What is Mercury Layer? – Bitfinex blog


What is Mercury Layer?

A New Kind of Bitcoin Layer 2 Protocol

Mercury Layer, created by Commerce Block, represents a significant advancement in Bitcoin’s layer 2 scaling ecosystem, focusing on enhancing privacy and efficiency through statechains. Mercury Layer enables the off-chain transfer and settlement of Bitcoin Unspent Transaction Outputs (UTXOs) without sacrificing the custody and security of the owner’s funds. This Layer 2 protocol leverages statechains and blinded co-signing technology to facilitate instant and cost-free transactions, presenting a novel approach to overcoming Bitcoin’s scalability hurdles.

Statechains, as implemented by Mercury Layer, achieves off-chain transfers of UTXOs through a combination of key sharing and blinded signatures, ensuring that the ownership of UTXOs can change hands securely and privately. The protocol’s design ensures that neither the Statechain Entity (SE) involved in facilitating these transfers nor any single party has complete control over the private keys, thereby maintaining the trust-minimised security and privacy of the transactions.

Mercury Layer’s introduction of “blinding” technology is a groundbreaking feature that ensures the SE cannot identify or censor transactions based on their content, further enhancing the privacy of users on the Bitcoin network. This approach prevents the SE from learning about transaction details such as the involved TXIDs, public keys, or the signatures it helps to co-generate. Moreover, the protocol employs Schnorr signatures via Taproot addresses, utilising a blinded variant of the MuSig2 protocol to generate signatures without revealing sensitive information to the SE.

The Mercury Layer protocol also includes mechanisms like backup transactions and an orderly closure process, which provide users with the ability to recover their funds autonomously in case the SE fails to cooperate or becomes unresponsive. This ensures a safety net for users, granting them greater control over their assets.

By addressing Bitcoin’s scalability and privacy concerns with instant, zero cost, private off-chain transactions, Mercury Layer paves the way for a broader adoption of Bitcoin for various applications requiring instant, secure, and private transactions. Its integration with the Lightning Network opens up further possibilities for enhancing Bitcoin’s transactional capabilities, making it a pivotal development in the quest for a more scalable and privacy-centric Bitcoin ecosystem.

A Massive Improvement in Scalability and User Privacy

By facilitating the transfer of ownership of Bitcoin’s UTXOs off-chain, Mercury Layer dramatically reduces the burden on the Bitcoin blockchain. This mechanism allows for a significant increase in the number of transactions that can be processed without directly impacting the main blockchain, thus enhancing Bitcoin’s scalability.

Mercury Layer’s use of statechains is central to its scalability improvements. Statechains allow for the transfer of UTXOs between parties without the need for on-chain transactions. This is achieved by sharing control of a UTXO between the original owner and a SE, and then transferring ownership through key updates. This process enables a high volume of transactions to occur off the main blockchain, greatly increasing throughput.

A critical feature of Mercury Layer is its implementation of blinded co-signing, ensuring that the SE cannot learn the transaction IDs, the public keys involved, or even the signatures it helps create. This blindness ensures that transactions remain private and secure, free from censorship or surveillance by the SE.

Utilising a variant of the Schnorr signature scheme, Mercury Layer allows for signatures to be generated over a shared public key without revealing the full key to the SE. This ensures that transactions can be securely signed while maintaining the privacy of the users’ keys.

The protocol ensures that no single party, including the SE, has full control over a user’s funds. The shared control mechanism, combined with backup transactions and orderly closure processes, not only enhances security but also preserves user privacy by preventing any unilateral actions by the SE.

Mercury Layer’s statechains provide a way for users to prove the uniqueness and ownership of their funds without exposing their transaction history or balances to the network or the SE, preserving financial privacy while ensuring network integrity.

How Does Mercury Layer Compare to Other Bitcoin Layer 2 Protocols? 

Mercury Layer represents a unique approach to Layer 2 scaling and privacy solutions on the Bitcoin network, differing significantly from other prominent Layer 2 protocols like Chaumian e-cash, sidechains, and the Lightning Network. Each of these solutions offers distinct mechanisms for transaction scalability and privacy, with their own advantages and limitations. 

Here’s a comparison of how Mercury Layer stands against sidechains, Lightning Network, and Chaumian e-cash:

Mercury Layer vs. Sidechains

Operational Model: Mercury Layer uses statechains to facilitate off-chain transactions of Bitcoin UTXOs while maintaining their security and privacy. It achieves scalability and privacy through blinded co-signing and key-cycling without requiring the transfer of assets between chains.

Sidechains are independent blockchains that run parallel to the main Bitcoin blockchain, allowing for assets to be pegged and transferred between the main chain and the sidechain. This can facilitate a broader range of applications and smart contracts not possible on the main chain.

Trust Model: Mercury Layer requires trust in the SE to act honestly in facilitating the transfer of UTXOs and in maintaining privacy through blinded operations. However, the protocol is designed to minimise trust through cryptographic mechanisms.

