Original author | Bankless
Compilation | Golem
Bitcoin development is experiencing explosive growth. New concepts like Ordinals, Runes, and BRC-20 are taking center stage. This marks a major shift in the Bitcoin ecosystem, which is evolving from a focus on BTC as an asset to a more vibrant ecosystem for people to use, build on, and speculate on.
L2 is now the new hot topic in the Bitcoin ecosystem. Everyone wants a piece of the Bitcoin L2 pie, but what are we hyping about? In this article, we will take a holistic look at Bitcoin L2 and answer key questions about Bitcoin L2: its necessity, current status, future prospects, and ultimate destination.
Why Bitcoin needs L2
The Bitcoin network is designed with security and decentralization in mind, but trades off on the scalability of the network. While this makes BTC a more valuable asset, it also means that the Bitcoin network is not an ideal infrastructure for building financial applications, as has been proven by the birth of Ethereum.
For nearly a decade, the Bitcoin community has been struggling with scalability issues, with on-chain transaction fees reaching tens of dollars at peak times. Today, driven by experiments such as Ordinals, Runes, and BRC-20, the demand for Bitcoin block space has reached new heights:
Ordinals caused Bitcoin fees to rise 280% in December 2023;
Since Runes was launched, its trading volume accounts for 68% of the total Bitcoin trading volume;
BRC-20 has caused Bitcoin transaction fees to spike several times over the past year, with these transaction fees at one point accounting for 74% of the block reward.
The vision of Bitcoin is to become a universally accessible and widely used currency. To achieve this, it must scale to handle more transactions without burdening every transaction with high fees. The growing demand for Bitcoin block space highlights the need to scale Bitcoin and reflects the inherent need for Bitcoin L2.
The Current State of Bitcoin L2
The Bitcoin community has been actively working to improve transaction scalability for years. One important development in this area is the Lightning Network, a payment channel protocol that aims to enable faster and cheaper transactions by processing transactions outside the Bitcoin mainnet. Although the Lightning Network has long been the flagship solution for Bitcoin's scalability vision, the community is increasingly aware of its limitations. There is a growing consensus that the Lightning Network may not be the ultimate scaling solution for Bitcoin, and that Bitcoin needs a better L2.
Eric Wall discussed the need for improvements to L2 in a recent episode of Bankless, suggesting that Bitcoin’s scalability could one day exceed what the Lightning Network can currently offer.
BitVM’s Trust Minimization Commitment
Currently, the focus is on BitVM, a new model for executing Turing-complete contracts on Bitcoin that could pave the way for optimistic rollups on Bitcoin.
The main reason why the community believes that BitVM is superior to other scalability solutions is its compatibility with the Taproot upgrade. This means that BitVM can be deployed without further modifications to the Bitcoin network, preserving the existing rules of the Bitcoin network. It is a win-win situation for all kinds of people in the Bitcoin community.
BitVM’s approach involves executing transactions off-chain and validating them on-chain via fraud proofs during a challenge window, a mechanism similar to Ethereum’s optimistic rollups.
This system can operate even with only one Prover, but its trust assumption is that there must always be at least one honest Prover in the system capable of detecting and broadcasting malicious transactions. However, this also means that if all Provers are compromised, the integrity of Bitcoin will be threatened, as the attacker can publish fraudulent transactions on the network.
Simplified BitVM operation diagram. Source: The Bitcoin L2 Opportunity
BitVM only allows the creation of trust-minimized Bitcoin L2s, such as optimistic rollups, rather than trustless Bitcoin L2s, such as ZK-rollups. In addition, similar to optimistic rollups on Ethereum, BitVM faces challenges such as long disputes and the need for operators to lock up large amounts of capital to ensure sufficient liquidity in the event of a withdrawal run.
Therefore, there is a certain degree of skepticism in the Bitcoin community about the practicality of BitVM. However, it is worth noting that BitVM is still in the early stages of development and, although not the most ideal solution, it is expected to scale Bitcoin through optimistic rollups.
The Dream of Zero-Knowledge
So, what is the ultimate destination of Bitcoin L2? The answer is ZK-rollups.
However, building ZK-rollups on Bitcoin is not easy, or even technically impossible at the moment… it would require changing the Bitcoin network via a soft fork, which is easier said than done. A soft fork would add a new opcode to Bitcoin that would enable it to natively recognize and verify zero-knowledge proofs, allowing trustless interaction between Bitcoin and rollups. However, as mentioned before, this is a huge technical hurdle, and its feasibility is uncertain.
If this is the case, and BitVM is still in its early stages, and both optimistic rollups and ZK-rollups are not currently possible on Bitcoin, then why are there already so many Bitcoin L2s in the Bitcoin ecosystem?
The reality is that technically speaking, true Bitcoin rollups don’t exist yet. But we can see that some teams are focusing on laying the foundation for the future Bitcoin L2.
BOB's phased approach to building Bitcoin L2. Source: BOB official website
For example, some rollup teams (such as BOB) are taking a phased approach. They first launch the ecosystem as an EVM rollup to attract users, TVL, and dApps; then they plan to transition to OP-rollups after the BitVM technology matures, and eventually they will evolve into ZK-rollups if Bitcoin soft forks to add the necessary opcodes.
Conclusion
The hype in the market always brings many scam projects. In this Bitcoin L2 craze, many projects falsely claim to be Bitcoin L2, so investors and users need to be cautious. It is still unclear whether those projects claiming to be Bitcoin L2 are really Bitcoin L2 or just use this title to attract venture capital and retail investment.
Despite this reality, it’s still an exciting time for the Bitcoin community. From the launch of Bitcoin spot ETFs, which marks the entry of institutions, to new concepts such as Ordinals, BRC-20, and Runes, the Bitcoin ecosystem is experiencing unprecedented growth and innovation.
The prospect of Bitcoin L2 adds more expectations to the future of Bitcoin.