Arkade

Arkade is a new protocol that enables programmers to build advanced financial applications on Bitcoin without any changes to the main chain. In this article we will dive into what Arkade is, its main aspects and how this technology will be leveraged on Hodl Hodl.

Arkade vs. Ark

To avoid any confusion we will briefly touch upon a difference between Ark and Arkade.

What is Ark?

Ark is a conceptual framework for scaling Bitcoin proposed in May 2023. It allows for consolidating many offchain Bitcoin transactions into a single mainnet transaction, enabling fast, cheap transactions while fully inheriting Bitcoin’s security guarantees.

Ark is not a protocol by the strictest definition, as it is neither interoperable nor standardized. It is best seen as a design pattern that anyone is free to implement as they see fit.

What is Arkade?

Arkade is an open-source platform created by Ark Labs. It builds on top of the concepts introduced by Ark, with a focus on leveraging the enhanced programmability introduced by Bitcoin’s 2021 Taproot upgrade.

What is a virtual output (VTXO)?

One of the fundamental building blocks of Bitcoin is the Unspent Transaction Output, or UTXO for short. Unspent outputs are discrete chunks of bitcoin that can be spent with a private key.

Arkade builds on top of this with the Virtual Transaction Output (VTXO), which is essentially an offchain version of a UTXO. Virtual outputs can be transformed into mainnet Bitcoin outputs at any time, but they can also be spent offchain to create new virtual outputs.

How do virtual outputs work?

A virtual output is a chain of unbroadcasted Bitcoin transactions leading up to a standard mainnet output. Virtual outputs are initially created by a special mainnet transaction called a batch swap, and are then spent in offchain transactions that follow the same rules as Bitcoin.

The benefits?

Because they are offchain, virtual outputs can be spent instantly and at a low cost. You don’t need to wait for the block confirmation or open a Lightning channel to receive them. In addition, transactions on Arkade remove pressure from the main chain and allow for a higher transaction throughput.

What are the Arkade operators?

Arkade uses a client-server model, with a trusted operator coordinating offchain transactions.

Is Arkade non-custodial?

Yes. Although the Arkade operators coordinate transactions and provide liquidity, it never touches your private keys. You can unilaterally exit to mainnet without involving the operator. To keep that exit path open, your outputs go through periodic renewals: a small, recurring fee debited from the liquidity backing your funds and paid to a trust-minimized delegate.

What is Transaction Finality?

When you want to gain full Bitcoin finality, the Arkade operator collects together your outputs and those of other users and settles them into a single onchain commitment transaction. This settlement bundles everyone's outputs together, swapping UTXOs in and out to move you from expiring liquidity into fresh outputs — while splitting the cost across all participants.

What is preconfirmation?

One of Arkade’s key innovations is preconfirmation.

Normally on Bitcoin, users wait for a block confirmation before treating a payment as final. Arkade allows transactions to become usable immediately after the operator cosigns them, without waiting for an onchain confirmation.

From the user perspective, payments feel instant. Received VTXOs can immediately be spent again inside the Arkade system, enabling fast and low-cost Bitcoin transactions.

This creates two settlement states:

• Preconfirmed → instant execution with a trust assumption around the operator
• Settled → full Bitcoin finality once batched onchain

Importantly, Arkade remains non-custodial. Users still retain a unilateral exit path that allows them to reclaim funds on Bitcoin mainnet if the operator disappears.

In practice, this gives users flexibility: keep funds preconfirmed for speed and convenience, or periodically settle onchain for maximum Bitcoin security and finality.

What is a unilateral exit in Arkade?

The unilateral exit is a key feature of Arkade that makes it non-custodial by design. Arkade virtual outputs are always backed by a guaranteed, permissionless path to a Bitcoin output. If the Arkade operator disappears, you don't need their permission to leave. You have a presigned exit path that allows you to claim the mainnet outputs backing your funds. Keep in mind that in the best case scenario there is never a need for a unilateral exit.

What is a transaction tree?

A transaction tree is a chain of several related Bitcoin transactions that are prepared and signed in advance, but not yet broadcasted. It splits a larger onchain pool of funds into smaller chunks. It enables many users to share a single onchain transaction and prove which part belongs to them, while keeping their money separate.

It works by layering transactions: a single root transaction is confirmed on the main Bitcoin chain, which then branches out into multiple offchain transactions. Your specific balance sits at the very end of one of these branches. If you ever need to get your money out without the operator's help, you simply broadcast the specific transactions that lead from the root down your branch, effectively unrolling your portion of the tree.

How much does it cost to do a unilateral exit?

While exiting is a guarantee of coming back to the mainchain, it can be expensive. If you are deep in a branch, you will have to pay to broadcast every transaction leading up to your output. This is why users are encouraged to periodically renew their outputs to keep their exit costs low.

How will Hodl Hodl leverage Arkade?

Since we are laser focused on bringing non-custodial solutions for P2P trading, it was essential for our team to find a way to integrate the Lightning Network in a non-custodial way.

The way we are working to solve the issue is by leveraging a Taproot-based escrow multisig on Arkade. From a user perspective it is a simple trade between Lightning and fiat.

What happens on the backend is a non-custodial atomic swap by Satora, from Lightning to Arkade when a seller deposits bitcoin. The BTC lands into a multisignature wallet with the keys distributed amongst 4 parties (buyer, seller, Hodl Hodl and the Arkade operator).

Similar to onchain 2/3 multisig wallets, bitcoin is held in a non-custodial way until the buyer completes their part of the trade and the seller confirms the receipt of the funds.

After the confirmation, bitcoin is released to the buyer and they can choose to receive it as BTC on Lightning. The complexity of a swap and key management will be obscured from the user making the flow seamless and non-custodial at the same time.

TLDR

• What is Ark? a conceptual framework for scaling Bitcoin via consolidating many offchain transactions into a single mainnet transaction.
• What is Arkade? an open-source protocol that builds on top of the concepts introduced by Ark, enabling advanced financial applications and fast, non-custodial payments.
• Virtual Outputs / VTXOs: these are offchain bitcoin balances. They are cryptographically guaranteed promises of onchain BTC that can be spent instantly.
• Non-Custodial: You always hold your keys. If the operator disappears, you can reclaim your funds on Bitcoin mainnet without asking for permission.
• Batch Swap: To keep fees low, Arkade bundles hundreds of users into one batch swap. Users share the cost of a single onchain transaction while gaining mainnet finality.
• Liveness: To stay non-custodial, users must perform a renewal every other month.
• Hodl Hodl integration: Hodl Hodl creates a non-custodial escrow by swapping Lightning Bitcoin into a secure 3/4 multisig wallet on Arkade by using atomic swaps from Satora.