Sidechains may require trust in the entities securing the sidechain, depending on the consensus mechanism used. Federated sidechains, for instance, depend on a group of validators to secure the network and approve cross-chain transfers.

Scalability and Privacy: Mercury Layer directly addresses scalability by allowing for numerous off-chain transactions without impacting the Bitcoin blockchain’s throughput. It enhances privacy by ensuring the SE cannot learn details about the transactions it facilitates.

Sidechains can potentially offer higher scalability and different privacy features depending on their design, but privacy and scalability are dependent on the specific architecture of the sidechain and the mechanisms it employs.

Mercury Layer vs. Lightning Network

Operational Model: The Lightning Network enables off-chain transactions through payment channels between two parties. These channels allow for nearly unlimited transactions that are settled on the Bitcoin blockchain only when the channel is opened or closed.

Mercury Layer’s use of statechains differs as it facilitates the off-chain transfer of UTXO ownership. Unlike the Lightning Network, which requires channels to be funded in advance, Mercury Layer enables the transfer of existing UTXOs.

Scalability: Both the Lightning Network and Mercury Layer offer solutions to Bitcoin’s scalability issue. Lightning achieves this through a network of payment channels facilitating microtransactions, while Mercury Layer does so through off-chain UTXO transfers.

Mercury Layer potentially offers a more straightforward mechanism for transferring value off-chain without the need for channel management and routing, but it’s focused on UTXO transfers rather than facilitating a high volume of small transactions.

Privacy: The Lightning Network provides privacy benefits by not broadcasting transactions to the public blockchain until a channel is closed. However, routing information could potentially leak privacy-sensitive information.

Mercury Layer enhances privacy through blinded co-signing, making it impossible for the SE to learn any details about the transactions it helps facilitate, providing a strong privacy guarantee.

Use Cases: The Lightning Network is well-suited for small, frequent payments, making it ideal for micropayments and everyday transactions.

Mercury Layer is particularly advantageous for privacy-sensitive transfers and potentially for larger transactions, given its focus on maintaining ownership, privacy, and security of UTXOs.

Mercury Layer vs. Chaumian eCash

Operational Model: Mercury Layer is a Layer 2 scaling solution based on statechains, facilitating the off-chain transfer of Bitcoin UTXOs with full custody maintained by the owner. It uses blinded signatures and key-cycling technology to ensure privacy and security.

Chaumian eCash operates as a privacy-focused digital cash system using blind signatures to provide anonymity for users. It allows for the creation of mints or banks where users can deposit and withdraw funds, transacting anonymously within the mint.

Trust and Custodial Risks: Mercury Layer minimises trust by ensuring neither the SE nor the users have complete control over the private keys, thus requiring cooperation for transactions. It introduces a novel method of transferring Bitcoin ownership without an on-chain transaction.

Chaumian eCash introduces a trust model where users must trust the mint operators to a degree. However, federated mints distribute trust across multiple parties to mitigate risk. The privacy and security of transactions within a mint rely on the integrity of these operators.

Privacy: Mercury Layer’s use of blinding techniques ensures that the SE cannot learn any transaction details, providing a high degree of privacy for users. It protects against both internal and external privacy leaks by design.

Chaumian eCash offers strong privacy features by design, using blind signatures to prevent mint operators from linking users to transactions or balances. It effectively addresses internal privacy leaks but must be carefully designed to protect against external analysis and surveillance.

Scalability and Usability: Mercury Layer addresses Bitcoin’s scalability directly by enabling off-chain UTXO transfers, potentially supporting a higher volume of transactions without burdening the Bitcoin network. Its approach simplifies the user experience by abstracting complex channel management seen in other Layer 2 solutions.

Chaumian eCash also offers scalability benefits by enabling off-chain transactions within mints. It simplifies the user experience, allowing for easy transactions without the need for direct blockchain interaction. However, the scalability is limited to the mint’s ecosystem and depends on the mint’s ability to handle large volumes of transactions.

Integration with Existing Networks: While Mercury Layer is a standalone Layer 2 solution focusing on UTXO transfers, its principles could theoretically be integrated with other networks for enhanced functionality.

Chaumian eCash mints can be designed to interoperate with the Lightning Network, offering a bridge between privacy-centric eCash systems and Lightning’s efficient micropayment channels. This interoperability could enrich the Bitcoin ecosystem with diverse transaction options catering to different user needs.

In summary, while sidechains, Chaumian e-cash, and the Lightning Network extend Bitcoin’s capabilities in different directions, Mercury Layer offers a novel approach focused on privacy and the secure transfer of ownership of UTXOs. Each of these Layer 2 solutions plays a crucial role in enhancing Bitcoin’s scalability, privacy, and utility, catering to diverse use cases within the ecosystem.


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