Basics of Bitcoin Layer 2 Network

The rise of Bitcoin inscriptions has brought new vitality to the Bitcoin ecosystem, attracting more attention to Bitcoin. In the technological development of the Bitcoin ecosystem, layer two construction is of utmost importance. This article summarizes the basic knowledge of Bitcoin layer two, hoping to inspire further discussion and promote the development of this field.

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

1. The mission to be accomplished by the second layer

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

1.1 The Basic Characteristics and Requirements of Blockchain

The blockchain can be seen as a "world computer." From this perspective, we can understand the various characteristics of blockchain:

• Open and transparent: This is a characteristic of blockchain's data storage and execution of instructions, as well as an internal demand feature that requires the participation of numerous distributed nodes globally in computation.

• Decentralization: This is an architectural feature of blockchain, where the degree of decentralization and fault tolerance is supported by the Byzantine Generals' Problem. The degree of decentralization is an important indicator of blockchain security.

• Security: Composed of internal demands arising from architectural features and external demands required by users. Guaranteed by cryptographic technology at the micro level and by decentralized architecture at the macro level.

• Computing power: A major function of blockchain is computing power. It is generally assessed by whether it is Turing complete.

• Performance: Under the same computing power, performance is another key capability of blockchain. It is generally measured by TPS.

• Storage: Blockchain has the capability to store data. Currently, data is primarily stored within blocks, while more specialized storage on off-chain is still under development.

• Privacy: Requires maintaining the scope of permissions for data producers and users during computation and storage processes. This is fundamentally driven by external demands from users.

Most of these characteristics are constrained by the impossible triangle, such as the DSS conjecture ( decentralization, security, scalability ) and the CAP theorem ( consistency, availability, partition tolerance ).

1.2 The Role of Layer 2 Construction

The construction of the second layer aims to address the shortcomings of the first layer system and to accomplish tasks that are not suitable for the first layer system. The main points are:

• Expand basic capabilities: openness and transparency, decentralization, security, computing power, performance, storage, privacy, etc.
• Reduce costs: The comprehensive cost of executing transactions in a single-layer network is usually high.
• Custom features: Adjusting the implementation level of various features for certain applications.

Summarized in three dimensions: increasing capacity, reducing costs, and customizing features.

1.3 Why do layered design?

Layered design is a means and methodology for handling complex systems. By dividing multiple hierarchical structures and defining the relationships and functions of each layer, it achieves modularity, maintainability, and scalability of the system.

Advantages of layered design:

1. Each layer is independent and does not need to know the implementation details of the lower layer.
2. Good flexibility, changes in one layer do not affect other layers.
3. The structure is modular, and each layer can adopt the most suitable technology.
4. Easy to implement and maintain
5. Promote standardization

Layered modular design is an effective method in the tech field for handling large-scale functions that require collaboration among multiple people and continuous project improvements.

2. Several Construction Ideas for Bitcoin Layer 2

There are three main routes for the second layer construction of Bitcoin:

1. Chain-based expansion route: Layer 2 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 systems: represented by centralized indexing, is a centralized structure.

Which solution is better? The total locked value (TVL) can be used as a measure, with solutions that have a higher TVL being superior. As time and technology evolve, the optimal solution will change.

The definition of the second-layer network for Bitcoin: As long as it relies on the Bitcoin network, establishes technical connections, and has certain features that are superior to the first-layer network of Bitcoin, it is considered a construction of the second-layer network for Bitcoin.

2.1 Layer Two Construction Based on Blockchain

Early Bitcoin imitation chains have explored various avenues, such as "Colorcoin", "MasterCoin", etc.; various scaling Bitcoin imitation chains, such as BCH, BSV, BTG; as well as various sidechain technologies are all based on chain expansion construction cases.

Ethereum can also be seen as an exploration of improvements based on Bitcoin. The improvements of Ethereum compared to Bitcoin and the development of Ethereum Layer 2 provide a reference for the development of Bitcoin-based Layer 2 networks.

The layer two construction based on the chain in Bitcoin mainly includes two types of chains:

• EVM-compatible account model: such as Ethereum, Polygon, BSC, Arbitrum, etc.
• Bitcoin-like UTXO model: such as CKB(Nervos), Chia, etc.

Advantages of Layer 2 construction based on blockchain:

• Maintain most of the fundamental characteristics of the blockchain
• Solve the Turing completeness problem
• Significantly reduce transaction fees
• Expand a layer of network capability to a certain extent.
• The technical implementation is relatively easy, with more exploration cases.
• The migration of upper-layer applications is convenient and can be implemented quickly.

Disadvantages:

• Limited by blockchain constraints, performance improvements are limited.
• May reduce the level of decentralization or security

Judgment: There may be numerous projects based on a chain structure on the second layer, with one or more second layers existing in various vertical fields to meet different application needs. Its value is determined by the number of upper layer applications and the total value.

2.2 Layer Two Construction Based on Distributed Systems

Some Layer 2 constructions are based on distributed systems, where the structure and framework are not blockchain-based but rather a distributed system based on Channels. The Lightning Network is a typical representative.

The second layer construction of distributed systems is 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

Advantages of distributed layer two construction:

• The system is more decentralized.
• Can accommodate countless nodes
• Better privacy and censorship resistance
• It has unlimited scalability and theoretically great performance.

