What Are Bitcoin Layer 2?
Bitcoin Layer 2 are protocols built on top of the Bitcoin blockchain. They are typically designed to address performance issues or other limitations of the main chain.
Layer 2 protocols process transactions off the main blockchain, providing advantages such as improved scalability, enhanced programmability, and expanded capabilities to support various decentralized applications.
Why Bitcoin Layer 2?
Bitcoin's initial design as a decentralized and secure payment system faced limitations when it came to scalability. The average block creation time of 10 minutes and a throughput of seven transactions per second (TPS) proved insufficient during periods of high transaction volume, leading to increased fees and delays.
The Bitcoin blockchain's limited scripting language also restricted its ability to support complex smart contract and decentralized applications (DApps).
Examples of Bitcoin Layer 2 Solutions
Several Layer 2 solutions have emerged within the Bitcoin ecosystem, each contributing to scalability and introducing new functionalities.
1. Lightning Network
Launched in 2018, the Lightning Network uses state channels to enable microtransactions on top of the Bitcoin Layer-1. It facilitates fast and low-cost transactions by conducting multiple transactions off-chain and settling the opening and closing balances on the main blockchain.
2. Rootstock (RSK)
Operating as a sidechain, Rootstock pioneered smart contracts on the Bitcoin blockchain. It allows users to send Bitcoin to the Rootstock network, where it becomes a locked-up smart Bitcoin (RBTC) in the user's RSK wallet, enabling faster and cheaper transactions.
3. Stacks Protocol
This Layer-2 blockchain (formerly Blockstack) enables smart contracts and decentralized applications on the Bitcoin blockchain. Stacks utilizes microblocks for speed and a Proof-of-Transfer (PoX) mechanism, tying transactions to the Bitcoin blockchain.
4. Liquid Network
Liquid Network is a Bitcoin Layer 2 sidechain that allows its users to move their bitcoins back and forth using a two-way peg mechanism. When BTC is transferred to the Liquid Network, it’s converted into Liquid BTC (L-BTC) at a 1:1 ratio. It also supports the issuance of tokens and other digital assets.