With the birth of the Ordinal protocol in 2023, Bitcoin, once the “digital gold,” has ushered in a new type of asset - “Inscriptions.” If Bitcoin is gold, then inscriptions are akin to products made from gold, possessing unique value.

This method of issuing native assets on the first blockchain quickly gained market popularity. It not only derived more asset issuing protocols like BRC20, Atomical, Runes, etc., but also gave birth to famous inscriptions such as ORDI, SATS, and many native NFTs of Bitcoin.

For a time, the Bitcoin ecosystem once again welcomed its spring, attracting a large amount of capital, users, and developers. However, after a period of development, the assets on Bitcoin are indeed increasing, and people are gradually realizing the limitations of Bitcoin as a Layer1. On the one hand, Bitcoin itself does not support smart contracts, so it is difficult to expand more application scenarios relying on inscription techniques.

On the other hand, Bitcoin’s performance and mining costs have become a significant obstacle to the further development of the Bitcoin ecosystem. During the active period of inscription gameplay, it will rapidly increase Bitcoin’s transfer cost and even begin to affect Bitcoin’s regular transfer, let alone if there are more application scenarios, which will further cause network congestion and long-term high mining fees.

Naturally, the heat wave set off by inscriptions quickly spread to the track of Bitcoin expansion, which also opened up another popular track - Bitcoin Layer2.

From Pursuit to Debunking, Where is the Road for Bitcoin Layer2?

Some old Bitcoin expansion plans are being revisited, and more and more new Bitcoin Layer2 projects are being proposed. Among them, the Bitmap Tech team, famous for its deep cultivation in the direction of inscriptions and the nested protocol BRC420 of inscriptions on the Bitcoin chain, took the opportunity of the heat of inscriptions and launched a Bitcoin Layer2, which is the later famous Merlin Chain.

Merlin Chain was launched in February 2024 and quickly started the pledge activity Merlin’s Seal. The targets of the pledge included not only Bitcoin and some inscriptions but also assets like BRC420’s Blue Boxes, which triggered the surge of Blue Boxes. Merlin Chain, inheriting the heat of Bitcoin inscriptions, gained a large amount of TVL (data source: https://geniidata.com/ordinals/index/merlin) after the pledge opened. The TVL exceeded 3 billion US dollars in less than 30 days after the activity went online, reaching a peak of 3.5 billion US dollars and becoming the current hot Bitcoin ecosystem star project.

On April 19th, the highly anticipated Merlin finally went public. Its token MERL surged to a high of 2 USDT, but then quickly fell back and continued to decline in the following weeks. It has now fallen by more than 80% and is close to the cost price, which directly surprised everyone.

Shortly after MERL went public, on April 25th, Merlin opened the BTC unlock function. Subsequently, its TVL plummeted, and it has now fallen to about 1.3 billion US dollars, a drop of more than 60%. The Blue Boxes that participated in the pledge beforehand also plunged from a peak value of about 1 BTC to less than 0.05 BTC.

As a star project of Bitcoin Layer2, the double plunge in coin price and TVL after going public has hurt many people who actively participated in Merlin. This inevitably raises doubts about Bitcoin Layer2. Is Bitcoin Layer2 a genuine potential narrative, or just a flash in the pan hype topic?

In fact, the development of the entire blockchain industry is constantly exploring between various doubts and recognitions. For blockchain scaling, Bitcoin is not the only ecosystem exploring. Ethereum, as the second dragon at the veteran level, was designed relatively early and also faces the dilemma of having to scale. However, Ethereum, which began to explore scaling solutions after Bitcoin, has a flourishing Layer2, showing very active development, and there must be something worth learning from this. We might as well look at the development of Bitcoin Layer2 through the development of Ethereum’s Layer2.

Looking Back at Ethereum’s Scalability Journey

1. Learning and Exploration

From the outset, Ethereum’s scalability solution drew on Bitcoin’s experiences, exploring methods such as state channels, lightning networks, and sidechains.

A state channel is like a constantly updating channel opened by two entities, A and B, who wish to transact outside of Layer1. No matter how many transactions the two parties conduct within the channel, they are not affected by Layer1’s performance or costs. The constant updating of the state is to upload the latest off-chain state to the main Ethereum chain as a final settlement reference to prevent malicious actions. This can greatly improve efficiency and reduce costs, as exemplified by the Connext Network, which explores based on state channels.

However, it is limited to the two parties within the channel and requires both parties to stay online and continuously update the state, otherwise, there is a risk of asset loss.

The Lightning Network is an iteration based on the state channel. If the state channel is the line between two entities, then the Lightning Network connects many lines to form a network. This allows A and B to connect even if they are not in the same channel, through a series of channels connected by the network.

