Unlocking Liquidity Before Shared Output Expiration

A new VTXO Tree signing scheme that allows the server to unlock liquidity before a round expiration.

Building on insights from Brandon Black, a generalized method allows Arkade clients to collaborate with Arkade Operators and release liquidity before the shared output that commits to a Virtual Tree of Bitcoin transactions, also known as a VTXO (Virtual Transaction Output) tree, expires.

The Evolution of the VTXO Tree Signing Process​

The Current implementation​

In the current VTXO tree signing process, all senders in a round sign every transaction within the tree using ephemeral keys. This was essential when users were required to join rounds to send funds to receivers, ensuring that receivers didn’t have to be online to sign transactions. The use of ephemeral keys during the signing process was promoted to minimize the risk of double-spending shared outputs intended for receivers.

• Signatures Required: Each participant signs (2n - 1) transactions, where n is the number of participants.
• Ephemeral Keys: Participants sign with ephemeral keys (A’, B’, etc.).

The Shift to Out-of-Round (OOR) Transactions​

With the introduction of Out-of-Round transactions, users no longer need to join rounds to send funds. Instead, they participate in rounds primarily to settle or refresh their own VTXOs, acting as both senders and receivers. This eliminates the need for the extensive trust mechanisms previously required between senders and receivers, rendering the use of ephemeral keys and signing all transactions in the tree unnecessary.

The New Simplified VTXO Tree Signing Process​

A streamlined VTXO tree signing process lets users sign only their specific branches with their wallet keys, eliminating the need for ephemeral keys. Each transaction is signed exclusively by the participants whose VTXOs descend from it, limiting signatures to the relevant participants. This method maintains security because the server still requires collaboration from some or all users to double-spend a shared output of the VTXO tree, preserving the system's integrity while significantly reducing signing overhead.

• Signatures Required: Each participant now only needs to sign log₂(n) transactions.
• No Ephemeral Keys: The use of ephemeral keys is no longer necessary.
• Security Maintained: The server cannot double-spend a shared output without the explicit consent of all underlying participants.

This simplified process empowers the server to regain liquidity allocated into a previous round , either fully or partially , before the shared outputs naturally expire. This is achieved through user collaboration after they've spent their VTXOs and can be incentivized in different ways.

How It Works​

• User Collaboration: In case two sibling VTXOs are spent out of round and the receivers settled their funds, the senders can collaborate with the server to double-spend their shared output, effectively unlocking liquidity earlier.
• Controlled Unrolling: The server may start unrolling a VTXO tree to sweep a shared output.

In this example, users A and B spent their VTXOs (VTXO_A, VTXO_B) so server asks for their collaboration to double-spend and sweep their shared output (SO'). Once the server collected both signatures, he starts unrolling the tree to broadcast the transaction that sweeps SO'.

Benefits​

Pros​

• Reduced signing overhead: Users sign far fewer transactions when joining a round, thus reducing the amount of data exchanged in the process.
• Efficient Liquidity: Servers can adopt strategies to group high-value VTXOs, allowing for partial sweeps and better liquidity allocation.
• Win-Win: Users are rewarded by the server for participating in the early unlocking of liquidity

Cons​

• Potential for Collusion: Users could theoretically collude with the server to sweep shared outputs before the receivers of the OOR txs settled their funds. However, this risk isn’t new; similar issues exist with OOR itself -- user and server can collude to double-spend a VTXO spent out of round before the receiver's settlement. The inherent trust dynamics between parties remain unchanged.

Conclusion​

The protocol's early iterations were a stepping stone toward more optimized implementations.

By simplifying the VTXO tree signing process and incentivizing users to participate in early liquidity callout, we create a more efficient and user-friendly platform. We're excited about the possibilities this opens up and look forward to your participation in making Arkade even better.

Credits​

The core concept behind this optimization was originally proposed by @reardencode in a Twitter thread. We've built upon and expanded this idea.

Stay tuned for more updates, and don’t hesitate to reach out with any questions or feedback.