Understanding BTC L2 Network in One Article

Preface

The scalability issues of BTC limit its disruptive potential, making it difficult to become a global payment system. Although innovations like Ordinals and BRC-20 Token have expanded the adoption of BTC, they have also exposed its limitations, putting huge pressure on the Blockchain. As more and more users use BTC, the network can sometimes be overloaded, leading to rising fees and slowing transaction speeds, as BTC's original design only supports seven transactions per second.

To address these issues, L2 (Layer 2) solutions have emerged. They handle transactions off-chain while the underlying layer is responsible for final settlement, accelerating transactions and reducing costs without sacrificing the security of the BTC network. In addition, L2 solutions such as Lighting Network, BEVM, Stacks, BOB, Merlin Chain, etc. also provide new functionalities, such as supporting Smart Contracts, making BTC more efficient, diverse, and scalable to meet the growing demand.

What is BTC L2 network?

Source: Ordinals NFTs X Account

BTC L2 Network is a protocol designed to run on the BTC mainchain. Its main goals are to solve scalability issues, improve transaction speed, and drop the Money Laundering of BTC. In addition to these advantages, some L2 solutions even introduce Smart Contract functionality, expanding the application potential of BTC.

The inherent limitations of the BTC base layer have given rise to BTC L2 solutions. Due to the very low transaction rate per second, BTC is difficult to scale, resulting in network congestion and soaring fees. During busy periods, fees sometimes exceed $120. This makes microtransaction Money Laundering expensive and impractical.

In addition, the underlying layer of BTC lacks the Smart Contract functionality required by Decentralized Finance (DeFi) platforms and Decentralization applications. L2 solutions have dropped the gas fees, accelerated transaction speed, and added new features, thereby addressing these issues and unlocking the untapped potential in the BTC chain.

How Does BTC L2 Solution Work

Source:PrimeXBT

The Block chain network is divided into two key layers: the execution layer responsible for processing transactions, and the consensus layer responsible for verifying and approving these transactions. The BTC L2 solution creates an independent execution layer to process transactions off-chain, and then submits them to the consensus layer of BTC for final Settlement.

Common execution layers include State Channels (such as State Channels used by Lighting Network), allowing multiple off-chain transactions to be conducted, with only the final state recorded on-chain. Sidechains (such as Liquid Network) act as independent Blockchains associated with BTC, providing faster transactions and more functionality. Meanwhile, rollups technology aggregates multiple off-chain transactions into one, providing validity proof encryption for Settlement on-chain in BTC Block.

State Channels

Source: Chainlink

State Channels in Lighting Network, like in State Channels in Lighting Network, allow both parties to exchange BTC off-chain, speeding up transaction speed and reducing costs. By locking BTC in a Multi-signature Address, users can make unlimited off-chain transfers, and the final state will only be recorded on the BTC Block on-chain when the channel is closed.

Sidechain

The BTCSidechain (such as the Liquid network) operates as an independent blockchain, connected to BTC through a "two-way peg". This system allows users to lock BTC on the mainchain and obtain an equivalent amount of Tokens (such as sBTC) on the Sidechain for faster transactions and additional features. A group of validators is responsible for managing and protecting the asset transfer between the two chains, ensuring accuracy and preventing double spending issues. The Sidechain also operates its own Consensus Mechanism, allowing custom block parameters and advanced features such as Smart Contracts and privacy functions, making it more flexible than the BTC mainchain.

Summary (Rollups)

Source: Chainlink

BTC L2 rollups technology executes transactions off the main blockchain, compresses the data, and submits encryption proof to BTC for final Settlement. This reduces the burden on BTC while maintaining its security. Although BTC currently cannot locally verify these rollups, it is exploring methods such as sovereign rollups for data storage using BTC and potential upgrades to BTC scripts. These innovations aim to enhance BTC's scalability and improve transaction processing efficiency.

The best BTC L2 project to know in 2024

When discussing BTC L2 solutions, it is important to note that most L2 projects do not have a forced exit mechanism. In the context of BTC scaling solutions, forced exit refers to the mechanism where users can withdraw funds from L2 solutions, such as sidechains or state channels, even in the event of latency, disputes, or unresponsiveness. This mechanism ensures that users can always retrieve their assets on the BTC mainchain, providing a safeguard against failures or malicious behavior within the L2 system.

