By
Dimitar Bogdanov
March 29, 2024
4 Min Read
Bitcoin Layer 2s are becoming an increasingly interesting prospect for the blockchain community. Layer 2s have been in the spotlight for a while, but, with few exceptions, the conversation is mostly focused on Ethereum L2s. However, Bitcoin Layer 2s have existed for a long time and in fact, in some instances even predate Ethereum. Now they are finally getting their deserved moment in the limelight.
From Ethereum, we are already familiar with the concept of Layer 2s. These are protocols that are built on top of the core blockchain protocol (also known as Layer 1) and are used to solve some limitations of said core protocol. That general concept also applies to Bitcoin L2s. But whereas Ethereum L2s are generally utilized as scaling solutions, Bitcoin Layer 2s can be much more varied.
This is because Bitcoin has more limitations that can be targeted by Layer 2 solutions. As we know, Bitcoin was initially designed to serve a very specific purpose - it was meant to be an electronic cash payment system rather than a general purpose blockchain protocol like Ethereum. Because of this, Bitcoin is not designed to support general-purpose smart contracts, which means no dApps, no token minting, no DeFi. And while there have been clever solutions to circumvent some of these limitations (for example, Bitcoin’s take on NFTs in Bitcoin ordinals), Bitcoin’s lack of programmability is really noticeable.
So Bitcoin can really benefit from Layer 2 solutions, but on the other hand, Bitcoin can serve as a great foundation for these types of protocols. This is due to its large network, which is even bigger than Ethereum’s.
As mentioned above, Bitcoin Layer 2s can be way more vаried than their Ethereum counterparts. Here are some of the purposes Bitcoin Layer 2s can serve or are already serving to improve the Bitcoin network.
The original use case for Layer 2s has always been scalability and this is true for Bitcoin, as well. In fact, one of the earliest examples of an L2 is the Lightning Network for Bitcoin. It was the first serious attempt at solving Bitcoin’s scalability problem without making changes to the Layer 1 protocol.
Bitcoin’s lack of programmability is one of its biggest limitations compared to platforms like Ethereum, which are capable of running smart contracts. While this is by design - Bitcoin was never meant to be a general-purpose blockchain protocol - this lack of programmability does limit Bitcoin’s influence on the broader Web3 ecosystem. It’s not a coincidence that when it comes to building decentralized applications and the new Web, Bitcoin is seldom mentioned in the same breath as Ethereum and other smart contract protocols.
Fortunately, there are already layer 2 solutions that aim to address Bitcoin’s lack of programmability by introducing smart contracts to the blockchain’s ecosystem.
There are also Bitcoin Layer 2s that seek to add specific functionalities or improve the protocol’s overall capabilities. With L2s you can add DeFi services, NFTs and other staples of the broader Web3 ecosystem. Or you can have L2s that seek to improve the network’s stability and overall performance.
Right now we are witnessing a growing interest in Bitcoin Layer 2s, as their potential to enrich the Bitcoin ecosystem is being increasingly recognized. Best of all, we’ve already seen a number of promising L2 gaining traction and providing a strong proof of concept. These are some of the most popular Bitcoin Layer 2s out there:
The Lightning Network, or LN for short, is a Layer 2 solution aimed squarely at solving the scalability problem. The LN enables the creation of bidirectional payment channels to be opened between Bitcoin users. An open LN channel can facilitate an unlimited number of direct payments between two transacting parties, without congesting the Bitcoin network. This is because the channel processes the payments directly and only needs two transactions to be recorded on the blockchain - one for opening the channel and another for closing, or settling, it.
The Lightning Network is now available to other blockchains (for example, Litecoin), but had its inception as a Bitcoin Layer 2.
Rotstock is an L2 that’s designed to bring general-purpose smart contracts to the Bitcoin ecosystem. Moreover, the solution also enables interoperability with Ethereum through its RSK Virtual Machine, which is based on the Ethereum Virtual Machine. This also means that developers can write smart contracts in Solidity.
Rootstock connects to Bitcoin via a sidechain and sports its own PoW consensus mechanism. The consensus mechanism supports merged mining, a process that allows miners to mine Rootstock and Bitcoin blocks simultaneously.
Another smart contract L2, Stacks utilizes a couple of innovative mechanisms that allows it to have speedier transaction processing, while also heavily leveraging the robust security provided by the base Bitcoin layer. First, Stacks uses microblocks, which can be confirmed in seconds (unlike the base BTC layer where it generally takes around 10 minutes to confirm a new block). Stacks also uses a novel consensus mechanism called Proof of Transfer, which allows it to settle Stacks transactions directly on the base layer.
Stacks features its own token called STX, as well as a Bitcoin-pegged asset dubbed sBTC. The platform is already home to a number of dApps, including DeFi services, NFT platforms and others.
Operating as a sidechain to Bitcoin, the Liquid Network aims to improve transaction speeds and network stability of the main protocol. It is connected to the Bitcoin chain via a two-way peg.
With a block confirmation time of 60 seconds and two-block finality, the Liquid Network can confirm transactions in two minutes - significantly faster than the main chain.
In addition, Liquid has other interesting features such as confidential transactions and atomic swaps. Liquid also utilizes a 1:1 BTC-pegged token called Liquid Bitcoin, which provides Bitcoin users with an easy way to access the L2’s more advanced features.
Layer 2s are a way to utilize Bitcoin’s immense network and strong security for something more than just simple transactions. And while that’s great, there is a significant caveat to consider. That same Bitcoin network still uses a Proof-of-Work consensus mechanism, which is significantly more energy intensive than its PoS counterparts. The energy consumption issue was the main motivation behind Ethereum’s own shift to Proof of Stake.
The emergence of promising Layer 2s for Bitcoin is an exciting development that could revitalize the world’s largest and oldest blockchain protocol. There are still challenges that need to be addressed for Bitcoin Layer 2s to realize their full potential - challenges relating to the complexity of the tech or security concerns. But as the space matures and developers continue to flesh out and improve upon their products, Bitcoin Layer 2s have every chance of becoming an important feature in the Web3 landscape.
