Basic Knowledge System of Bitcoin Layer 2 Network

The rise of Bitcoin inscriptions has brought new vitality to the Bitcoin ecosystem, attracting more people to pay attention to Bitcoin again. Some believe this has opened the Pandora's box of the Bitcoin ecosystem. Among the numerous technological developments in the Bitcoin ecosystem, layer two construction is of utmost importance. This article aims to summarize the basic knowledge of Bitcoin layer two, hoping to spark ideas and attract more people to improve related thoughts and promote the development of this field.

The blockchain world begins with Bitcoin and ends with the Bitcoin ecosystem. Ethereum can also be seen as an exploration of a sidechain technology for Bitcoin.

1. The mission to be accomplished by Layer 2

To understand the fundamental issues that need to be addressed in the construction of Bitcoin's second layer, we will start with the basic characteristics of blockchain systems.

1.1 Basic Characteristics and Requirements of Blockchain

Blockchain can be seen as a "world computer". We understand the various characteristics of blockchain from this perspective:

• Open and transparent: The characteristics of data storage and execution instructions in blockchain are also internal requirements for distributed node collaboration.

• Decentralization: The architectural feature of blockchain determines the system's fault tolerance.

• Security: Guaranteed by cryptographic technology and decentralized architecture.

• Computing power: Generally measured by Turing completeness.

• Performance: Typically measured by TPS(, the number of transactions processed per second is ).

• Storage: The ability to record data. Currently mainly stored within the blockchain.

• Privacy: Protecting data permissions during computation and storage.

There is an impossible triangle between these characteristics, which requires trade-offs. For example, the DSS conjecture: decentralization, security, and scalability cannot all be achieved simultaneously.

1.2 The Role of Layer Two Construction

The main purpose of Layer 2 construction is to:

1. Increase Capacity
2. Reduce costs
3. Custom Features

Layer 2 may reduce or alter certain features in exchange for enhancements in other attributes. For example:

• Reduce the level of decentralization to improve performance
• Change the settlement method to increase throughput
• Enhancing privacy and censorship resistance, but increasing implementation difficulty

1.3 Why do hierarchical design?

Layered design is an effective method for handling complex systems, which can improve the modularity, maintainability, and scalability of the system. The advantages of layering include:

• Each layer is independent, making it easy to design and modify.
• Good flexibility, changes in one layer do not affect other layers.
• The structure is modular, and each layer can adopt the most suitable technology.
• Easy to implement and maintain
• Promote standardization

2. Several construction ideas for Bitcoin Layer 2

There are three main routes for Bitcoin's second layer:

1. Chain-based expansion route: a layer similar to EVM, is the blockchain structure.
2. Distributed-based route: represented by the Lightning Network, is a distributed structure.
3. Route based on centralized system: represented by centralized index, is a centralized structure.

Currently, blockchain-based expansion is relatively easier to achieve, with more cases available. The distributed route is more challenging and develops more slowly. The centralized route is controversial, but it can also expand the capacity of a layer of the network to a certain extent.

2.1 Chain-based Layer Two Construction

In the early days, there were explorations like colored coins and Mastercoin. Ethereum can also be seen as an improved exploration of Bitcoin. Currently, it mainly includes two categories:

• EVM-compatible account model: such as Ethereum, Polygon, etc.
• UTXO model: such as CKB, Chia, etc.

This solution retains most of the fundamental characteristics of blockchain and addresses the Turing completeness issue, while also significantly reducing transaction fees. However, it is still subject to the inherent limitations of blockchain, and performance improvements are limited.

2.2 Layer 2 Construction Based on Distributed Systems

In this type of solution, the second layer structure is no longer a blockchain, but a distributed system based on Channels. A typical representative is the Lightning Network.

Divided into two categories:

1. Only complete value transfer, such as the Lightning Network.
2. Complete value transfer and Turing complete computation, such as RGB

The advantages of this solution are greater decentralization, good scalability, and strong privacy. The disadvantages are the complexity of technical implementation and lack of experience in value transmission.

2.3 Layer 2 Construction Based on Centralized Systems

Such as centralized indexing structures like Ordinals. This solution, although controversial, can also expand the capabilities of a layer network to a certain extent.

The advantages are mature technology and good performance. The disadvantages are high centralization, and the blockchain characteristics mainly rely on a single layer of network.

3. Related Matters of Layer 2 Construction

3.1 Connection Technologies Between Layer 1 and Layer 2

Common connection technologies include:

• Cross-chain technology
• Isolation Verification Technology
• Sidechain technology
• State Channel technology
• Plasma technology

Different connection technologies are suitable for different layer two structures. The metrics for measuring connection technologies include: whether layer one can validate layer two transactions, whether assets can escape during a layer two collapse, and whether it will reduce certain characteristics of the system, etc.

3.2 Referring to the von Neumann architecture to view the development of blockchain

Blockchain, as the "world computer," can be compared to the traditional von Neumann architecture of computers:

• CPU( processor and controller) correspond to the layer one and layer two computing power expansion
• The expansion of storage corresponds to on-chain storage space.
• Input and output devices correspond to oracles
• Special chains and functions similar to dedicated components such as GPUs.
• On-chain applications are similar to the early stage when operating systems and application software had not yet been separated.

Blockchain applications will gradually expand from the financial sector to broader fields.

4. Current status of Bitcoin's Layer 2 development

4.1 Running Bitcoin Layer 2 Projects

1. Lightning Network: A distributed layer two solution that provides fast and low-cost transactions.

2. Liquid: A blockchain-based sidechain solution that offers fast and private transactions.

3. Rootstock(RSK): A blockchain-based smart contract platform that offers functionality similar to Ethereum.

4. RGB: A second layer built on distributed systems and Turing completeness, supporting complex smart contracts.

5. Stacks: A decentralized computing platform that provides identity verification, storage, and smart contract functionalities.

6. Other new projects: such as B² Network, BEVM, Dovi, Map Protocol, etc., mainly based on layer two construction on the chain.

4.2 Analysis of the Development of Bitcoin Layer 2 Construction

1. Existing projects: Need to fully leverage accumulated advantages to attract more applications.

2. New projects: can leverage latecomer advantages to quickly address lightweight demands.

3. No accumulation projects: Users and funds can be accumulated through community consensus.

4. Upper-layer applications: With the development of Layer 2, expanding from financial applications to more fields.

The era of Web 3.0 has just begun, and continuous exploration and construction are needed. By grasping new technologies and developments, the teams that constantly adjust and participate in construction will eventually achieve results in certain fields.