Introduction

In 2023, the Taproot upgrade brought new vitality and possibilities to the Bitcoin ecosystem. Subsequently, in early 2024, Bitcoin reached a historic high of $73,000 and underwent its halving event, once again attracting market attention.

Bitcoin’s proven security and network effects have attracted numerous developers who see Bitcoin as the foundational layer of blockchain. These developers are focused on building various Layer 2 projects on top of the Bitcoin base layer. In this article, we will introduce both early and recent Layer 2 projects related to Bitcoin.

Why does Bitcoin need Layer 2?

According to the “scalability trilemma,” decentralized networks struggle to simultaneously achieve decentralization, security, and scalability. The Bitcoin network, with over 75,000 core nodes, is highly decentralized and widely recognized as the most secure blockchain. However, it can only process 3–5 transactions per second, presenting scalability challenges. One potential solution to scalability issues is Bitcoin Layer 2 technology, aimed at improving Bitcoin’s scalability to handle a large number of transactions without compromising transaction speed or increasing transaction costs.

Early Bitcoin Layer 2 Development Projects

Currently, the total locked value (TVL) of Bitcoin’s Layer 2 (L2) projects represents only a small fraction of Bitcoin’s market capitalization. The combined TVL of the four most well-known L2 projects is approximately $700 million, accounting for only around 0.15% of the entire L2 market. This indicates that Bitcoin’s Layer 2 ecosystem is still in its nascent stage, which is particularly evident when compared to the Layer 2 market on other blockchains.

However, the situation is quietly changing. The Lightning Network continues to grow steadily, Stacks is committed to significant upgrades to drive the development of the Bitcoin smart contract market, and Rootstock is also undergoing continuous improvements. Currently, existing L2 solutions on Bitcoin have different objectives, with some aiming to improve the scalability of the Bitcoin network, while others aim to enhance its more expressive programmability.

I. LightningNetwork

The Lightning Network, as a second-layer solution for Bitcoin, aims to address Bitcoin’s scalability issues by increasing transaction throughput and reducing transaction fees. Through payment channels, users can conduct transactions off-chain, thus avoiding the need to compete for block space on the Bitcoin blockchain or wait for L1 consensus, thereby improving efficiency. When users decide to settle transactions conducted through payment channels, they can choose to close the channel and settle off-chain activity on the Bitcoin network. The total locked value (TLV) of the Lightning Network currently stands at:

The design of the Lightning Network enables it to facilitate over 40 million transactions per second, far surpassing other blockchains and traditional payment channels. Additionally, the Lightning Network significantly reduces transaction fees, with both base fees and rates being very low. As the adoption of the Lightning Network increases, these fees continue to decline.

More and more users and businesses are adopting the Lightning Network to reduce transaction costs and enhance the practicality of Bitcoin. Integration at government and corporate levels has also propelled the application of the Lightning Network, such as the Salvadoran government adopting Bitcoin as a legal tender and being compatible with the government-backed Chivo Wallet. Companies like Twitter and Cash App have also added support for the Lightning Network on their platforms.

The market is optimistic about the future prospects of the Lightning Network, with many projects and investors dedicated to building L2 networks. For example, Block, a Bitcoin startup under Jack Dorsey’s umbrella, launched a new venture capital firm called “c=” focused on providing new financing tools and services on the Lightning Network. Meanwhile, companies like Spiral are developing Lightning Development Kits (LDKs) to enhance the user experience of the Lightning Network and increase its appeal to mainstream users. Additionally, the Lightning Network’s core team, Lightning Labs, introduced the “Taro” upgrade to leverage Bitcoin’s Taproot upgrade to bring new assets to the Bitcoin network, allowing users to issue and transfer synthetic assets, tokens, and NFTs to Bitcoin.

Finally, some companies like Zeebeedee and Strike are negotiating with different countries for fiat on-ramps, aiming to attract more users to join the Lightning Network and provide international remittance services, expanding its use cases.

II. Stacks

Stacks refers to itself as the “Bitcoin Layer,” meaning it operates as a second-layer solution on the Bitcoin blockchain. While not a sidechain, it leverages the security of Bitcoin and incentivizes miners and transaction processing through the introduction of the STX token and a consensus mechanism called PoX. Stacks allows developers to build various DApps, particularly in the fields of DeFi and NFTs. The current total locked value (TLV) of Stacks is:

Currently, Stacks has introduced sBTC, which is an asset pegged to Bitcoin, allowing users to transact with sBTC equivalent to Bitcoin on the Stacks layer. This move is expected to further drive the development of DeFi and NFT use cases on Stacks and potentially unlock capital within the Bitcoin ecosystem. Additionally, Stacks is undergoing an upgrade called Nakamoto to fully leverage Bitcoin’s security in determining transaction confirmations on the Stacks layer.

