tradeoffs.

Liquid allows bitcoin to flow between the Liquid and Bitcoin networks with a two-way peg. Bitcoin used in the Liquid network is referred to as L-BTC, and its verifiably equivalent amount of BTC is managed and secured by the network’s members, called functionaries.

However, functionaries can be interpreted as requiring trust in third parties because although full nodes can ensure functionaries’ correct behavior by verifying transactions and peg-ins, only functionaries have the power to secure the network.

The uprising of different options for users to interact with and leverage the Bitcoin network is a net positive, but the tradeoffs are essential to understand. Liquid is a meaningful tool for a particular set of use cases, primarily for exchanges and high-frequency traders. Still, everyday users might be put off by the introduction of trust and permission into pegging in and out of a BTC IOU  which goes against some principles of Bitcoin.


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Bitcoin Sidechain Liquid Plans Oct. 4 Hardfork

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The Bitcoin sidechain Liquid Network will execute the DynaFed hardfork on Oct. 4.

Liquid Schedules DynaFed Hardfork

A hardfork for the Bitcoin sidechain Liquid Network is scheduled to go live on Oct. 4.

Liquid Network is one of the two leading Layer 2 protocols on Bitcoin, alongside Lightning Network. Developed by Blockstream, both projects enhance Bitcoin’s scalability and allow the network to support faster payments.

Lightning Network is Blockstream’s most popular product. It was created to settle small-scale merchant payments, whereas Liquid Network is designed for traders and exchanges looking to move larger amounts of Bitcoin.

Blockstream’s most popular product called Lightning was created to settle smaller merchant payments. On the other hand, Liquid was designed for traders and exchanges to transact big amounts of Bitcoin quickly and privately.

The hardfork, dubbed Dynamic Federations (DynaFed), is aiming to improve the security and flexibility of Liquid Network.

In a Wednesday tweet, Blockstream said that the DynaFed was the sidechain’s “the biggest update to date.”

Some of the most important aspects of the upgrade include increasing the number of functionaries, which are currently limited to 15, and adding and removing functionaries without affecting network operations. Functionaries are the network’s equivalent of validators. They play a critical role in securing transactions and assets on Liquid by running specialized hardware security modules.

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The hardfork is also aiming to improve the security of the functionaries. The update brings improvements to the current multi-signature model and restricts functionaries’ access to emergency keys by extending the time lock parameter. It’s hoped that the changes will eliminate the possibility of a nefarious entity stealing funds from the network.

According to Blockstream, users running Liquid Network nodes will need to upgrade to node client version Elements v0.18.1.11 to avoid service interruption.

While Liquid Network is a sidechain to Bitcoin, the base chain itself is also due to launch its own update later this year. Taproot is due to launch in November, opening the door for DeFi to emerge on the network.

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A Comparison Between Layer-2 And Sidechain Solutions

If you’ve been keeping up with developments in the crypto community over the past few months, you’ve probably already heard the words ‘layer-2’ and ‘sidechains’ being thrown around. 

There’s a reason behind this: as demand for Ethereum has surged over the past few months, some of the cracks in its model have been beginning to show. Transaction speeds have slowed significantly, while gas prices have skyrocketed as a result of increased demand. Layer-2 and sidechain solutions are a way to tackle this problem. 

If these phrases leave you feeling confused, you’re not alone. But given that these solutions are both vital to tackling Ethereum’s scaling problems until its transition to Eth 2.0 is completed, it’s a good idea to have at least a base understanding of what each of these solutions does, and what the main differences between them are. 

First off, here’s a quick run down to help you get to grips with what layer-2 and sidechain solutions actually do:

What is a layer-2 solution?

Before we dive into explaining what a layer-2 solution is, let’s quickly touch on what a layer-1 solution is. 

A layer-2 network is a blockchain. The purpose of a layer-1 solution is to add utility to a native blockchain to increase its performance.

A layer-2 solution is not a blockchain. Rather, it is a third-party protocol that is specially designed to integrate with this underlying layer-1 solution in order to increase transactional throughput. 

To give a concrete example, Bitcoin is a layer-1 network. The Lightning Network, however, is a layer-2 protocol that is designed to improve transaction speeds on the Bitcoin network. 

Immutable X is aiming to tackle Ethereum’s scaling problems by creating the first layer-2 scaling solution for NFTs on Ethereum. It enables its partners to develop marketplaces, apps, games, and more, with massive scalability in the region of 9,000 trades per second, and zero gas fees. 

There’s a reason why the Immutable X team decided to opt for a later-2 solution. Instead of competing with Ethereum, they wanted to use a solution that still uses the well-developed security, ecosystem, connections, and community of Ethereum instead of using a sidechain solution or a separate chain platform. 

What are sidechains?

A side chain is essentially just a blockchain that is linked to another main blockchain. 

Each of these chains has its own set of rules, functionalities, and purposes. Although they remain independent from one another, together they form an entire ecosystem. 

