❷ [Analysis] The Bitcoin second layer – Nik Bhatia

Similar to gold, Bitcoin ($BTC) will evolve in layers on its way to world reserve currency status. Despite having served as money for millennia, gold has not acted as money only in its raw physical form, or first layer. Gold is a perfect example of how a layered money system evolves as it has four layers and each layer only works if the previous layers' protocols have been adhered to:

• First layer: The physical gold in its raw form after it is mined: gold nuggets. Its protocol is just to adhere to the properties of the periodic table’s 79th element.
• Second layer: Gold that has been melted and shaped into bars and coins following a standardized protocol of purity, weights, and measures.
• Third layer: Gold certificates that are claims issued by banks that have taken gold on deposit. These certificates can act as money but carry counterparty risk of the issuer.
• Fourth layer: Certificates backed by bank-issued gold certificates. A liquidity provider can issue these certificates, which would require several layers of trust by the user. Each layer uses the layer beneath it for consensus and security. Money will always see a multiple layered expansion as it evolves, and each layer has costs and benefits. Each layer serves a different function. Base layers are for final settlement, while higher layers are for facilitation of economic activity.

Similarly, Bitcoin has two layers.

• First layer: Bitcoin's base layer is the original protocol described in the Bitcoin whitepaper. Bitcoin’s confirmation process is meant to be slow because of security reasons and its intent of being a censorship-resistant, scarce digital cash. The best way to think about Bitcoin’s base layer protocol is as a final settlements layer.
• Second layer: Lightning Network is a second layer protocol on top of Bitcoin and uses it as its native denomination. Lightning allows for the instantaneous transfer of Bitcoin from peer to peer with one considerable difference from the first layer: channel balances can adjust but do not require immediate settlement on the base layer. Simply stated, Lightning transactions are unsettled Bitcoin transactions.

Lightning is important for three reasons

• Lightning Network is a zero-sum, fully reserved routing network, meaning that it retains Bitcoin's limited supply feature.
• Lightning does not carry the burden of base layer confirmation, allowing Bitcoins to be exchanged ad infinitum without consuming precious block space.
• Lightning transactions can be interpreted as financial agreements, making Lightning Network a capital market layer.

Bitcoin is often referred to as digital gold, but I’ll propose a more specific analogy. Bitcoin’s base layer is like digital physical gold, while Lightning Network is like digital paper gold but without the counterparty risk. The second layer is unsettled and less secure, but infinitely more usable.

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