To address Bitcoin’s scalability challenges, an increasing number of Bitcoin Layer 2 protocols are emerging as developers seek to scale Bitcoin to make it ready for mass adoption.
Read on to learn about Bitcoin Layer 2 solutions, the technology they use, the way they impact Bitcoin, and the latest entrant in the space.
The Bitcoin scalability problem refers to the blockchain’s limited capacity to process a high number of transactions at low cost due to the network’s strong emphasis on security and decentralization and its limited scripting language that only supports simple smart contracts.
On average, the Bitcoin blockchain processes around five transactions per second, although the number could increase or decrease depending on the degree of network activity.
The transaction throughput constraint is a result of Bitcoin’s limited block size and block time. Satoshi Nakamoto designed the blockchain to have a limited block size of 1 MB. The block size was later expanded to a maximum of 4 MB through the 2017 SegWit upgrade, although blocks under SegWit are typically around 2 MB.
In addition to the block size, Bitcoin’s average block time of ten minutes also limits how fast the blockchain can process transactions.
Now, these limitations are, in fact, beneficial to the Bitcoin blockchain because they prevent it from growing in size too fast, which can lead to the centralization of nodes. Furthermore, the block size restriction is an anti-spam measure that prevents anyone from spamming the network with artificially large blocks containing fake transactions.
The Bitcoin scalability problem is also caused by the blockchain’s simple scripting language that only supports simple smart contracts. That means building decentralized applications (dApps) on Bitcoin is difficult, as they require a more complex programming language.
This limits Bitcoin as an infrastructure on which to build new financial products and services. However, some in the Bitcoin community actually view it as a strength, ensuring the blockchain remains highly secure, decentralized, and stable. The Bitcoin network has recorded an uptime of 100% in the last ten years.
So, while Bitcoin developers could hypothetically implement more upgrades to enable a higher on-chain throughput and more flexibility on Bitcoin Layer 1, they understand the importance of maintaining the core integrity of the blockchain. As a result, only a few significant alterations have been made, and scaling solutions are built on top of the Bitcoin blockchain as Layer 2 protocols.
A Bitcoin Layer 2 (L2) is a secondary protocol built on top of Bitcoin to address Bitcoin’s scalability challenges and enhance the network’s utility.
Bitcoin Layer 2 scaling solutions primarily aim to improve the efficiency of the base layer by moving transactions off-chain for processing. The Layer 2 protocol then sends the transactions to the base layer, where they undergo the final settlement process.
In addition to enhancing the transaction throughput of the Bitcoin network, Layer 2 protocols also expand Bitcoin’s utility and functionality by introducing complex smart contracts that support dApp development or enable asset issuance.
Layer 2 scaling solutions allow Bitcoin to enjoy increased scalability and utility without negatively affecting its high level of decentralization, security, and stability. These factors are what make Bitcoin the reputable and reliable blockchain network it is today.
More specifically, Layer 2 scaling protocols' key impacts on the Bitcoin network are:
By solving the Bitcoin scalability problem, Layer 2 protocols can help Bitcoin potentially serve billions of people while providing a diverse ecosystem with a wide range of use cases.
The primary goal of Layer 2 scaling solutions is to solve the Bitcoin scalability problem. However, the underlying technology that each protocol chooses to solve this issue varies.
Here are the three types of technologies Bitcoin Layer 2 projects are using to build scalability solutions.
Sidechains are independent protocols that connect to the parent chain or base layer using a two-way peg. These blockchain networks have separate consensus mechanisms; that is, in their basic form, they don’t rely on Bitcoin’s Proof-of-Work system to process transactions.
Sidechains have their own token, which is pegged to BTC. This token is used in the two-way peg system, permitting the transfer of digital assets between the sidechain and the Layer 1 protocol.
State channels are peer-to-peer protocols that enable parties to transact off-chain and only rely on the base layer for security and final settlement of transactions.
They aim to keep interactions on the main chain as minimal as possible by enabling parties to transact directly with each other via channels, with only the initial and final state being recorded on the main chain, thereby reducing the load on Layer 1.
Rollups are scaling solutions that take transactions away from the base layer and process them off-chain, thereby reducing computational load and enhancing efficiency. They “roll up” (batch) these transactions and send them to the Layer 1 protocol for final settlement.
The two main types of rollups are zero-knowledge (ZK) and optimistic. The difference between the two is in the fraud-proving process.
ZK-rollups use zero-knowledge proofs to determine the accuracy of a batch of transactions, while optimistic rollups assume all the transactions in a rollup are valid. However, it provides a period for anyone to challenge the validity of a transaction.
Sovereign rollups are another category, which don’t rely on a smart contract or settlement layer for verification. Instead, settlement takes place within the rollup itself.
Now, let’s take a look at some of the most promising Layer 2 scaling protocols for Bitcoin.
The Lightning Network (LN) is a Bitcoin Layer 2 protocol that uses payment channels to enable off-chain micropayments. Users can transact as much as they want with each other on these channels without interacting with the main chain.
Only the opening and closing balances of a state channel are recorded on Layer 1. Therefore, all the other transactions in between can be carried out without requiring the base layer to confirm them. This makes payments near-instant and low-cost.
The Lightning Network was proposed by Thaddeus Dryja and Joseph Poon in a 2016 paper.
