Ark Protocol

Ark is a layer-two protocol for making off-chain Bitcoin transactions. Initially published on the bitcoin-dev mailing list as TBDXXX by Burak, is has since been named Ark and the protocol design has advanced significantly.

The goal and result of the Ark protocol is a payments system where people can make Bitcoin transactions at very low cost and without requiring any setup. The Ark model very closely resembles the UTXO model, which is a key differentiator with Lightning.

Lightning Network

Intuitively, we are inclined to compare Ark with the Lightning Network, because it is currently the only second layer on the Bitcoin network.

However, the Ark protocol design has very little in common with Lightning’s design. Lightning is a payment channel network, where a network of participants manage channels amongs pairs of them and payments are routed over paths along these payment channels.

The main difficulty that users experience when trying to use Lightning is that users need to have at least one payment channel in order to be able to receive payments. On top of having a channel, they also need to have some inbound liquidity, meaning that their channel counterparty has to commit some amount of money into the channel that will then be available for the new user to receive.

This onboarding process of creating one or more channels and acquiring inbound liquidity is the main drawback of the Lightning protocol that the Ark protocol doesn’t have.

Shared UTXOs

The Ark protocol is built around the idea of shared UTXOs. In principle, Lightning also has shared UTXOs, however they are only shared between the two channel counterparties. In Ark, UTXOs are shared among a large amount of users, potentially up to tens or hundreds of thousands of users.

While in the Lightning Network, payments are made by atomically shifting an amount of Bitcoin in a series of channels, in Ark, payments are made by exchanging a share in an existing shared UTXO for a share in a new shared UTXO. These shares of UTXOs will be called virtual UTXOs, or VTXOs.

These exchanges are coordinated by a central party, an Ark Service Provider (ASP), that facilitates payments, but is never a custodian. Because the UTXO is shared among the users in the shared UTXO, they can claim back there Bitcoin at all times without depending on the ASP by broadcasting their VTXO transactions.

Rounds and Connectors

Traditional Ark payments happen in so-called rounds. The ASP will organize these rounds periodically to give the users in the Ark the chance to make payments. During a round, any user that has a VTXO in the Ark can participate and request the service provider to include a transaction for them in the round. The ASP will then construct a new shared UTXO, which will include all the payments that are made inside this round.

The participating users will then relinquish their existing VTXO to the ASP by signing an off-chain forfeit transaction, which sends their input VTXO to the ASP. In return, the ASP creates a new shared on-chain UTXO with the desired output VTXOs and broadcast that transaction.

The way these transaction are made atomic, meaning that the sending doesn’t forfeit their VTXOs without having a guarantee that the newly created VTXOs will actually confirm, is by making the forfeit transaction dependent on the newly created shared UTXO transaction. This is done using connector outputs which are outputs that are part of the shared UTXO transaction and that will be used as an input on the forfeit transactions.

Arkoor

These rounds require interaction between participating users and because they result in an on-chain transaction that needs to be confirmed before the transactions can be considered final. Because of this, it takes time to hold rounds.

In order for users to be able to spend their VTXOs more rapidly without needing to participate in Ark rounds, there is a way to make out-of-round (OOR) transactions. These are payments that participants in an Ark can make instantly, directly from one party to another.

OOR payments are cosigned by the ASP. In theory, the trust model for OOR payments relies on the sender and the ASP not colluding to make a double spend. The receiver can then decide to either keep the OOR VTXO and rely on the ASP not wanting to lose its reputation by being proven to be dishonest, or decide to not have this trust and participate in the next Ark round to cycle this OOR VTXO into a new regular VTXO.