So what does it mean that someone other than me can touch my funds on Layer 2? It means that if the previous owner of a VTXO I hold (essentially, bitcoin on Layer 2) colludes with the ASP, a double spend becomes possible. I may think I've received the money, but in reality it could have been double-spent so that someone else receives it too, and if that person withdraws onchain first, I have no recourse.
Some might conclude from this that it isn't self-custody at all, but that's not the case. A VTXO can have its history reset through a process called "refresh," either periodically or whenever its owner wants. Put simply, a refresh is an onchain transaction, and through it the VTXO becomes something only I can withdraw. This is cryptographically guaranteed.
And since the only party who can wrongfully touch my VTXO is its previous owner, once I've refreshed, every change VTXO that comes back to me as I spend from then on belongs to me alone, because every previous owner is me.
I really like the Lightning Network, but there's one thing its critics say that I can't help but agree with: Lightning alone cannot solve Bitcoin's scaling problem. In fact, that was the very first thing I asked the Bitcoiners here publicly when I first came to Nostr (though I never got a single answer).
This is obvious to anyone who can do a bit of arithmetic, which is why everyone is exploring new Layer 2s to complement Lightning. I'm no exception, and of all of them, I consider Ark the most promising. Its detractors call it a "fake L2" or even a "scam." So which side has the stronger case? Let's look at whether their arguments actually hold up.
For a Layer 2 to be called self-custodial, it must satisfy the following conditions:
An onchain deposit must atomically result in Layer 2 funds.
A Layer 2 withdrawal must atomically result in an onchain UTXO.
I must be able to perform #2 entirely on my own, without any help from the Ark Service Provider, and even in an adversarial environment.
No one but me should be able to touch my funds on Layer 2.
Ark satisfies 1, 2, and 3. The only one it doesn't fully satisfy is #4, and that is the strongest criticism against Ark. There are other criticisms too, but most of them are drawbacks that can all be overcome as long as the client behaves correctly. I see those as UX issues, not something to be addressed from a custody standpoint.
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