Here are some of the most popular Bitcoin L2 solutions, these projects have played a key role in optimizing blockchain transaction throughput, dropping Money Laundering, and promoting adoption:

Lighting Network

Source: Lighting Network

This L2 solution, Lighting Network (LN), enables fast and low-cost transactions off-chain, improving the scalability of Bitcoin (BTC). Users can set up payment channels between each other for countless transactions, and only the opening and closing of the channels will be recorded on the BTC base layer. All intermediate transactions are completed off-chain, bypassing the limitations of the BTC protocol.

Both parties to the transaction must lock a certain amount of BTC to open the payment channel. These BTC will be kept in the channel until it is closed, and the total amount that can be transferred is equal to the amount of BTC promised by both parties. Let's understand this through a simple example:

Assuming Jessica Pearson and Mike Ross want to open a payment channel. Jessica Pearson deposits 10 BTC and Mike Ross deposits 5 BTC. They jointly guarantee to provide 15 BTC and record this initial transaction on the BTC Block on-chain. Once the transaction is completed (which takes about 10 minutes or longer), Jessica Pearson and Mike Ross can trade almost unlimited times at almost zero cost and with ultra-fast speed. The transaction may proceed as follows:

• Jessica Pearson sends 1 BTC to Mike Ross (Jessica: 9 BTC, Mike: 6 BTC)
• Jessica Pearson sends 2 BTC to Mike Ross (Jessica: 7 BTC, Mike: 8 BTC)
• Mike Ross sends 3 BTC to Jessica Pearson (Jessica: 10 BTC, Mike: 5 BTC)
• Mike Ross sent 1 BTC to Jessica Pearson (Jessica: 11 BTC, Mike: 4 BTC)

When either party decides to close the channel, the final balance will be committed to the blockchain. At this point, Jessica gets 11 BTC, while Mike gets 4 BTC.

If Jessica wants to send BTC to Carol but doesn't have a direct channel with Carol, what should she do? Even so, Jessica can still transact through Mike because Mike has a channel open with Carol. Jessica can pass her transaction through Mike, who may charge a small fee for the transfer. This multi-hop approach, similar to the 'Six Degrees of Separation' theory, allows the Lighting Network to enable almost anyone to transact with almost anyone else, creating a powerful and efficient layer for BTC payments.

In addition, with the support of former Twitter CEO Jack Dorsey and integration into platforms like X (formerly Twitter), Lighting Network is quickly gaining mainstream recognition.

BEVM

Source: BEVM

BEVM is a BTC L2 network built on Substrate, fully compatible with Ethereum Virtual Machine (EVM). This integration allows developers and users to seamlessly interact with BEVM through both Ethereum API and Substrate API, greatly enhancing its flexibility. A major highlight of BEVM is its use of the same account system as Ethereum, allowing users to directly interact with BEVM using existing mnemonic phrases and Private Keys (such as those from Ethereum Wallet like Metamask).

Due to the final confirmation of Block taking about 18 seconds (3 Blocks), BEVM provides an efficient and secure trading platform, regardless of the potential Fluctuation in the Proof of Stake (PoS) network. The network also ensures high reliability and speed of transaction confirmation through enhanced finality detection methods, enhancing security. For developers, BEVM is compatible with both Substrate and Ethereum, bringing more tools for Decentralization application development. Whether you prefer to use Substrate-based or Ethereum-based development tools, the BEVM ecosystem offers flexible options to help you easily achieve innovation.

BOB (Build on Bitcoin)

Source: BOB

BOB (Build on Bitcoin, built on BTC) is a groundbreaking hybrid L2 solution that combines the strengths of BTC and the Ethereum network. By integrating the excellent security and liquidity of BTC with the innovative ecosystem of the Ethereum network, BOB bridges the gap between the widespread use of BTC and the thriving development of the Ethereum network. With its Rollup architecture, BOB ensures security while allowing users seamless access to a rich ecosystem of decentralized applications (dApps), stablecoins, Non-fungible Tokens, Decentralized Finance platforms, etc., on the Ethereum network.

The demand for this hybrid approach arises from BTC's dominant position in user base and market capitalization, while its innovation speed is relatively slower compared to ETH. By combining BTC's Proof of Work (PoW) security and ETH's Virtual Machine (EVM), BOB enables developers to build on the largest network of users. At the same time, BTC holders can leverage the innovation of ETH without leaving the BTC ecosystem, providing a win-win solution for users and developers.

With the support of major investors such as Castle Island Ventures, Coinbase Ventures, and Bankless Ventures, BOB will lead a new wave of BTC innovation. It is committed to building a Decentralization rollup ecosystem that can provide both security and flexibility, allowing users to interact with cutting-edge Ethereum tools and various applications while relying on BTC's strong security protection.

