While Bitcoin has become the largest and most popular cryptocurrency, it faces several challenges, the most notable being scalability. Last year, due to the popularity of inscriptions, attention shifted from Ethereum to Bitcoin. A large number of assets with substantial market capitalization and liquidity appeared on Bitcoin, but technical limitations made it difficult to create and manage these assets on the Bitcoin mainnet. This provided an excellent opportunity for the development of Bitcoin’s Layer 2 networks. Recently, the Bitcoin scaling solution, Fractal, achieved a market cap of $6 billion on its launch day—a milestone that took Bitcoin nearly five years to reach. Fractal has ignited a new wave of interest in Bitcoin Layer 2 networks, so let’s explore what kind of solution Fractal is and whether there are other potential breakthroughs in space.

What is Bitcoin Layer 2?

Bitcoin Layer 2 Networks are scaling solutions built on top of the Bitcoin main chain. They are designed to improve Bitcoin’s scalability, transaction speed, and reduce transaction costs. These solutions allow transactions to be processed off-chain, reducing the load on the main chain while maintaining the security and decentralization of the Bitcoin network.

Why are Layer 2 Networks Needed?

Bitcoin was originally designed as a decentralized and secure payment system, but it faces scalability limitations. With an average block creation time of 10 minutes and a throughput of about 7 transactions per second, Bitcoin’s capacity is far below that of traditional payment systems like Visa, which processes thousands of transactions per second. Additionally, Bitcoin’s transaction fees rise during network congestion, making small payments or daily transactions less feasible. This low throughput limits Bitcoin’s application in large-scale usage scenarios. Furthermore, Bitcoin’s scripting language restricts its ability to support complex smart contracts and decentralized applications (DApps). Bitcoin Layer 2 solutions emerged to address these challenges.

Common Layer 2 Networks

The common types of Bitcoin Layer 2 solutions include the following:

State Channels

State channels allow participants to open payment channels and conduct multiple off-chain transactions using a multi-signature wallet. These transactions are only recorded on the main chain when both parties agree to settle and close the channel. Bitcoin’s most famous state channel example is the Lightning Network.

• Advantages: Transactions are almost instant and cost very little, making them ideal for frequent micropayments.
• Example: Lightning Network.

Sidechains

Bitcoin sidechains are independent blockchain systems connected to the Bitcoin main chain through a two-way peg. Sidechains allow users to lock Bitcoin on the main chain and then perform transactions and operations on the sidechain. Sidechains provide more flexible functionalities, such as supporting other crypto asset payments, stateful smart contracts, faster settlement, and higher privacy. However, sidechains require their own set of validation nodes, which may face centralization risks and lack Bitcoin’s inherent security.

• Advantages: Sidechains provide enhanced privacy, support for smart contracts, and higher throughput.
• Examples: Liquid Network, Stacks, RSK.

Rollups

Rollups originated as an Ethereum Layer 2 scalability solution, aimed at improving the performance and throughput of blockchain networks. Rollups move most transaction data and computation off-chain, recording only the summary or aggregated data on-chain, reducing the load on the main chain and increasing overall efficiency. Implementing Rollups on Bitcoin presents some challenges, as Bitcoin doesn’t natively support smart contract validation. Hence, introducing Rollups on Bitcoin requires alternative validation methods, such as client-side validation or building a custom data availability (DA) layer.

• Advantages: Rollups significantly reduce on-chain transaction volume and improve network efficiency.
• Example: Merlin Chain.

Layer 2 Examples

Lightning Network

The Lightning Network is a state channel-based Layer 2 solution for Bitcoin. It allows users to conduct multiple off-chain transactions within a payment channel without needing each transaction to be confirmed by the Bitcoin main chain. Only the final state is submitted to the main chain when the channel is closed. The Lightning Network’s state channel mechanism enables nearly instant transactions at very low cost, making it ideal for micropayments. It also supports routed payments, where users can transfer Bitcoin even without a direct payment channel between them, by routing through other users’ channels. This increases Bitcoin’s transaction throughput while reducing congestion on the main chain, and enhances privacy since off-chain transactions are not publicly recorded.

RSK

RSK (Rootstock) is a smart contract platform for Bitcoin Layer 2, with a focus on decentralized finance (DeFi). RSK uses sidechain technology and introduces RBTC as a token for transaction fees. Its goal is to serve as the foundation of financial inclusion. RSK uses merge-mining, where Bitcoin miners can mine both Bitcoin and RSK blocks simultaneously, leveraging Bitcoin’s security to protect RSK’s smart contracts and transactions. It is compatible with the Ethereum Virtual Machine (EVM), allowing developers to write smart contracts in Solidity and port Ethereum DApps to RSK. In addition, RSK’s RIF network offers a variety of infrastructure services such as DeFi, storage, domain services, and payment solutions to meet user needs.

Fractal

Fractal packages Bitcoin’s core into deployable software bundles (BCSP) and uses Bitcoin’s core code to recursively create infinitely scalable layers on the Bitcoin main chain. This improves transaction processing speed and capacity while maintaining full compatibility with the existing Bitcoin ecosystem. Fractal Bitcoin creates multiple scaling layers on top of the Bitcoin main chain, forming a tree-like recursive structure. This allows each layer to further expand through “forking,” increasing the network’s parallel processing power. Fractal reduces block confirmation time to 60 seconds or less, improves response time, increases storage space, and lowers transaction costs, making it suitable for applications like Ordinals Inscriptions. The cross-layer elevator mechanism enables direct asset transfers between different layers without the need for additional relays. By leveraging virtualization and self-replication, Fractal enhances Bitcoin’s processing power and opens up new application scenarios, such as optimizing Ordinals Inscriptions and building virtual worlds.