20.12.2024
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Blockchains scale in layers, and Bitcoin is no different. This is why Bitcoin layers have become integral to solving Bitcoin’s scalability challenges.
Read on to learn about Bitcoin layers and their role in the Bitcoin ecosystem, and discover a list of the leading Bitcoin layers you should know about.
Bitcoin layers are protocols built on top of the Bitcoin blockchain to enhance the scalability and utility of Bitcoin without altering Bitcoin’s code. Instead, these second-layer protocols leverage technologies, including sidechains, rollups, and state channels, to improve network efficiency by processing transactions off-chain, which eventually settle on the base layer and enable the development of new decentralized products and services secured by Bitcoin.
Bitcoin layers are integral components of Bitcoin’s future because they enhance the base layer’s capability to serve more people.
The main goal of Bitcoin layers is to boost scalability. However, they also expand utility, attracting a new customer base to the Bitcoin ecosystem.
Below, we break down these two roles and explain why they are essential.
Bitcoin layers increase scalability by processing transactions off-chain to minimize congestion on the base layer.
This is important because high activity on the mainchain often leads to delayed transactions, forcing users to pay more to incentivize miners to confirm their transactions faster.
Scaling solutions like BitcoinOS move transactions off-chain, where transactions are processed and rolled up into compressed batches before being submitted to the mainchain for final settlement. These transactions occupy less space in a block, helping reduce congestion and lower transaction fees.
Bitcoin protocol layers also enhance scalability by improving transaction speeds, increasing transaction throughput, and improving programmability via complex smart contracts.
Bitcoin scaling is crucial because it can significantly boost efficiency, creating an ecosystem capable of potentially serving billions of people. Therefore, secondary protocols will play an essential role in helping Bitcoin achieve mass adoption in the future.
Bitcoin layers also introduce new use cases that expand the utility of Bitcoin.
For instance, secondary layers focused on dApp development draw developers to the Bitcoin ecosystem, enabling them to build DeFi protocols, NFT marketplaces, and more, all secured by Bitcoin. As a result, these dapps bring a larger user base (back) to the Bitcoin ecosystem from other blockchain communities.
By expanding utility, Bitcoin layers can help Bitcoin become the base infrastructure of a shared digital economy built on decentralized protocols secured by Bitcoin’s security.
Now, let’s take a look at some of the most popular off-chain protocols in the market.
BitcoinOS is a superchain of interoperable rollups and near-trustless BTC rails that help to scale Bitcoin by improving efficiency and programmability.
Rollups are scaling solutions that process transactions off-chain, reducing congestion on the base layer.
BitcoinOS was built because there are currently no trustless rails for bridging BTC between the base layer and secondary protocols, and dapps built on Bitcoin layers aren’t interoperable.
The BitcoinOS protocol solves these challenges by providing near-trustless Bitcoin rails where users can transfer BTC from the mainchain to the rollup without relying on a trusted group of people.
Furthermore, BitcoinOS introduces interoperability and composability to permit dapps on any rollup to communicate and be interconnected with each other. This is crucial in creating a shared economy within the Bitcoin ecosystem.
The protocol also enhances Bitcoin’s programmability with EVM-compatible smart contracts to support the development of a wide range of dapps.
BitcoinOS doesn’t have a native asset. That means rollup transaction costs are paid in BTC.
The Lightning Network is a secondary protocol layer that leverages payment channels to scale Bitcoin. Using off-chain, peer-to-peer payment channels, two parties can transact with each other near-instantly and at an incredibly low cost.
Only the opening and closing balances of a payment channel are confirmed on-chain. All the other transactions in between are near-instant, as on-chain confirmation is not required. Users open or close payment channels by sending a commitment transaction to the base layer.
The smart contracts used in Lightning are known as Hashed Timelock Contracts (HTLCs). They create deadlines and execute automatically when parties meet the stipulated conditions.
While Lightning does offer faster transaction speeds than Bitcoin Layer 1, it has not yet reached the point where it is processing millions of transactions per second but has established itself as one of the most popular secondary Bitcoin layer protocols.
Lightning doesn’t have a native asset since all transactions are made in BTC. By utilizing Bitcoin’s smallest unit, Lightning allows users to make near-instant micropayments.
The Lightning Network brings the following use cases to Bitcoin:
Liquid offers asset issuance and fast and confidential transactions. As a sidechain, the Liquid Network is independent and only connects to the base layer via a two-way peg. It also has its own native token and consensus mechanism.
Liquid allows for faster transactions of about two minutes compared to Bitcoin’s average settlement time of 10 minutes. Users can access fast settlements by moving BTC to Liquid through the two-way peg system. During this process (peg-in transaction), BTC is locked on the base layer, and an equal amount of Liquid Bitcoin (L-BTC) is minted and issued on the sidechain.
The sidechain keeps a record of all off-chain transactions, which aren’t published to the base layer. After a user completes their Liquid transactions, they can return to the parent chain (base layer) through an on-chain peg-out transaction. This process burns L-BTC tokens and releases the locked BTC.
Liquid relies on a trusted group of people known as functionaries to propose blocks and confirm transactions on Liquid. Functionaries also secure the locked BTC in a multisig wallet.
L-BTC is Liquid’s native asset. The token is pegged to BTC at a ratio of 1:1. Besides facilitating the two-way peg, L-BTC can be used to swap assets issued on the Liquid sidechain.
Rootstock, or RSK, is a sidechain that links to the Bitcoin base layer through a two-way peg and merged mining. It scales Bitcoin by enabling off-chain transactions and EVM-compatible smart contracts.
The EVM compatibility of Rootstock smart contracts enables developers to run Ethereum smart contracts on the sidechain.