In a sense, the Lightning Network is a network version of the state channel. Ethereum has borrowed Bitcoin’s Lightning Network to launch the Raiden Network. However, the Raiden Network is an off-chain network and does not support smart contracts. Its main use case is for transfer payments. In addition, the Raiden Network is not a blockchain network, its nodes are susceptible to control by centralized entities, posing certain risks, so it still has many shortcomings.

The subsequently introduced sidechain technology filled the gaps of the Lightning Network. It is a form of blockchain that can also run smart contracts, thus offering higher security and greater scalability than the Lightning Network.

However, sidechains also brought new problems. Due to their independence, sidechains are only responsible for their own ledgers and only return transaction results to the main chain, which may lead to losses caused by malicious actions on the sidechain. For example, sidechain nodes altering transaction records or refusing to execute transactions may lead to erroneous results being returned to the main chain, thereby affecting system security and reliability. Therefore, sidechains have data availability issues and have not been widely recognized.

At this stage, Ethereum’s scalability solutions were basically implemented following the path of Bitcoin’s scalability solutions. However, after numerous attempts, Ethereum did not stop exploring and began to take a more advanced step.

2. Light at the End of the Tunnel

In 2017, Joseph Poon (one of the proposers of the Lightning Network) and Vitalik Buterin proposed a new Ethereum Layer2 off-chain scalability framework—Plasma. Plasma referenced some designs of state channels and improved on the shortcomings of sidechains, adopting an architecture composed of a Merkle tree of many sub-chains. Compared to sidechains, Plasma hashes all transactions occurring on these Plasma sub-chains, generates a Merkle root, and sends it back to the main chain, allowing the main chain to supervise transactions on Plasma. This Merkle root contains summary information of all transactions occurring on the Plasma chain. The main chain can use it to verify the integrity and validity of these transactions, thereby ensuring the legality and security of the transactions.

Although Plasma seemed to solve some of the problems of state channels and sidechains, Plasma still had certain data availability issues. Moreover, Plasma could not support smart contracts, and its development also hit a bottleneck.

Just when it seemed like a hopeful solution had fallen into a predicament, a new solution was quietly born a year after Plasma’s birth. This solution set off a major explosion in Layer2, and this is—Rollup technology.

Although Rollup also uses a Merkle tree and a sub-chain structure, compared to Plasma, Rollup compresses all transaction records in the sub-chain and sends them to the main chain, instead of hashing them like Plasma. Nodes on the main chain can directly access and verify all transaction details, not just the hashed summaries. This provides strong data availability and transparency, thus increasing the system’s credibility and security.

With the introduction of Optimistic Rollup, projects based on this technology such as Optimism and Arbitrum have been launched one after another. Due to the fact that OP Rollup solved key issues such as sub-chain data availability and supports smart contracts, its security and functionality have finally been widely recognized. Optimism and Arbitrum have attracted a large number of developers and projects. Users and funds have also dared to participate deeply in it, and the two quickly built their own ecosystems. Since then, Ethereum’s Layer2 has finally gotten on track and exploded.

3. Blooming of Various Projects

The success of Layer2 solutions such as Optimism and Arbitrum has attracted more teams to explore different Layer2 solutions. For teams with strong technical capabilities, they may develop their own Layer2 solutions. However, some teams may also want to operate their own independent Layer2, but lack the necessary technical skills. This demand was first noticed by the Optimism team. They launched a tool called OP Stack based on Optimism, which allows any team to easily publish their own Layer2. Other teams that have developed their own Layer2 solutions have also released Layer2 development tools based on their own projects, such as Arbitrum Orbit by Arbitrum, ZK Stack by zkSync, and Polygon CDK by Polygon.

As a result, more Layer2 needs have been uncovered, leading to a feast of Layer2 projects. Currently, there are over 50 Layer2 projects listed on L2beat, indicating that the development of Layer2 has entered a phase of rapid growth.

On the other hand, in the current mainstream Rollup solutions, there is often the problem of sequencers acting maliciously. Sequencers in Layer2 are mainly responsible for sorting the transactions that occur on Layer2 according to certain rules, packaging them into blocks, and then submitting them to the main chain for confirmation. Sequencers usually determine the order of transactions based on some rules, such as transaction fees and timestamps, to ensure the validity of the blocks.

However, since sequencers have the power to control the order of transactions, they may act maliciously, deliberately adjusting the order of transactions to gain more MEV profits. Therefore, some teams have started to explore decentralized sequencer solutions to make Rollup more secure and mature.

Looking at the development of Ethereum’s Layer2, we can see that Ethereum’s expansion is not always smooth, but it is moving towards a more decentralized, data-available, and secure direction. Only when safer and more decentralized solutions reach a certain level can they gain more funding and user recognition, and develop more quickly.

