Mercury Wallet Roadmap for Bitcoin Scalability and Privacy
Mercury Wallet, a layer 2 scaling solution for Bitcoin, plans to integrate with the Lightning Network and hide its server.
Mercury Wallet, a Layer 2 application designed for Bitcoin, is currently developing infrastructure to integrate with the Lightning Network.
Apps like Mercury are a way to scale Bitcoin usage by temporarily transacting off-chain before returning to the main-chain, making payments to other users easier and more cost-effective. But what is Mercury Wallet, how does it differ from the Lightning Network, and what could its integration ultimately accomplish for Bitcoin’s growth?
Statechains and Statecoins
In order to understand the Mercury Wallet, we must first understand the technology Mercury uses to build its application: state chains.
A statechain works very similarly to a blockchain or a sidechain. In short, a state chain provides cryptographic proof of ownership for any given statecoin. A statecoin can be thought of as representing a digital currency without actually being the digital currency, which in this case would be bitcoin.
Likewise, the easiest comparison to understand a Statecoin is to think of it the way paper money is tied to a gold standard. Paper money is not real gold, it simply represents part of the value of gold. Likewise, a statecoin is not a bitcoin, it is simply meant to represent a portion of bitcoin’s value. This allows users to trade the value of bitcoin without interacting with the bitcoin blockchain.
Now that we have a basic premise for state chains and state coins, back to Mercury.
What is the Mercury Wallet?
Mercury Wallet is itself an implementation of a state chain. Wallet is how unspent transaction outputs (UTXO) or funds are organized into a string of state once they are deposited.
When a user chooses to use Mercury Wallet, they deposit UTXOs into the wallet through the graphical user interface (GUI) in a fairly straightforward process. Depositing UTXO in Mercury Wallet is like playing poker with your friends. Each person brings a fixed amount of cash denominated in tokens. Tokens cannot be divided into smaller denominations of money and have a fixed value.
Likewise, UTXOs deposited in Mercury Wallet cannot be split into smaller denominations. Therefore, if the donated UTXO represents 1 BTC, it must be spent in full and cannot be split into smaller payments. This is one of the disadvantages of Mercury Wallet.
So, once funds are deposited, a chain of transactions secured by cryptography signifying ownership begins. If a user chose to spend their UTXOs, it would create an ownership path leading from the spender to the receiver each time a transaction was made. However, to transact with Mercury Wallet, a user must transact with another Mercury Wallet.
Additionally, each deposited UTXO essentially creates its own state chain that tracks the transfer of ownership with every transaction on the Mercury Wallet platform. This is why Mercury Wallet users must interact with each other, to continue the chain of custody.
Additionally, if users want the ownership path of their deposits to be broadcast on the Bitcoin blockchain to actually transfer the funds, Mercury’s interface is connected to a Bitcoin node, making the process quick and easy.
So what does Lightning offer Mercury Wallet that it doesn’t already have?
Privacy, security and options
If Lightning Network is a Layer 2 scaling solution and Mercury Wallet is a Layer 2 scaling solution, doesn’t that make them competitors? This is an incorrect lens through which to view both projects. In fact, it would be more accurate to consider them adjacent rather than in opposition to each other.
Accordingly, Lightning Network is an implementation of a communication protocol through the use of channels, and Mercury Wallet is an implementation of state channels that leverage a product with a company behind it.
However, Mercury integrating its product with the Lightning Network allows Mercury users to access its communication protocol. This integration enables transfers from Lightning to Mercury or vice versa, which strengthens Mercury’s use cases.
For example, currently Mercury’s business model is to collect a fee to facilitate Layer 2 transactions by charging an address once funds are retransmitted to the Bitcoin blockchain, which users are required to provide when they initially deposit funds. This is a privacy issue, as the address must be collected in advance and stored, although it does not have to be the same address that the deposited UTXOs originate from.
However, with a Lightning integration, Mercury could bill the fee upfront and only need to collect a Lightning invoice, storing none of the user’s data. This would not only be a boon for privacy, but also for security.
In its current state, Mercury Wallet is prone to denial of service (DoS) attacks, i.e. a malicious user sends fake transactions to flood the network, making it difficult or impossible to use the platform. Being able to charge Lightning bills upfront would significantly reduce the likelihood of this attack vector by placing a price on spam and allowing for more options.
So Lightning Billing would also allow Mercury to completely change its pricing model. Similar to how Opendime allows users to transact with UTXOs placed on a USB key-type device for ease of use; Mercury users could buy a virtual form of Opendime-like real estate en massewhich would allow bulk discounts for multiple deposits.
Still, Mercury has another upgrade on the horizon.
A blind waiter
Currently, Mercury plans to blind its server in the fourth quarter of this year, according to CEO Nicholas Gregory, according to email correspondence Bitcoin Magazine had with the Mercury team. What does it mean?
“The blind version of Mercury Wallet will apply cryptography in an approach that makes it impossible to identify coins that have been transferred or traded,” explained Tom Trevethan, CTO of Mercury Wallet.
The company announcement his plans to go blind in June with an explanation of what it means to be blinded in the crypto world here. In short, blinding Mercury’s server ensures that it cannot know any identifiable information about a coin, which prevents coins from being censored.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.