Author: Marcin Kazmierczak, Sarah Morton, CoinDesk; Translated by: Wuzhu, Golden Finance
Marcin Kaźmierczak of Redstone Oracles explains how Bitcoin Layer 2 can enhance the performance of the protocol by deploying enhanced functionality on a separate blockchain while maintaining its integrity.
Last week, many advisors attended the Consensus 2024 conference in Austin, Texas. I highlighted the key themes that emerged from the event in my “Expert Q&A.” I look forward to next year’s conference in Toronto, Canada.
Bitcoin Layer 2
Bitcoin has revolutionized the world of finance with its decentralized, secure, and transparent nature. Although it was the first cryptocurrency, Ethereum (ETH) pioneered the development of the entire decentralized finance, or DeFi, ecosystem. Now, Bitcoin is following suit and ushering in an era of development for its own ecosystem. As Bitcoin’s popularity has grown, so have the challenges associated with its scalability and transaction speed. To address these issues, the Bitcoin community has developed various Layer 2 blockchains that can improve the efficiency and functionality of the network without changing Bitcoin itself.
This article delves into the concepts of Bitcoin Layer 2, exploring their classification, advantages, and expected advancements. By understanding these innovative protocols, users can understand how Bitcoin can continue to evolve and maintain its relevance in an increasingly competitive digital environment. Ultimately, Bitcoin is digital gold, and an entire economy is created around it, similar to gold in the physical world.
Q: What is Bitcoin Layer 2 and how are they categorized?
A: They are built on top of the Bitcoin blockchain. They solve the performance issues and limitations of the Bitcoin blockchain and add programmable features. There are three types of Bitcoin Layer 2:
1. State Channel
Function: Create external channels for transactions that are recorded off-chain and eventually updated as a single transaction on the main network. You can liken it to dedicated mailing routes between houses to optimize the cost of sending letters between houses.
Example: Bitcoin Lightning Network.
2. Sidechain
Functionality: A semi-autonomous network that maintains communication with the main network and can define its architecture. Imagine an optimized city mail system that periodically synchronizes with a central office.
Examples: Stacks Network, Rootstock Infrastructure Framework (RIF).
3. Rollups
Function: Serves as an execution layer that batches transactions and submits them to the main network's consensus layer for final settlement. Imagine a full-state messaging system that updates a central authority on its delivery status every 10 minutes. In the Ethereum ecosystem, examples include Arbitrum, Optimism, zkSync, and Starknet.
Types: Optimistic Rollups and ZK Rollups.
Examples: Merlin Network, Build On Bitcoin, B^2, Bitlayer.
Q: What problems does Bitcoin L2 solve and why are they important?
A: Bitcoin Layer 2 solves key problems to increase the efficiency and functionality of the network. First, they improve scalability by reducing congestion. As a result, transaction fees are lower and execution is faster, making Bitcoin more suitable for everyday use. L2 also increases the utility of Bitcoin holdings and introduces complex smart contract capabilities, thereby supporting DeFi, NFTs, and other Web3 applications. This enhanced programmability helps Bitcoin maintain market relevance. They expand Bitcoin's use cases and ensure smoother and more affordable transactions. Ultimately, Bitcoin L2 is important for users because they provide new features for BTC holders, such as using lending platforms, yield solutions, or decentralized exchanges (DEX). For participants who hold a significant part of their Bitcoin portfolio, they are an alternative to Ethereum-based solutions.
Q: Comparison of existing Bitcoin L2 and what to expect in this space this year.
A: Comparing Bitcoin Layer 2 requires evaluating their technical classification. It should be determined whether it is a state channel, a Rollup, or a sidechain. In addition, metrics such as transaction fees, security guarantees, and decentralized applications (dApps) available on the network are also crucial. The following table represents the main Bitcoin Layer 2 as of June 2024.
* BounceBit is not a Layer 2, but a Layer 1 Proof-of-Stake chain with BTC as the main currency.
** Babylon is a BTC staking platform that implements a novel method of allowing BTC staking.
Looking ahead, we can undoubtedly expect further expansion of Bitcoin Layer 2. Due to the scarcity of Bitcoin and the fact that there will only be about 21 million Bitcoins, it fundamentally makes sense to expand the programmability and functionality of digital gold. Upcoming developments will include reducing transaction costs for the aforementioned Layer 2, adding more compatibility layers, and implementing well-known primitives on top of Ethereum, such as automating dApps or supporting popular wallets.
Bitcoin’s value has no floor or ceiling, with a cumulative market cap currently approaching $1.4 trillion. In its current form, the Bitcoin blockchain acts as a foundational layer upon which innovation can flourish. Today, this is achieved through Layer 2. Looking at the success of Arbitrum, Optimism, Base, and zkSync, we can say that we will have at least a few thriving ecosystems in this category. Therefore, it is crucial to track its development and accept the use of BTC as one of the fastest growing narratives in 2024.