BABYLON

Source: Babylon

Babylon is currently developing a secure protocol frontend to protect the world of decentralization using the advantages of Bitcoin. By utilizing Bitcoin's Proof of Work (PoW) for secure timestamps and uncensorable block space, Babylon aims to build a more secure, Bitcoin-centric ecosystem. Its two main protocols, Bitcoin Timestamping and Bitcoin Staking, ensure that data has verifiable timestamps and provide economic security for the decentralized system through trustless stake.

The core of Babylon's innovation is its shared secure protocol, which integrates BTC into other chains, enhancing their ability to resist potential Proof of Stake (PoS) attacks while maintaining the excellent security of BTC. Babylon's partner network is constantly rising, demonstrating its flexibility and making BTC an important pillar of Decentralization security solutions.

Stacks

Source: Stacks

Stacks (formerly known as Blockstack) is a blockchain platform. It supports smart contracts, decentralized finance (DeFi), and decentralized applications (dApps), enhancing the functionality of Bitcoin (BTC). Through its STX token, Stacks directly connects with BTC, ensuring security while introducing features such as microblocks and the Clarity programming language to improve smart contract functionality. With the development of Stacks, it plays a significant role in the blockchain field by expanding the BTC ecosystem through innovative solutions and applications.

梅林链（Merlin Chain）

Source: Merlin Chain

Merlin Chain, developed by Bitmap Tech, is an innovative BTC L2 project that utilizes ZK-Rollup technology to improve the scalability of BTC, allowing for faster and cheaper transactions. Its testnet went live in early 2024, and the Mainnet is also in preparation. Merlin Chain features a Decentralization Oracle Machine network and on-chain BTC fraud proof module to enhance security. Its native token MERL serves as a governance token, supporting compatibility with Ethereum-based dApps, making it a valuable asset in the encryption ecosystem.

Rootstock Infrastructure Framework (RIF)

Source: RIF

Rootstock (RSK), launched in 2018, features the Rootstock Infrastructure Framework (RIF). RIF is a set of open protocols aimed at simplifying the development process of Decentralized Applications (dApps) on the BTC network. RIF combines the security of BTC with compatibility with the Ethereum Virtual Machine (EVM), providing tools for payment, storage, and naming systems to create a more inclusive financial ecosystem. It offers a $2.5 million funding program to support decentralized finance startups, reflecting its commitment to advancing decentralized finance and empowering developers.

Dovi

Source: DOVI

Dovi, launched in 2023, is a community-centric BTC L2 solution. It integrates with EVM, enhances BTC's functionality, and provides fast and low-cost smart contract capabilities. Dovi features security enhancements such as Schnorr signatures and supports multiple asset types. These enable efficient cross-chain interaction and the deployment of dApps similar to ETH on the BTC network. Kucoin Labs' strategic investment further demonstrates Dovi's long-term rise potential and its determination to optimize the user experience of the BTC ecosystem.

CKB blockchain

Source: Nervos Network

Nervos Network is driving CKB to become a unique BTC L2 project, combining Proof of Work (PoW) with the UTXO model to improve scalability and Cross-Chain Interaction functionality. This architecture leverages the security of BTC while supporting decentralized applications and the token economy. CKB, as the native utility token, can be used for Money Laundering, resource management, and governance, thus having strong potential in the future development of the BTC ecosystem.

Liquid Network

Source: Liquid Network

The Liquid Network BTC L2 solution aims to improve transaction speed and privacy. By using Liquid Bitcoin (L-BTC) anchored to BTC at a 1:1 ratio, it enables faster and more confidential transfers. Its main features include Confidential Transaction, which hides asset details, and atomic swaps for seamless asset swap. The network also supports the creation of utility tokens, stablecoins, and non-fungible tokens, further expanding the functionality of BTC. Governed by the Liquid Federation, it caters to the needs of large-scale transactions and is highly suitable for financial institutions and exchanges.

Statechains

Statechains provides a unique BTC scalability solution, allowing ownership of coins to be transferred off-chain. Although still in development, this technology has potential applications in micropayments and privacy protection. Currently in the experimental stage, its true impact will be revealed after real-world testing and implementation.

Compared to other BTC L2 solutions, Statechains focuses more on privacy and efficiency, while the Lighting Network optimizes microtransactions. Stacks and RIF introduce smart contract functionality. Each L2 network meets different needs and balances scalability, decentralization, and security.

