Understanding Mercury Layer: A New Bitcoin Layer 2 Protocol

Author: Bitfinex; Translation: 0xxz@金财经

Mercury Layer was created by Commerce Block and represents a major advancement in the Bitcoin layer 2 scaling ecosystem, focusing on enhancing privacy through statechains. and efficiency. Mercury Layer enables off-chain transfer and settlement of Bitcoin UTXOs without sacrificing owner fund custody and security. This 2-layer protocol leverages state chaining and blind co-signature technology to facilitate instant and fee-free transactions, providing a novel approach to Bitcoin’s scalability.

The state chain implemented by Mercury Layer realizes the off-chain transfer of UTXO through a combination of key sharing and blind signature, ensuring that the ownership of UTXO can change hands safely and privately. The design of the protocol ensures that neither the Statechain Entity (SE) nor any party involved in facilitating these transfers has full control of the private keys, thus maintaining the trust-minimized security and privacy of transactions.

The "blind signature" technology introduced by Mercury Layer is a breakthrough feature that ensures that SE cannot identify or review transactions based on transaction content, further enhancing user privacy on the Bitcoin network. This approach prevents the SE from knowing transaction details such as the TXIDs involved, the public keys, or the signatures it helped generate together. Additionally, the protocol uses Schnorr signatures via Taproot addresses, leveraging a blind variant of the MuSig2 protocol to generate signatures without leaking sensitive information to the SE.

The Mercury Layer protocol also includes mechanisms such as backup transactions and orderly closure processes, allowing users to autonomously recover funds in the event that the SE is unable to cooperate or is unresponsive. This ensures a safety net for users, giving them greater control over their assets.

By solving Bitcoin’s scalability and privacy issues through instant, zero-cost, private off-chain transactions, Mercury Layer enables broader adoption of Bitcoin for a variety of applications that require instant, secure, and private transactions. Coins paved the way. Its integration with the Lightning Network opens up further possibilities for enhancing Bitcoin’s transaction capabilities, making it a key development in the quest for a more scalable and privacy-focused Bitcoin ecosystem.

Big improvements in scalability and user privacy

Mercury Layer greatly reduces the burden on the Bitcoin blockchain by facilitating the off-chain transfer of Bitcoin UTXO ownership. This mechanism enhances Bitcoin’s scalability by allowing a significant increase in the number of transactions that can be processed without directly impacting the blockchain mainnet.

Mercury Layer's use of state chains is at the core of its scalability improvements. The state chain allows UTXOs to be transferred between parties without the need for on-chain transactions. This is achieved by sharing control of the UTXO between the original owner and the SE, then transferring ownership via key update. This process enables a large number of transactions to occur on the blockchain mainnet, greatly increasing throughput.

A key feature of Mercury Layer is its implementation of blind joint signatures, ensuring that the SE cannot learn the transaction ID, the public keys involved, or even the signature it helped create. This blindness ensures that transactions remain private and secure, free from review or surveillance by the SE.

Mercury Layer utilizes a variant of the Schnorr signature scheme, allowing signatures to be generated via a shared public key without revealing the full key to the SE. This ensures that transactions can be signed securely while maintaining the privacy of user keys.

This agreement ensures that no party, including the SE, has complete control over user funds. The shared control mechanism, combined with backup transactions and orderly shutdown processes, not only enhances security but also protects user privacy by preventing any unilateral actions by the SE.

Mercury Layer’s state chain provides users with a way to prove the uniqueness and ownership of their funds without exposing their transaction history or balance to the network or SE, thus ensuring the integrity of the network. All while protecting financial privacy.

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 and is significantly different from other well-known layer 2 protocols such as Chaumian e-cash, sidechains and the Lightning Network. Each of these solutions provides unique transaction scalability and privacy mechanisms, each with its own advantages and limitations.  

The following is a comparison between Mercury Layer and sidechains, Lightning Network and Chaumian e-cash:

Mercury Layer and Sidechains

Operation Model: Mercury Layer uses state chaining to facilitate off-chain transactions of Bitcoin UTXOs while maintaining their security and privacy. It achieves scalability and privacy through blind co-signing and key rotation without the need to transfer assets between chains.

A side chain is an independent blockchain that runs in parallel with the Bitcoin main chain, allowing assets to be pegged and transferred between the main chain and the side chain. This can facilitate a wider range of applications and smart contracts that are not possible on the main chain.