Recently, there has been a noticeable increase in interest in Stacks due to discussions around Ordinals and Runes, as well as Stacks’ role in expanding Bitcoin use cases. Founder Muneeb Ali has also been actively involved in top cryptocurrency-related podcasts. Investors may be preparing for the upcoming Stacks upgrade, and everyone is closely monitoring sBTC and its potential impact on Bitcoin.

III. Rootstock

Rootstock (RSK) is a sidechain aimed at universal Bitcoin smart contracts, compatible with the Ethereum Virtual Machine (EVM). It employs a unique variant of Bitcoin’s Nakamoto consensus called DECOR+, allowing RSK to merge mine with Bitcoin. Smart Bitcoin (RBTC) is the native currency within RSK, pegged 1:1 with Bitcoin, used for paying transaction fees. The current total locked value (TLV) of Rootstock is:

RSK connects to the Bitcoin L1 through Powpeg, allowing BTC to be transferred between the two chains. Initially managed by an alliance responsible for overseeing a multisignature wallet, RSK has since increased the decentralization of Powpeg. Nevertheless, Powpeg still requires a degree of trust as BTC withdrawal requests need approval from at least 51% of the alliance members. Currently, nine members support Powpeg.

One of RSK’s key advantages is its compatibility between its Virtual Machine (RVM) and the Ethereum Virtual Machine (EVM), meaning smart contracts on RSK can be written in the Solidity language. Sovryn, a well-known RSK project, is a non-custodial smart contract platform supporting Bitcoin lending and leveraged trading. RSK recently announced the removal of the supply cap for RBTC, expanding RBTC’s supply to be equivalent to BTC, i.e., 21 million coins. This move holds significance for Bitcoin DeFi as the previous supply cap restricted activities on RSK. Removing the supply cap may attract more developers’ attention and encourage them to build more DApps on RSK.

For any new DApps launched on RSK, we should closely monitor their development as RSK provides a robust foundation for enabling DeFi on Bitcoin.

IV. Liquid Network

Liquid Network is an L2 sidechain that settles and issues digital assets on top of the Bitcoin blockchain, such as stablecoins, security tokens, and other financial instruments. Unlike other L2 solutions, Liquid Network is relatively centralized, ensuring its security through a federation consensus mechanism managed by 60 functionaries. These functionaries’ task is to validate blocks and add transactions to the Liquid Network sidechain.

Similar to RSK, Liquid Network also has a token called “L-BTC,” pegged 1:1 with BTC. At the time of writing, the circulating supply of L-BTC tokens is approximately 3,534. This token is primarily used for the Lightning Network, offering faster transaction speeds and higher throughput compared to the Bitcoin main chain. Additionally, Liquid Network users can also utilize their L-BTC for other applications supported by Liquid Network, such as lending or purchasing security tokens.

Bitcoin Layer 2 New Projects

I. BEVM

BEVM was founded in 2023 as a decentralized Bitcoin Layer 2 that is compatible with the Ethereum Virtual Machine (EVM). Leveraging technologies such as the Schnorr signature algorithm brought by the Taproot upgrade, BEVM allows BTC to cross-chain to the second layer in a decentralized manner from the Bitcoin mainnet. Since BEVM is compatible with the EVM, all DApps running in the Ethereum ecosystem can operate on the BTC Layer 2 and use BTC as Gas.

On November 29, 2023, BEVM released its whitepaper. Currently, BEVM has launched its testnet, ChainX. According to the annual data of the BEVM testnet in 2023, its total transaction volume reached 2.77 million, with a total of 55,000 active addresses; TVL reached 119.56 BTC (approximately $5.09 million); the total bridge capacity for round trips to Ethereum L2 was $11.53 million. Recently, the BEVM testnet launched its first Taproot protocol, Bevscriptions, which processed 3 million transactions within 6 hours, with a tps of around 150.

In December 2023, BEVM launched the first phase of its Odyssey event, which has now concluded. BEVM founder Gavin (@gguoss) stated that the second phase is expected to commence on January 15th, inviting 10–20 ecological projects to participate. The second phase event will not use the term “Odyssey” but will instead be named after the location where Satoshi Nakamoto mined the first BTC block, “Helsinki.”

Currently, the BEVM ecosystem includes over 20 ecological projects such as the BTC full-chain DEX OmniSwap and the decentralized signature protocol Bool Network.

II. B²Network

B² Network was established in 2022 as a Bitcoin Layer 2 network based on ZK-Rollup, while also being compatible with the Ethereum Virtual Machine (EVM), enabling seamless deployment of DApps for EVM ecosystem developers. The network participated in the November 2023 ABCDE Bitcoin ecosystem project roadshow and ultimately secured investment. According to ABCDE, the core members of B² Network’s technical team come from mainstream Web3 open-source communities such as Ethereum, Bitcoin, Cosmos, and Sui, and have received multiple grant supports. The team excels in Web3 infrastructure products such as blockchain Layer 1, Layer 2, cross-chain, and account abstraction, possessing mature engineering capabilities.