In theory, Bitcoin’s Layer2 can also refer to the development of Ethereum’s Layer2 to find its own “chain”. It will also enjoy a blooming of projects like Ethereum when its security and decentralization reach a level widely accepted by the market.

So, what are the current Layer2 solutions for Bitcoin, and what new changes are worth paying attention to? Let’s take the experience of Ethereum Layer2’s development and turn our focus back to the Bitcoin ecosystem.

The Dilemma and Breakthrough of the Bitcoin Ecosystem

1. The Current Scaling Dilemma of Bitcoin

We haven’t seen many professional organizations or institutions entering the current Bitcoin ecosystem in large numbers. This is because the level of security and decentralization has not reached the satisfaction of these professional players.

When we talk about the development of BTC Layer2, the draft of the Lightning Network white paper was released as early as February 2015. This is the earliest Layer2 “payment protocol” based on BTC, which led the later thinking about Layer2 itself. However, as is well known, the Lightning Network does not support smart contracts. Therefore, it is impossible to develop ecosystem applications related to Bitcoin on the Lightning Network, and it can only serve as a payment extension path.

In 2016, a company that was very optimistic about doing L2 on BTC received $55 million in financing led by Tencent. This company is the well-known “Blockstream” in the industry, and their L2 product is called Liquid Network - interacting with the Bitcoin main chain through two-way anchoring technology, which is a relatively well-known BTC sidechain. However, Liquid’s Bitcoin cross-chain solution is relatively centralized, using 11 certified multi-signature nodes to manage Bitcoin. The overall solution is similar to a permissioned consortium chain, not a true public chain.

Another sidechain that emerged at the same time as Liquid Network is RSK, which was born even earlier and released its white paper in October 2015, but it has not become a widely discussed solution and is no longer mentioned now.

Also in 2016, developer Giacomo Zucco, based on Peter Todd’s philosophy, proposed the preliminary concept of the RGB protocol. But it wasn’t until 2019 that Maxim Orlovsky and Giacomo Zucco established the LNP/BP Standards Association to promote the development of RGB towards practical applications. In April of last year, they released RGB v0.10, which brought full support for smart contracts to Bitcoin and the Lightning Network. From then on, RGB completed the key function of “landing”, and the recent hot “RGB++” came into being. However, both RGB and RGB++ still have a long way to go in terms of real implementation.

Of course, we can’t forget another important player - Stacks. As a well-known Layer2 that claims to truly support smart contracts and can develop decentralized applications on Bitcoin, it has been a leading player in the BTC Layer2 field since its launch in 2018. With the arrival of the “Satoshi upgrade”, it has attracted a lot of attention, but the recent delay of the upgrade has extinguished the enthusiasm.

A recent BTC Layer2 solution is BitVM, which was proposed last year. Its implementation is similar to Ethereum’s Optimistic, so it has received a lot of attention. However, BitVM’s smart contracts run off-chain, and each smart contract does not share a state. BTC’s cross-chain uses traditional Hash locks to anchor assets, which does not really achieve decentralized BTC cross-chain.

Looking back, we can see that BTC Layer2 development actually started much earlier than Ethereum. These attempts have been continuously validated, and later people have been making progress on the shoulders of their predecessors. This has led to the present day in 2024, and the development of BTC L2 is no longer just a spark. We can see the current status and representative projects of several mainstream BTC Layer2 solutions on the market through the following diagram, which gives a clear picture of the current dilemma (thanks to the netizen for providing the diagram).

According to public information, no less than 10 BTC Layer2 projects have received financing this year, and the number is still growing. It can be called a star track. However, so far, there are very few BTC L2s that can really be shown off and recognized by the public. Either they are trapped in technical bottlenecks and the development is blocked, or they are like Merlin, which start high and fall low and get complained about by the community. There are also those who are not decentralized enough, so big money is always afraid to get on the bus and just play a “cover” on the periphery.

As we analyzed in the previous text, the reason why ETH Layer2 has achieved today’s achievements is precisely because it balances “decentralization” and “nativeness”, which makes funds willing to enter the Layer2 ecosystem and thus achieve the “blooming” effect. At present, BTC Layer2 is also in such a dilemma and urgently needs to break the game.

2. Possible breakthrough direction of Bitcoin ecosystem

The recent Bitcoin Hong Kong Conference has just ended. The author had the opportunity to listen to the shares of these well-known BTC L2s on the spot. On the one hand, I attended the conference, and on the other hand, I answered my own doubts. I hope to find a more decentralized, more data available and safer BTC Layer2 direction. Two emerging BTC Layers that have attracted wide attention have entered the field of vision.