Trust Model: Mercury Layer requires trust in the SE to act honestly, facilitate the transfer of UTXOs and maintain privacy through blind operations. However, the protocol is designed to minimize trust through cryptographic mechanisms.

A sidechain may require trust in the entity protecting the sidechain, depending on the consensus mechanism used. For example, Federated sidechains rely on a group of validators to secure the network and approve cross-chain transfers.

Scalability and Privacy: Mercury Layer directly addresses scalability issues by allowing a large number of off-chain transactions without affecting the throughput of the Bitcoin blockchain. It enhances privacy by ensuring that the SE cannot learn the details of the transactions it facilitates.

Sidechains can provide higher scalability and different privacy features depending on their design, but privacy and scalability depend on the specific architecture of the sidechain and the mechanisms it employs.

Mercury Layer and Lightning Network

Operating Model: Lightning Network realizes off-chain transactions through payment channels between two parties. These channels allow for virtually unlimited transactions, which are settled on the Bitcoin blockchain only when the channel is opened or closed.

Mercury Layer’s use of state chains is different in that it facilitates off-chain transfer of UTXO ownership. Unlike the Lightning Network, which requires funding channels in advance, Mercury Layer can transfer existing UTXOs.

Scalability: Both the Lightning Network and Mercury Layer provide solutions to Bitcoin’s scalability issues. The Lightning Network does this through a network of payment channels that facilitate microtransactions, while Mercury Layer does this through off-chain UTXO transfers.

Mercury Layer may provide a more direct off-chain value transfer mechanism without the need for channel management and routing, but it focuses on UTXO transfers rather than facilitating large numbers of small transactions.

Privacy: The Lightning Network does not broadcast transactions to the public blockchain until the channel is closed, providing privacy benefits. However, routing information may reveal privacy-sensitive information.

Mercury Layer enhances privacy through blind co-signing, which prevents the SE from knowing any details of the transactions it helps facilitate, thus providing strong privacy guarantees.

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

Mercury Layer is particularly beneficial for privacy-sensitive transfers and potentially large transactions, as it focuses on maintaining UTXO ownership, privacy, and security.

Mercury Layer and Chaumian eCash

Operating Model: Mercury Layer is a 2-layer scaling solution based on the state chain, promoting off-chain transfer of Bitcoin UTXO , and is fully self-hosted and maintained by the owner. It uses blind signature and key rotation technology to ensure privacy and security.

Chaumian eCash is a privacy-focused digital cash system that uses blind signatures to provide users with anonymity. It allows the creation of mints or banks where users can deposit and withdraw funds and conduct anonymous transactions within the mint.

Trust and Custody Risk: Mercury Layer minimizes trust by ensuring that neither the SE nor the user has full control of the private key and therefore needs to cooperate to conduct transactions. It introduces a novel method of transferring Bitcoin ownership without on-chain transactions.

Chaumian eCash introduces a trust model where users must trust the mint operator to a certain extent. However, Federal Mint distributes trust among multiple parties to reduce risk. The privacy and security of transactions within the Mint depend on the integrity of these operators.

Privacy: Mercury Layer uses blind signature technology to ensure that SE cannot learn any transaction details and provide users with a high degree of privacy. It prevents internal and external privacy leaks by design.

Chaumian eCash is designed to offer strong privacy features, using blind signatures to prevent mint operators from linking users to transactions or balances. It effectively solves the problem of internal privacy leaks, but must be carefully designed to prevent external analysis and surveillance.

Scalability and Usability: Mercury Layer directly addresses Bitcoin’s scalability issues by enabling off-chain UTXO transfers, potentially supporting larger transaction volumes while No burden will be placed on the Bitcoin network. Its approach simplifies the user experience by abstracting complex channel management found in other 2-tier solutions.

Chaumian eCash also offers scalability benefits by enabling off-chain transactions within the mint. It simplifies the user experience and allows for easy transactions without direct blockchain interaction. However, 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: Although Mercury Layer is a standalone layer 2 solution focused on UTXO transport, its principles can theoretically be integrated with other networks to enhance functionality.

The Chaumian eCash mint could be designed to be interoperable with the Lightning Network, creating a bridge between the privacy-focused eCash system and the Lightning Network’s efficient micropayments channel. This interoperability can enrich the Bitcoin ecosystem with diverse transaction options that meet different user needs.

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