Rootstock’s two-way peg is facilitated by Smart Bitcoin (rBTC), which is backed by BTC at a ratio of 1:1. During a two-way peg, BTC is locked in a multisig wallet, triggering a payment verification proof to be sent to Rootstock’s bridge smart contract. The smart contract then releases an equivalent amount of rBTC.
To return to the mainchain, a user sends rBTC to the bridge address. This initiates a transaction that functionaries must sign to release BTC to the user’s Bitcoin wallet.
Rootstock also taps into Bitcoin’s security through merged mining. This process allows Bitcoin miners to secure Rootstock with the same resources they use to mine BTC in exchange for rewards. The goal of merged mining is to secure Rootstock and not to generate new coins.
Rootstock’s native asset is rBTC, which is tethered to BTC at a ratio of 1:1. The sidechain uses this token to bridge funds from the parent chain. Besides facilitating two-way pegs, users pay gas fees in rBTC when interacting with smart contracts on Rootstock.
Stacks is a Bitcoin layer scaling the blockchain by improving programmability. It does this by enabling fully expressive smart contracts through a programming language known as Clarity.
Stacks connects to the Bitcoin base layer through the Proof-of-Transfer (PoX) mining mechanism, where Bitcoin is used to secure the Stacks network. The PoX mining mechanism also involves a group of participants called Stackers, who secure the Bitcoin layer by locking their STX tokens for a certain period in exchange for BTC rewards.
Stacks plans on introducing a two-way-pegged token known as sBTC through the Nakamoto upgrade scheduled for Q1/2024. The token will allow the secondary protocol to use BTC within its economy.
STX is the native asset of the Stacks network. It is minted through the PoX mining mechanism where Stack miners spend BTC and earn STX. STX tokens are also used to secure the network through stacking, a process of locking up STX tokens for a period of time.
Drivechain is a scaling technology for sidechains proposed through BIP 300 and 301. It scales Bitcoin by moving transactions off-chain to take the pressure off the base layer.
Drivechain can power multiple sidechains featuring two-way-peg systems. These systems will allow users to “transfer” funds to and from the base layer. However, rather than giving custody of the locked BTC to a federation, Drivechains will assign this role to Bitcoin miners.
Drivechains are somewhat similar to Rootstock because they use merged mining. However, the proposed variant of merged mining is known as blind merged mining. It differs from traditional merged mining because miners don’t have to run the sidechain’s full node and can receive rewards in BTC.
Besides scaling Bitcoin, drivechains can allow developers to convert worthwhile altcoins into sidechains and potentially make the sidechain version superior to the original altcoin, thanks to Bitcoin’s robust security.
Drivechains don’t have a native asset. Instead, they utilize the asset from the parent chain, which could, for example, be BTC.
The Taproot Assets Protocol (TAP) is focused on asset issuance, allowing users to create new assets by attaching metadata (e.g., token name, token supply, and image of the underlying asset) to Bitcoin Unspent Transaction Outputs (UTXOs).
This metadata is stored off-chain to lessen the on-chain footprint. A UTXO is the balance left in a wallet after a Bitcoin transaction is executed.
Taproot Assets leverages the 2021 Taproot upgrade, which improves how digital signatures and public keys are stored in multisig transactions. The upgrade also reduces transaction fees and enhances data storage by introducing Merkle Trees, which condense complex transactions into a single hash.
Taproot Assets is compatible with the Lightning Network, allowing users to deposit funds into payment channels and make near-instant and low-cost micropayments. Also, users can deposit issued Taproot Assets in Lightning channels and swap them for BTC.
Taproot Assets doesn’t have a native asset. It uses Bitcoin transactions to mint new tokens, so fees are paid in BTC.
Fast asset transfers: Taproot Assets’ Lightning compatibility can enable users to quickly transfer issued assets among themselves.
Let’s take a look at the opportunities and challenges of Bitcoin off-chain protocols.
Some two-way-peg systems rely on trusted parties, creating room for censorship: Bitcoin bridges enabling the transfer from the base layer to a second-layer protocol often require a level of trust for the involved parties.
BitcoinOS will revolutionize the Bitcoin ecosystem by scalable smart layer on which future digital economies can be built by enabling interoperability and composability among decentralized applications (dapps) secured by Bitcoin.
Furthermore, BitcoinOS will introduce near-trustless Bitcoin rails that don’t rely on a group of trusted intermediaries to bridge BTC from the base layer to the rollups, making it a more secure and censorship-resistant alternative to many of its peers.
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Bitcoin Layer 1 is the main layer of Bitcoin. It consists of a distributed ledger, a large network of nodes, a consensus mechanism, and a native asset. A Layer 1 blockchain is independent and doesn’t rely on another chain to operate. Layer 2 networks are built on Layer 1 blockchains and depend on the base layer to a certain degree to operate.
The layers on top of the Bitcoin protocol are referred to as Bitcoin layers. They are built to scale Bitcoin Layer 1 and bring new utility to the Bitcoin ecosystem. Bitcoin layers scale the network by processing transactions off-chain. While all Bitcoin layers aim to scale Bitcoin, they are built using different technological approaches. Also, some Bitcoin layers may focus on improving programmability, while others aim to enhance transaction efficiency.
BitcoinOS is arguably the best Bitcoin layer because it not only helps to scale Bitcoin but also makes Bitcoin dapps interoperable and composable, enabling the creation of a shared digital economy that is different from the siloed environment of other Bitcoin layers with dApp support.
The BitcoinOS layer uses rollups, which are a powerful scaling solution that processes and batches transactions off-chain before submitting the batched transactions to the mainchain for final settlement.
What’s more, BitcoinOS uses near-trustless rails to transfer bitcoin, making it a more secure alternative to other Bitcoin layers.