On December 18, 2023, B² Network announced the launch of the Alpha testnet MYTICA with its partners and openly recruited ecosystem developers. Partners and developers can deploy DApps on the B² Network testnet. The network’s ecosystem project, the cross-chain protocol Meson, has deployed the stablecoin USDC on the B² Network Alpha testnet. Meson is a cross-chain protocol focused on speed, stability, security, and low fees, supporting free circulation of mainstream digital assets such as ETH, BNB, USDC, and USDT between B² Network and over 30 mainstream public chains.

III. Dovi

Dovi was founded in 2023 as a Bitcoin Layer 2 solution compatible with EVM smart contracts. In November 2023, Dovi officially released its whitepaper, which introduced technologies integrating Schnorr signatures and MAST structures aimed at improving transaction privacy, optimizing data size, and verification processes. Additionally, Dovi implemented a flexible framework for issuing various asset types other than Bitcoin, enabling cross-chain asset transfers.

In December 2023, KuCoin Labs announced a strategic investment in Dovi, and its native token DOVI was listed on the KuCoin trading platform on December 12 of the same year. The distribution of DOVI tokens followed a fair launch model, with all 15 million tokens being claimed within the first 4 hours of listing. As of January 15th, the fully diluted market capitalization of DOVI is approximately $9.4 million. Currently, users can stake DOVI on the official website to earn rewards.

Dovi’s official website states that the next steps involve launching a testnet, establishing a developer community and ecosystem support, and rolling out Dovi V1. This initiative will further develop Dovi’s ecosystem, attracting more developers and users to participate.

IV. Map Protocol

MAP Protocol is a highly promising project, particularly in addressing cross-chain interoperability. By leveraging the security of Bitcoin, MAP Protocol provides a seamless way for assets and users from other blockchains to interact with the Bitcoin network, thereby enhancing the security and interoperability of the entire blockchain ecosystem.

The recent strategic investments from DWF Labs and Waterdrip Capital undoubtedly provide strong support for the project’s development, indicating market recognition and expectations for the project.

The initiative to burn MAP and MAPO tokens not only helps reduce token circulation, increasing token scarcity, but also contributes to enhancing the token’s value. The current fully diluted market capitalization is approximately $260 million, demonstrating market recognition of MAP Protocol’s potential value. As the project develops and adoption increases, this figure is expected to further grow.

In summary, MAP Protocol’s innovation in cross-chain interoperability and its investment support lay a solid foundation for its future development.

V. Merlin Chain

Merlin Chain is a Bitcoin Layer 2 network developed by the renowned teams behind BRC-420 Bluebox and Bitmap. It supports multiple types of native Bitcoin assets and is compatible with EVM through ZK Rollup technology. According to the official website and various research reports, Merlin integrates ZK-Rollup network, decentralized oracle, and on-chain BTC anti-fraud module, making it a comprehensive Bitcoin Layer 2 solution.

From Merlin Chain’s official website, one can observe the attributes of its bridge, which facilitates the transfer of assets from BTC to the Layer 2 network, thereby reducing transaction fees. This represents a typical approach to addressing pain points in the ecosystem.

This integrated solution, incorporating ZK-Rollup, oracle, and anti-fraud modules, is poised to bring more innovation and development to the Bitcoin ecosystem. It aims to provide a more efficient and secure trading experience, attracting more users and developers to participate.

VI. Bison

Bison, founded in 2023, is a Bitcoin-native zk-rollup designed to enhance transaction speeds while enabling advanced functionalities on native Bitcoin. Developers can leverage zk-rollup to build innovative DeFi solutions such as trading platforms, lending services, and automated market makers.

Bison also participated in the ABCDE Bitcoin ecosystem project roadshow, where its solution was described as leveraging zero-knowledge proofs and Ordinals for fast and secure transactions. All data is anchored back to Bitcoin to enhance security. Bison is capable of processing 2,200 transactions per second, with fees only 1/36th of Bitcoin’s.

The Bison team includes contributors to Starknet’s core codebase, indicating rich blockchain technology expertise and knowledge, enabling the development of efficient and secure solutions. As Bison continues to evolve within the Bitcoin ecosystem, it is expected to bring more innovation and convenience to Bitcoin users and developers.

