Current Landscape of Bitcoin Layer 2 (2024)

Bitcoin Layer 2 solutions are secondary protocols built to enhance scalability, functionality, and ease transaction efficiency on the Bitcoin blockchain. These solutions process transactions off the main blockchain, reducing congestion and transaction fees.

In this article, we will navigate the current landscape of Bitcoin Layer 2, how they work, technological developments, and challenges of Bitcoin Layer 2 solutions.

Layer 2 solutions are secondary protocols built on the main Bitcoin blockchain (Layer 1) to improve functionality and scalability. These protocols expand functionality, making it capable of supporting complex systems and addressing the scalability and efficiency issues in Layer 1. The Bitcoin Layer 2 solutions handle transactions, resolve technical challenges, reduce load, increase efficiency, and make Bitcoin more than a store of value.

The on-chain transactions are transactions that happen directly on the Bitcoin blockchain. These transactions are slower and more expensive than Layer 2 transactions. The Layer 2 solutions offer alternatives to cheaper, faster, and more scalable transactions to the on-chain transactions. While on-chain transactions are fundamental to the Bitcoin blockchain operations, Layer 2 enhances the usability and utility of Bitcoin as a digital currency and payment system.

With the increasing number of users, there’s a need to expand the Bitcoin network. The present infrastructure is limited and incapable of handling a large number of transactions in a short amount of time and at a fast rate, hence the need to scale the network to accommodate the growing users on the network.

State Channels

State channels facilitate multiple off-chain transactions between two or more parties. Recording microtransactions can slow down and increase the load on the Bitcoin blockchain, hence, state channels ensure that only the first and last transactions are recorded in the Bitcoin blockchain.

Users can establish end-to-end encrypted channels to perform multiple transactions without broadcasting each to the main blockchain. State channels reduce congestion, increase scalability, and ensure reduced fees.

The Lightning Network is a typical example and can perform more transactions through smart contract applications. The Lightning Network uses the revocable sequence maturity contract (RSMC) and hashed time lock contract (HTLC) to resolve confirmation of off-chain transactions and payment channel issues.

Sidechain

Sidechains are independent blockchains that allow users to transfer assets (bitcoins) from the parent blockchain to the sidechain. When transferred to the sidechain, these assets (bitcoins) can now be used for smart contracts, token issuance, or implementing new consensus mechanisms.

Sidechains verify information on the Bitcoin main blockchain and carry out subsequent executions. A two-way peg mechanism such as a centralized exchange links the sidechains and the Bitcoin blockchain.

Rollup

Rollups are a scaling solution that moves multiple off-chain transactions from the main Bitcoin blockchain to a separate network, processes them, and submits a single compressed transaction on-chain. Rollups ensure that the Bitcoin blockchain doesn’t process thousands of transactions but technically processes one transaction.

Rollups reduce the load on the Bitcoin blockchain, enabling faster and more cost-effective transactions. The common types of Rollups are optimistic rollups, zero-knowledge rollups (ZK-Rollups), and sovereign rollups.

Lightning Network

Lightning Network is the most prominent Layer 2 solution for Bitcoin designed to enhance the scalability limitations of Bitcoin blockchain. The Lightning Network facilitates off-chain microtransactions and reduces network congestion. Lightning Network establishes a peer-to-peer channel, enabling the conduct of multiple transactions off-chain, this results in minimal fees and fast transactions. The transactions are not recorded immediately, the first and last transactions are later settled and recorded on the Bitcoin blockchain. The number of transactions within the first and last transactions are done off-chain.

Rootstock

Rootstock (RSK) is a Layer 2 solution that enhances faster and cheaper transactions. Rootstock allows Bitcoin to be sent to its network, which turns it into a Smart Bitcoin living in Rootstock (RBTC). This RBTC can also be sent back to the Bitcoin chain which is known as a sidechain. Rootstock uses Ethereum Virtual Machine (EVM) to run smart contracts. Rootstock uses a merge-mining mechanism, where miners can mine Bitcoin and Rootstock blocks simultaneously.

Dovi

Dovi enhances Bitcoin security with decentralized multi-signature transactions. Dovi emphasizes efficient and discreet transactions, minimizing transaction costs and enhancing scalability. Dovi focuses on client-side verification and off-chain processing with safer mechanisms.

Stacks

Stacks (formerly Blockstack) is a Layer 2 solution that accommodates smart contracts, NFTs, decentralized finance (DeFi), and decentralized apps (DApps) on the Bitcoin blockchain. Stacks ensure fast transactions and high network responsiveness, the security of Bitcoin with 100% Bitcoin finality. Stack uses Proof-of-Transfer (PoX) to settle transactions to Bitcoin.

Liquid Network

Liquid Network is a Bitcoin Layer 2 solution that operates as a sidechain to the Bitcoin blockchain. Liquid Network enables the issuance of security tokens and other digital assets. Liquid Network allows for faster and more confidential settlements.

Bitcoin Virtual Machine (BVM)

The introduction of the Bitcoin Virtual Machine (BVM) ensures that Layer 2 solutions are more robust and scalable. The BVM is similar to the EVM which helps users deploy smart contracts and DApps on the Bitcoin blockchain. BVM takes computation off-chain with an on-chain fraud-proving mechanism. The BVM platform allows users to start their networks on Bitcoin. The BVM will release the Truly Open AI platform that lets users create artificial intelligence (AI) models on the Bitcoin Network.

BEVM

BEVM is the first fully decentralized EVM-compatible Layer 2 solution for Bitcoin, using BTC as gas. BEVM allows solutions run in the Ethereum ecosystem to operate on Bitcoin Layer 2. Through the POS consensus of Taproot threshold contract, BEVM enjoys a robust interaction with Bitcoin, paving the way for enhanced scalability in the blockchain landscape.

CITREA

Citrea introduces Bitcoin’s first ZK rollup, ensuring the verification of all on-chain transactions and data accessibility throughout the network, making it possible to build everything on the Bitcoin blockchain. Citrea aims to provide a modular ecosystem for Bitcoin, providing developers with a flexible environment to build applications on the Bitcoin network and securely scale Bitcoin without the need for trust.

• Layer 2 solutions like the Lightning Network aim to increase the scalability of Bitcoin transactions by enabling off-chain transactions at the cost of decentralization. The transactions on the Lightning Network are not directly settled on the Bitcoin blockchain but through payment channels.
• The speed of Layer 2 transactions may come at the expense of security. The security of funds in payment channels depends on the integrity of the participating nodes and the underlying smart contracts.
• Layer 2 adds complexity to the Bitcoin network, affecting user-friendliness as it’ll be difficult for non-technical users to understand.
• Users must understand and evaluate trust models such as trusting intermediaries in payment channels and relying on certain security mechanisms to assess the risks of using Layer 2 solutions.

The current landscape of Bitcoin Layer 2 ensures robust scalability, efficiency, cheap transaction fees, and fast transactions.

Bitcoin Layer 2 is essential in the evolution of the Bitcoin network, offering solutions to scalability, congestion, and efficiency. With technological advancements, the Bitcoin Layer 2 focuses on increasing scalability, security, and decentralization, ensuring seamless integration and enhancing user experience. The growth of Bitcoin lies in the introduction of more sophisticated solutions introduced to Bitcoin Layer 2.