An example of a sidechain is the Liquid Network, which is designed to provide faster and more private transactions to traders and trading platforms. However, because the main chain of the Liquid Network is Bitcoin, only activities involving Bitcoin are possible. 

You might have heard of Ethereum’s version of sidechains, which are known as shard chains. These are attached to the Beacon Chain, and they are set to make it easier to run a node by keeping hardware requirements low. As it stands, this upgrade is set to become the main chain of proof-of-stake (PoS)-based Ethereum.  

So what is the key difference between layer-2 and sidechains?

When it comes to solving the scaling problem of layer-1 protocols, both layer-2 and sidechain solutions are essential.

Despite dramatically boosting transaction capacity, both solutions provide significant security tradeoffs in comparison with normal transactions. Just a couple of weeks ago, hackers breached cross-chain interoperability network, Poly Network, and took a surplus of $600 million in cryptocurrencies. 

The key difference between layer-2 and sidechain solutions lies in the differences in their security mechanisms. While layer-2 generally relies on the security of the main chain, sidechains have their own security properties. 

Both solutions have huge potential for breakthroughs over the next few months, and there is little doubt that their capabilities will continue to expand as time progresses. 

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How Polygon and xDai Will Adopt EIP-1559

Key Takeaways

  • Polygon and xDai are two Ethereum sidechains. They run their own consensus mechanism and have their own native tokens.
  • The two networks are planning to introduce their own takes on Ethereum’s EIP-1559 fee burning proposal.
  • Introducing a variant of EIP-1559 could lead their native tokens to appreciate in price due to a reduction in the supply of tokens available on the market. .

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To maintain their compatibility with Ethereum, Polygon and xDai have also planned to implement the fee burning proposal used in EIP-1559 on their own networks.

EIP-1559 on Sidechains

Ethereum shipped EIP-1559 last week after much anticipation, but it’s not the only network that should benefit from the update.

The Ethereum blockchain has historically faced gas fee issues due to its auction-based fee model. Before EIP-1559, the system incentivized miners to add new transactions to blocks by prioritizing users who paid the highest gas price. 

Users who wanted to get their transactions added to the new blocks more quickly could bid a higher gas fee, which would often result in a spike. The auction-based model would often result in users overpaying or underpaying in gas to add their transaction to a block.

EIP-1559 overcomes the problems associated with the auction-based model by introducing a base fee that adjusts on a block-by-block basis. The base fee changes dynamically based on network usage to ensure that once a transaction is paid for, it is added to the next block. The upgrade also enhances Ethereum’s maximum gas limit per block from 12.5 million to 25 million.  

The EIP-1559 proposal launched after surging gas fees had led to bottlenecks on Ethereum throughout the bull market of this year.

Another important aspect of EIP-1559 is the introduction of a fee burn. While users have the option to add a tip for miners, the base fee gets burned and removed from the ETH supply. This adds deflationary pressure to the asset and could mean the supply falls over time if the burn rate exceeds issuance. 

While EIP-1559 has been a hot topic of conversation across the crypto community in recent weeks, there’s one aspect to the upgrade that hasn’t received as much attention: the impact it will have on sidechains.

Sidechains are independent EVM-compatible blockchains that run parallel to Ethereum. They have their own consensus mechanism, a limited set of validators, and function as a more scalable and cheaper alternative than Ethereum. 

Ethereum’s two most popular sidechains are Polygon and xDai. Both networks have gained a significant amount of traction as the Ethereum ecosystem has grown. They also both have plans to implement their own modified takes on EIP-1559.  

Polygon to Allocate Base Fees to Treasury

Polygon has seen exponential growth in 2021. The project has inked several partnerships with several leading crypto teams, including DeFi blue chips like Aave, Balancer, and Curve Finance, and a wide variety of NFT-based games. It currently holds over $9 billion in total value locked across hundreds of popular DeFi, NFT, and gaming dApps.  

Like Ethereum, the Polygon team is planning to introduce a base transaction fee and dynamic block sizes to deal with network congestion. Hamzah Khan, Head of DeFi at Polygon, told Crypto Briefing that the team is aiming to make the upgrade in line with EIP-1559. However, the launch will likely take some time as the community needs to finalize details, with a possible community vote to follow. A proposal for the update was put forward on the Matic Network developer forum on Jun. 18, though an agreement has not yet been reached. 

The EIP-1559 upgrade will introduce a base fee to transactions on Polygon. However, instead of burning the base fee, the team has proposed sending it to a foundation contract that is controlled through governance. Later on, the community would be able to vote on how to spend it.

According to the Polygon team, rather than burning the fee, allocating it to its treasury will result in more sustainable tokenomics. This is because the supply for Polygon’s MATIC token is Polygon’s native token supply is limited unlike Ethereum’s, which could cause the token price to increase at a much faster rate than intended. 