Bitcoin’s Ecosystem Next Step: Smart Contract Market

For years, Bitcoin has grappled with various issues, including a lack of developer tools, slow and cumbersome infrastructure, and seemingly limited innovation compared to smart contract platforms like Ethereum, BNB Chain, and Solana. However, recent developments suggest a shift in the landscape. Developers can now showcase their skills within the Bitcoin ecosystem, working tirelessly to drive updates and advancements at an unprecedented pace. This change is largely driven by natural demand. When an ecosystem faces genuine, organic user needs, these demands inherently spur innovation and product development, creating a virtuous cycle that rapidly improves the situation.

I. BitVM

On October 9th, the project lead of ZeroSync, Robin Linus, unveiled a paper on BitVM. In essence, BitVM is a virtual machine for the Bitcoin network, achieving Turing completeness through off-chain execution and on-chain verification, without altering the consensus rules of the Bitcoin network.

Compared to Ethereum smart contracts, BitVM presents significant differences. While Ethereum smart contracts support multi-party transactions, BitVM’s design is limited to two-party transaction exchanges. Most of BitVM’s transaction processing occurs off-chain, minimizing its impact on the underlying Bitcoin blockchain. In contrast, EVM operates as an on-chain engine, with all operations taking place within Ethereum’s native environment. BitVM serves as an optional additional engine for the Bitcoin blockchain, with its operations not required by BitVM itself. In contrast, EVM is an indispensable part of the Ethereum blockchain; without EVM, there would be no Ethereum.

BitVM’s functionality is achieved through the Bitcoin Taproot upgrade. BitVM heavily relies on the taproot address matrix (taptree), akin to program instructions in binary circuits. Within this framework, each spending condition instruction in the Script script is considered a minimal program unit, generating 0 or 1 through specific code in the taproot address, forming the taptree. The execution result of the entire tapree is akin to the textual effect of a binary circuit program. The complexity of the program depends on the number of combined taproot addresses; the more addresses there are, the richer the pre-set instructions in the Script, and the more complex the programs the tapree can execute.

Most of BitVM’s processing occurs off-chain, with off-chain processed transactions bundled into batches and published to the underlying Bitcoin blockchain, utilizing a validity confirmation model similar to that used in optimistic rollups. Meanwhile, BitVM employs a model that combines fraud proofs with challenge-response protocols to handle and verify transactions between two parties (prover and verifier). The prover initiates a computation task and sends it through a channel established between themselves and the verifier, who then confirms the validity of the computation. Once verified, the transaction is added to the curated batch for publication to the underlying Bitcoin blockchain.

II. RGB

RGB, maintained and updated by the LNP/BP Association, is an intelligent contract system supporting both the Bitcoin and Lightning networks. The RGB protocol proposes a more scalable, private, and future-oriented solution, founded on the concepts of client-side validation and single-use seals introduced by Peter Todd in 2017.

The core idea of RGB is to use the Bitcoin blockchain only when necessary, leveraging proof of work and the decentralized network to achieve double-spending protection and censorship resistance. All validation work for token transfers is moved off-chain from the global consensus layer, and is solely verified by the recipient’s client.

In RGB, essentially all tokens belong to a Bitcoin UTXO (whether existing or temporarily created), and to transfer tokens, you must spend this UTXO. When spending the UTXO, the Bitcoin transaction must include a commitment to a message containing RGB payment information, detailing inputs, the destination UTXO for the tokens, asset IDs, quantities, spent transactions, and other additional data.

The specific payment information for RGB tokens is transmitted through dedicated off-chain communication channels, from the payer’s client to the recipient’s, and verified by the latter to ensure compliance with RGB protocol rules.

However, validating the received payment information alone is insufficient to ensure the sender truly owns the assets being sent to you. To ensure the received transaction is final, you must also receive the entire transaction history of these tokens from the payer, tracing back to their initial issuance. By validating all transaction history, you can ensure that the assets have not been inflated and that all spending conditions attached to the assets have been met.

Summary

Bitcoin Layer 2 is an integral part of the modern Web3 development. If Bitcoin wishes to maintain its position as one of the primary blockchain networks, it needs a fast and cost-effective way to handle transactions. Fortunately, many developers have taken on the challenge of Bitcoin’s scalability. Thus, when people seek to reduce transaction fees and expand Bitcoin’s capabilities, there are numerous Bitcoin Layer 2 solutions to choose from.

Cregis is a solution platform for the Web3 era, focusing on providing enterprise-grade tools and solutions for cryptocurrency asset management since 2017. Currently, we have served over 3,200 Web3 enterprises and teams, including exchanges, projects, Crypto Funds, and e-commerce businesses, with a daily on-chain turnover exceeding $30 million. Cregis currently offers MPC wallet services, trading interface APIs, and will fully implement VCC services and the Web3 underlying asset solution Web3Bridge in 2024. This will help more Web3 teams achieve diversified cryptocurrency asset trading and management.

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