First of all, at the event site, the author had a chat with a small partner of BEVM. Although I had seen their news of receiving Bitmain financing before, and also learned about the situation of Taproot Consensus due to RGB research, I was not very clear about their team background and specific situation.

In fact, they made ChainX as early as 2017, a project that brings BTC into Polkadot in a decentralized way, and attracted more than 100,000 BTC to enter the protocol interaction. However, because it uses the multi-signature scheme of 11 people to manage the bitcoin assets of users, there is a certain risk of centralization. Subsequently, due to the famous Taproot upgrade of Bitcoin, which brought a more efficient, flexible, and private transmission method for BTC, the ChainX team saw a new way to construct BTC L2, and thus the first Taproot Consensus-based BEVM network was born.

According to official information, BEVM realizes a trustless BTC network solution through Taproot Consensus, and Taproot Consensus consists of three core functions: first, Schnorr Signature allows bitcoin multi-signature addresses to be expanded to 1000 (compared to ChainX’s 11-person scheme greatly improves security), thereby achieving the dispersion of multi-signature addresses; second, MAST realizes the codification of multi-sign management, not relying on people to sign, but relying on code-driven; finally, Bitcoin Light Node Network relies on bitcoin light node network consensus to drive multi-signature, realizing a completely decentralized bitcoin cross-chain and management.

Logically speaking, the implementation method of Taproot Consensus is neither like the traditional sidechain method, nor like the popular RGB. It seems to have opened up a new technical implementation logic. Of course, the author is not a professional technician and cannot judge from the technical advantages and disadvantages and code level, but at least he sees a brand new solution. In addition, the core developer of BEVM also mentioned BEVM-Stack at the event, a concept similar to OP Stack, which has caused a lot of discussion. After all, if a one-click Layer2 is implemented on BTC, it may bring a new pattern to the development of BTC Layer2.

Another project that was mentioned a lot in Hong Kong is Mezo, which also completed a $21 million Series A financing in April. The investors are very eye-catching, led by Pantera Capital, with participation from Multicoin, Hack VC, Draper Associates, etc. It can be said to be a true representative of Western BTC Layer2.

Mezo uses tBTC as the basis. tBTC is a bridge that has been born for several years to link Ethereum and Bitcoin DeFi. tBTC allows any user who owns BTC or ETH to create tBTC through using a signer network. Unlike previous solutions, the locked bitcoins do not have a centralized custodian, signers are randomly selected, and different signer groups are chosen for each minted tBTC. Signers provide collateral to ensure that they cannot easily take away the funds, and the network operates normally through over-collateralization.

Therefore, tBTC, as an ETH of equivalent BTC value, acts as a bridge between Bitcoin and Ethereum. BTC holders can deposit BTC into smart contracts and receive tBTC. Mezo achieves BTC Layer2 functionality through tBTC. Although it is innovative, it is more like a “technical patchwork monster”. The team that financed this time is also the development team behind tBTC, Thesis.

In addition, from the currently known information, Mezo’s security guarantee method seems to be a multi-signature method, which is not very decentralized in a sense and is questionable.

Of course, the trust issue of BTC Layer2 is the stumbling block hindering development. Although the old saying goes “to attack the shield with the spear of the child”, we cannot belittle the other party’s disadvantages with the advantages of others. Just looking at the development of the industry, how to do a big track, how to set an example is the goal of any project. To take a step back, if BTC Layer2 can achieve the effect of ETH Rollup, why worry about the development of the ecosystem, why can’t it achieve a BTC Layer2 of hundreds of billions of scale?

Outlook

Although the recent macroeconomic changes have brought a lot of impact to the cryptocurrency ecosystem, and also caused Bitcoin’s market value to fall back to around 1.2 trillion US dollars, this does not stop the industry from moving forward, nor will it make people lose confidence in the development of the Bitcoin ecosystem. Although projects like Merlin seem to have started a “bad head” for the BTC Layer2 track, it will not prevent people from continuing to build BTC Layer2.

You know, the development of ETH Layer2 is also full of difficulties, and even requires one or two bull markets to consolidate this trend. But once the technical direction and technical path are confirmed, its rising index is geometric growth, and BTC Layer2 is probably in this difficult uphill period.

From a utility point of view, we need more ecological projects like BEVM that possess “decentralization”, “nativeness” and “more security”, and we also need old players who continue to build like Stacks to contribute fresh blood, as well as innovative projects like Mezo to contribute to the track. Only when the ecology of all flowers blooming together appears, can BTC Layer2 usher in a new spring.

“Pessimists are always right, optimists are always moving forward”, as long as we keep going in the right direction, we are likely to see the real explosion of the Bitcoin ecosystem, not a flash in the pan. After all, the magic box of this billion-dollar race has already been opened. What we can do aside from holding expectations is to show more patience and persistence.

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