Disadvantages:

• The technical implementation is complex
• There is a lack of engineering implementation experience and infrastructure in value transfer.
• Achieving a Turing complete system is a huge challenge.

Judgment: Based on the distributed structure of the Channel, there may only be a few parallel projects in the second layer, reason:

1. The system has unlimited scalability
2. The technical difficulty of implementation is high.

Such systems require a more open design and concept that can accommodate more people and teams to participate.

2.3 Layer 2 Construction Based on Centralized Systems

Centralized index structures like Ordinals, or the indexers of certain functional nodes, are also a kind of Layer 2 construction idea.

This construction approach is less recognized, as the second layer is too centralized and has very limited scalability for the first layer network. The various fundamental characteristics of the second layer's centralized structure depend on the first layer network, with the second layer only performing simple calculations and statistical functions.

Advantages:

• Centralized systems are very mature
• There are numerous available use cases and optimization solutions.
• Fully Turing complete and exceptional performance

Disadvantages:

• Extremely centralized layer two
• All blockchain basic features rely on a layer of network

Judgment: Layer 2 based on centralized structures may only have a few projects, or may even exist only temporarily. After the distributed structure based on chain structures and Channels matures, most Layer 2 constructions based on centralized structures may disappear or only remain for a few special scenarios.

3. Related Matters of Layer 2 Construction

3.1 Connection technology between Layer 1 and Layer 2

The technological development of Bitcoin itself, such as modifications to OP_RETURN, Taproot, Schnorr signatures, MAST, Tapscript, etc., should be designed for the purpose of connecting Layer 1 and Layer 2. Common technologies for connecting Layer 1 and Layer 2 networks of blockchain include:

• Cross-chain technology: Achieve interoperability between different blockchains, asset cross-chain transfer and interaction.
• Layered Validation Technology: Isolates a layer of transaction data to be processed by a second layer validation.
• Sidechain technology: Connects the main chain and side chains to achieve data transmission.
• State Channel technology: Establish communication channels off-chain to increase transaction speed and throughput.
• Plasma technology: Processes transaction data in shards on one layer, validated by a second layer.

Examine the indicators of Layer 1 and Layer 2 connectivity technology:

• Can layer one verify transactions on layer two?
• Can first-layer assets successfully escape when second-layer collapses?
• Will the connection technology reduce certain features of the system?

3.2 Referencing the von Neumann architecture to view blockchain development

The "world computer" of blockchain can be compared and analyzed with the von Neumann architecture of traditional computers. The five major components of a von Neumann architecture computer are: arithmetic logic unit, control unit, memory, input devices, and output devices. Similar components also exist in blockchain systems.

A few comparisons:

1. The expansion of CPU is similar to the expansion of layer one and layer two computing power and throughput.
2. Memory expansion will move from competitive chains to using real blockchain storage.
3. Input and output devices are oracles in blockchain systems.
4. Some special chains and functions are similar to traditional computer GPUs, dedicated device cards, etc.
5. On-chain applications and higher-level applications are similar to the stage where traditional computers have not yet distinguished between operating systems and application software.
6. Blockchain applications will expand from early financial applications to broader applications.

4. Current Bitcoin Layer 2 Development Status

4.1 Already operational Bitcoin layer two projects

1. 闪电网络(Lightning Network)

• Distributed Layer 2 Construction
• Proposed in 2015, fully implemented in 2018
• Features: Fast, Low cost, Scalable
• Achieving off-chain transactions through payment channels, significantly reducing confirmation time and costs.
• Facing challenges such as network stability and routing algorithms

2. Liquid

• Layer 2 construction based on the chain
• Sidechain solution launched by Blockstream in 2015
• Features: Fast transaction confirmation ( 2 minutes ), transaction privacy, high throughput
• Use Confidential Transactions technology to hide transaction amounts
• Supports a large number of parallel transactions using Federated Peg technology

3. Rootstock(RSK)

• Layer 2 construction based on the chain
• Proposed in 2015, officially launched in 2018
• Features: Bi-directional pegging with Bitcoin, supports smart contracts
• Provide Bitcoin with Ethereum-like functionality
• Development is relatively slow, but it has the potential to become an important smart contract platform.

4. RGB

• Based on distributed + Turing complete layer two construction
• Originated in 2016, developed by the LNP/BP Standards Association
• Features: Scalable, Confidential, Decentralized protocol without the need for introducing tokens
• Adopt client verification and one-time sealing concept
• Executable token issuance, NFT minting, DeFi, DAO and other complex smart contracts

5. Stacks

• Layer 2 construction based on the chain
• Proposed in 2013, ICO conducted in 2017
• Features: Provides decentralized identity verification, storage, and smart contract functionalities.
• Adopting the "Stacking" consensus mechanism
• Has become one of the important platforms in the field of decentralized applications.

6. Other Emerging Projects

• B² Network: Developed based on ZK-Rollup, compatible with EVM
• BEVM: Decentralized Bitcoin L2 compatible with EVM
• Dovi: Bitcoin Layer2 compatible with EVM smart contracts
• Map Protocol: Focused on cross-chain protocol
• Merlin Chain: Integrates ZK-Rollup networks, decentralized oracles, and on-chain BTC anti-fraud modules.
• Bison: Bitcoin's native zk-rollup

4.2 Bit