The upgrade is expected to help mitigate denial of service (DoS) attacks from entities aiming to exploit Polygon’s cheap transaction fees. In fact, Polygon suffered one such spam attack in June for a few hours.

xDai to Burn STAKE Tokens 

xDai, a rising EVM-compatible sidechain, has also decided to implement its own upgrade in response to EIP-1559. Similar to Polygon, xDai has developed a healthy ecosystem of EVM-based dApps, with about $158 million in total value locked in the network. 

The team told Crypto Briefing that it was working hard to bring EIP-1559 to xDai to truly be compatible with Ethereum. Commenting on the upgrade, xDai founder Igor Barinov said:

“xDai has always maintained Ethereum compatibility by following the Ethereum hardforks. While higher transaction fees on xDai have been an unexpected financial bonus for validators, high gas fees have also created some friction for users.”

xDai follows a dual-token model. It uses the XDAI stablecoin for transaction fees and another token called STAKE for governance and security.

One important point to note is that new XDAI tokens are only generated on the network when users lock DAI from Ethereum mainnet in a bridge contract.

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Following the EIP-1559 upgrade, the sidechain will introduce a base fee paid in XDAI. It will also get burned like ETH does on Ethereum. However, the burn may cause a mismatch between XDAI and DAI tokens locked on the xDai bridge from Ethereum mainnet.

To maintain consistency, the corresponding amount of DAI locked on xDai bridge will be removed and used to buy and burn STAKE on the Ethereum network. This process will reduce STAKE’s supply and increase value for the STAKE token, which helps protect xDai’s consensus. Speaking of the deflationary mechanism, Barinov said:

“The EIP-1559 upgrade should serve the community well by reducing overall STAKE token supply by creating a deflationary environment and providing consistent, predictable fees for users.”

The Price Impact of EIP-1559

Adopting an adaptation of EIP-1559 could have a positive price impact on the native tokens for the sidechains that implement the update. 

The Polygon team has proposed sending MATIC fees to its treasury for later use, meaning a large number of tokens would no longer be available to sell on exchanges.

Locking the base fees may help the token price appreciate, which would benefit all token holders. Since the beginning of 2021, the MATIC price has grown by more than 4,000%. It’s currently the 19th-ranked cryptocurrency with a market cap of $7.5 billion.

xDai’s STAKE, meanwhile, has a market cap of just under $50.7 million, significantly less than the $158 million in total value locked. The network is home to major DeFi projects like Curve Finance and SushiSwap. Furthermore, active wallets and transactions on xDai are rising each month.

The increase in activity generates sizable fees for validators. In the last 30 days, the protocol has generated over $200,000 in transaction fees according to Dune Analytics. Once EIP-1559 is implemented, a portion of the fees will be used to buy back and burn STAKE governance tokens.

After implementing its own version of EIP-1559, the continuous buyback and burn process could make STAKE a deflationary token. As an increasing number of tokens get burned, the price could appreciate.

This news was brought to you by ANKR, our preferred DeFi Partner.

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Karura launches decentralized exchange on Polkadot and Kusama

Karura, the Polkadot implementation of the Acala protocol, has launched its decentralized exchange (DEX) platform, Karura Swap.

According to the announcement issued on Friday, the DEX platform is now live, with KSM/KAR being the first trading pair on the exchange.

Per details provided by the announcement, Karura Swap has gone live with an initial total value locked north of $3.4 million, with more than 1,000 unique liquidity providers (LP).

The team revealed that the DEX launch highlighted the benefits of its “Bootstrap feature” that provides a liquidity sandbox for trading pairs with the walled environment, reportedly preventing front-running and market manipulation during the initial launch of a trading pair.

“With Bootstrap, Karura aims to empower trustless trading at fair market rate to reflect the tenets of equitable and open finance for all,” the blog post added.

Indeed, the inaugural KSM/KAR pair passed through the bootstrap phase and has only gone live after satisfying the mandated liquidity goal. With the launch of the DEX, Karura Swap becomes the first decentralized exchange on Polkadot and Kusama and the first avenue for trustless trading of Kusama tokens on a DEX.

Other trading pairs that will be launched on Karura Swap can also make use of the Bootstrap feature. LPs can elect to supply one or both tokens in the pool during the process, while trading remains suspended until the set liquidity target is achieved.

Related: DeFi hub Karura emerges as first Kusama parachain slot auction winner

With Karura envisioned as a decentralized finance hub on Kusama, the team said other features such as kUSD stablecoin loans, staking and liquidity mining programs are in the works. These added protocols are part of the plans to build up the network within the 48-week network lease secured by winning a parachain auction slot.

As previously reported by Cointelegraph, Karura became the first Kusama parachain slot auction winner back on June 22, with over 501,000 KSM staked in the crowd-loan process. These slot auctions determine the parachains that will be added to the Kusama relay chain, which serves as a companion network for Polkadot.