Advantages of BTC L2 Solution

• Scalability: BTC L2 solutions significantly improve the network's ability to process more transactions per second. By processing transactions off-chain, they alleviate congestion on the main blockchain, making daily payments and high-frequency trading more efficient.
• Lower Money Laundering: With L2 solution, fewer transactions are recorded on the BTC mainchain, significantly dropping the data storage requirements. This reduces the cost, making microtransaction (such as small payments and remittances) cheaper.
• Faster confirmation time: Unlike the usual 10-minute waiting time on BTC mainchain, the L2 solution can almost achieve instant transaction confirmation. This speed is crucial for real-time transactions such as retail payments and e-commerce, improving the user experience.
• Enhanced Privacy: Some L2 implementations improve transaction privacy and protect user identity and transaction details by using technologies such as onion routing and payment channels [Anonymity].
• Smart Contract Capability: Some L2 networks have introduced Smart Contract functionality, enabling the development of Decentralized Applications (dApps) and Decentralized Finance (DeFi) platforms on BTC, expanding the use case of BTC.
• Security: L2 solutions inherit security from BTC's Proof of Work system to a certain extent. By relying on BTC, they benefit from BTC's secure and decentralized consensus model.

BTC Layer 2 Solution Challenges

• The secure bridge between BTC and the L2 network: One of the main challenges facing the BTC L2 network is the secure bridge. These chain bridges lock assets on the BTC mainchain and on-chain mint equivalent tokens on the L2, but the security risks of this process are obvious. Over time, many hacker attacks and vulnerabilities have caused user losses, so this important area of bridge needs improvement.
• The speed and cost of Settlement on the BTC network: Although L2 solutions process transactions off-chain, the final state must be settled on the BTC mainchain. The speed and cost of these Settlements are key factors affecting overall efficiency. If we hope for the effective scalability of the L2 network, we need to achieve faster and cheaper Settlement processes on the mainchain.
• Maintaining security without direct BTC validation: Unlike Ethereum's L2 network, where validators directly validate L2 transactions, BTC's L2 network does not inherit security directly from the BTC Node. Instead, they rely on their own independent protocol, making it difficult to match the security provided by the BTC mainchain. The L2 network must find a way to maintain strong security while still benefiting from the core advantages of BTC.
• Higher centralization risks: Some L2 solutions require the establishment of payment channels, Relay Nodes, or the operation of independent Consensus Mechanisms. This may lead to power concentration in the hands of a few individuals, raise concerns about centralization, and potentially threaten the Decentralization feature of BTC.
• Technical complexity and integration challenges: integrating L2 solutions with BTC infrastructure faces technical barriers. Ensuring compatibility, maintaining high security standards, and achieving consensus within the network are major challenges.

To promote wider adoption, the key is to address these technical complexities or challenges.

The main differences between BTC and ETH Layer 2 solutions

As a major player in the cryptocurrency industry, more and more people are referring to Ethereum as the twin of BTC, as they have each played a unique role in successful development, innovative applications, and driving ecosystem growth.

However, this view has sparked in-depth analysis and direct comparisons that allow us to evaluate the unique advantages of each project and what makes these features worth following. Both BTC and Ethereum have adopted L2 solutions, but their differences stem from their respective core architectures. The following analysis will focus on their respective L2 blockchains.

From the above analysis, it can be seen that although BTC has unique advantages in framework design, Ethereum provides more unique features because it is developed based on BTC and compatible with smart contracts.

Risk Analysis

To be able to choose the BTC L2 project, it is necessary to fully understand the various risks involved in each platform and know how to best deal with these risks. As of October 2024,BTCEden Listed below is the risk analysis of the following BTC L2 projects, covering aspects such as bridging custody, forced exit status, state verification, data availability, anti-censorship status, and rollback resistance of each project.

Conclusion

BTC L2 solutions are crucial for the development of the BTC ecosystem. They address the scalability challenges of the BTC chain, making transactions faster, cheaper, and opening up new use cases, especially in the field of decentralized finance (DeFi). With these advancements, BTC is poised for greater innovation and wider institutional adoption.

In addition, this article also introduces the main BTC L2 solutions, especially Lighting Network, BEVM, Stacks, etc., and compares them with Ethereum's L2 solutions, pointing out that both focus on scalability, but there are differences due to differences in core architecture. BTC's L2 solution emphasizes security and simplicity, while Ethereum's L2 solution tends to provide more advanced features such as Smart Contracts and Decentralized applications (dApps).

We believe that the emergence of these L2 solutions will enable BTC to create a wider range of use cases beyond value storage or peer-to-peer transactions.