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Nick Szabo Talks Necessity of Second Layer Blockchain on Top of Bitcoin

Joseph Young
Last Updated March 4, 2021 4:57 PM
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Nick Szabo, prominent blockchain, cryptocurrency, and smart contracts pioneer, recently emphasized the necessity and importance of a peripheral or second-layer network on top of the bitcoin blockchain to settle smaller transactions in a more efficient and secure manner.

Previously, CCN.com reported that Microsoft head of decentralized identity Daniel Buchner criticized Bitmain for their vision and viewpoint on two-layer solutions such as Lightning. In an official blog post entitled “UAHF: A contingency plan against UASF (BIP148),” Bitmain released a controversial statement in regards to the development and implementation of Lightning.

Referring to the Lightning network, the Bitmain development team wrote: 

“We do not believe that decentralization means a 1MB block size limit or a responsibility to constrain the block size so that a Raspberry Pi can run a full node while the fee per Bitcoin transaction is higher than the daily income in most developing countries. We believe Bitcoin needs to offer people an alternative to flourish without depending on powerful authorities that charge fees that can be as high as 100$/transaction.”

As a response, Buchner emphasized that the implementation of two-layer solutions and peripheral financial networks such as Lightning renders the bitcoin network more decentralized and Bitmain’s emphasis on the emergence of “powerful authorities” is far from being true.

“Bitmain caps it off by asserting the superior scaling of L2 requires powerful authorities. False: L2 operation is even more decentralized,” said Buchner.

Szabo, who remains as one of the most respected pioneers within the cryptocurrency community for his contributions in the early-stage development of bitcoin, sided with Buchner in his recent statement which explained that at scale, it is inefficient to settle small bitcoin transactions on-chain. Small payments must be moved to a peripheral network that settles payment on its blockchain rather than having all transactions settled on a premium global blockchain.

“At scale, you can’t pay for coffee on a premium global blockchain. You’ll need a peripheral financial network that settles on that blockchain. Can be confident that if one secure blockchain was used for all world’s high-value transactions, fees would be too high for most or all of your list,” said  Szabo.

Szabo also noted the possibility of utilizing two blockchains and essentially creating a peg in between to have both blockchains interoperable. Currently, bitcoin is similar to digital gold and a settlement network. Investors, traders and users are utilizing bitcoin to settle large transactions with large fees. However, Szabo explained that the premium global blockchain such as bitcoin can’t be used for both small and large payments unless a second peripheral financial network is pegged to the original bitcoin blockchain or a two-layer solution is established.

Szabo’s statement is vey similar to that of bitcoin pioneer and developer Hal Finney’s in December of 2010, in which he explained: 

“Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the block chain. There needs to be a secondary level of payment systems which is lighter weight and more efficient.”

At the moment, the closest technology that describes the peripheral financial network characterized by Szabo is Lightning, as it allows the settlement of transactions off-chain and broadcast various transactions as a single transaction with a high fee on-chain. The utilization of Lightning opens door for a wide range of applications and transforms bitcoin into a more efficient digital currency and digital cash system, as noted in Satoshi Nakamoto’s original bitcoin whitepaper.

Featured image from Shutterstock.