Liquid, also known as the Liquid Network, is a sidechain focused on enabling asset issuance and fast and confidential transactions on Bitcoin. It was launched in 2018 by Blockstream.
As a sidechain, Liquid has its own consensus model and token. The federated consensus mechanism relies on functionaries to verify transactions, while the L-BTC token allows users to bridge BTC to Liquid.
A peg-in transaction in the two-way peg system entails locking BTC on the base layer and minting an equal amount of Liquid Bitcoin (L-BTC), which is released to the user’s Liquid wallet. Conversely, a peg-out transaction sends L-BTC to a burn address, and BTC is released on Layer 1.
Stacks is a Bitcoin layer built for asset issuance and developing dApps. It leverages a smart contract language called Clarity for creating complex smart contracts. Stacks is connected to Bitcoin through the Proof-of-Transfer (PoX) mining model. PoX requires Stacks miners to spend BTC to secure the Layer 2 protocol.
Muneeb Ali and Ryan Shea rolled out Stacks in 2018. Since then, the project has grown technically and in popularity. It is currently in version 2.1 of development, with plans to launch the Nakamoto Release before the next Bitcoin halving in April 2024.
The Nakamoto Release will also introduce sBTC, a two-way peg token backed by BTC on a ratio of 1:1. sBTC will enable users to bridge BTC from the main chain to Stacks and vice versa.
Launched in 2016 by RSK Labs, Rootstock (RSK) is a sidechain that taps into Bitcoin’s security through merged mining, a process that enables Bitcoin miners to secure RSK with the same resources they use in Bitcoin mining. Presently, 52.4% of Bitcoin’s hash rate is securing RSK.
Rootstock’s two-way peg token is called Smart Bitcoin (rBTC). The token is pegged to BTC at a ratio of 1:1. rBTC enables users to bridge funds between the two layers.
Rootstock also has a virtual machine (VM) that powers smart contracts. The VM is based on Ethereum’s Virtual Machine (EVM), which means Ethereum-based smart contracts can also run on RSK.
The smart contract capabilities of RSK enable developers to build a range of different Bitcoin dApps, which is why we chose RSK as the Layer 2 protocol to build Sovryn on. Today, Sovryn is the largest Bitcoin DeFi protocol in the market, with over $100 million in TVL.
BitcoinOS is a rollup-based smart contract layer built on Bitcoin, which allows developers to create interoperable rollups and applications secured by Bitcoin. BitcoinOS smart contracts will be EVM-compatible.
BitcoinOS was officially announced in January 2024 and is currently being developed by the team behind Sovryn.
As the name suggests, BitcoinOS will be an operating system for Bitcoin to create a shared economy. The Layer 2 protocol will enable interoperability among all the dApps and chains it will host.
While Bitcoin Layer 2 scaling solutions are helping solve Bitcoin’s scalability problem, some challenges still need to be overcome before Layer 2 scaling will succeed in pushing Bitcoin to global mass adoption.
Sovryn will tackle the challenges currently experienced by Bitcoin Layer 2 protocols by building BitcoinOS.
BitcoinOS is a superchain of interoperable Bitcoin rollups with near-trustless BTC rails.
The new smart layer will transform Bitcoin into a scalable, programmable platform on which future digital economies can be built by enabling interoperability and composability among decentralized applications (dApps) secured by Bitcoin.
What’s more, BitcoinOS is revolutionizing Bitcoin Layer 2s with trustless bridging rails, allowing anyone to check the accuracy of validity proofs. These validity proofs will be embedded on the base layer, creating a secure ecosystem to transact in.
Like Bitcoin itself, BitcoinOS is designed to be a tool shared by all.
While the Sovryn community will continue to hold a leading role in making the new Bitcoin layer a reality, BitcoinOS will be a public good that will grow to its full potential through a collaborative effort by attracting an open-source developer community, service providers, and users.
Bitcoin is a Layer 1 (L1) network on which secondary protocols can be built. It has a consensus mechanism, a native cryptocurrency, and a network of participants responsible for validating transactions and securing the blockchain.
As a foundational layer, all Layer 2 transactions settle on Bitcoin. Once recorded on the main chain, transactions cannot be reversed, deleted, or altered.
Sovryn’s BitcoinOS is a Layer 2 solution for Bitcoin that offers transaction efficiency with rollups while also providing an EVM-compatible environment for building dApps.
For the first time, the Bitcoin community will have access to a Layer 2 protocol that allows dApps to communicate seamlessly with each other. Therefore, BitcoinOS will take building on Bitcoin to the next level.
BitcoinOS is currently under development, with the testnet launch scheduled for Q3 2024. The mainnet will ship in Q4 2024.
Layer 1 Bitcoin is the independent base layer blockchain with its own consensus rules and native cryptocurrency. Bitcoin is the most decentralized, secure, stable, and immutable blockchain in the world.
However, Layer 1 Bitcoin is limited in scalability. This is where Layer 2 Bitcoin protocols come into play.
The job of Bitcoin L2s is to solve the Bitcoin scalability problem by enhancing transaction speed and/or introducing complex smart contracts for dApp development. These networks are built on top of Bitcoin and may or may not have their own consensus mechanisms and tokens. Layer 2 networks leverage sidechain, rollup, or state channel technology to scale Bitcoin.