Introduction

Bitcoin’s revolutionary potential has been limited by scalability challenges, making it difficult to serve as a global payment system. While innovations like Ordinals and the BRC-20 tokens have increased Bitcoin’s adoption, they have also exposed its limitations, placing significant pressure on the blockchain. As more users engage with Bitcoin, the network sometimes becomes overwhelmed, leading to higher fees and slower transaction times, as Bitcoin’s original design only supports seven transactions per second.

Layer 2 (L2) solutions have been developed to address these issues. They process transactions off-chain while the base layer handles final settlement, thus boosting transaction speed and reducing costs without compromising the security of the Bitcoin network. In addition, Layer 2 solutions such as Lightning Network, BEVM, Stacks, BOB, Merlin Chain, etc. unlock new functionalities, such as enabling smart contracts and making Bitcoin more efficient, versatile, and scalable to meet growing demand.

What are Bitcoin Layer-2 Networks?

Source: Ordinals NFTs X Account

Bitcoin layer-two (L2) networks are protocols designed to operate on top of the main Bitcoin blockchain. Their primary goals are to solve the scalability challenges, improve transaction speed, and lower Bitcoin fees. In addition to these benefits, some L2 solutions even introduce smart contract capabilities, broadening Bitcoin’s potential applications.

Further, the need for Bitcoin layer-two solutions arose from the inherent limitations of its base layer. With a very low transaction rate per second, Bitcoin struggles with scalability, leading to network congestion and soaring fees, sometimes exceeding $120 during busy periods. This makes small transactions costly and impractical.

Bitcoin’s base layer lacks the smart contract functionality for decentralized apps and DeFi platforms. Layer-two solutions address these limitations by reducing gas fees, enabling faster transactions, and adding new capabilities, thereby unlocking the vast, untapped potential within the Bitcoin chain.

How Bitcoin Layer-2 Solutions Work

Source: PrimeXBT

A blockchain network is divided into two key layers: the execution layer, which processes transactions, and the consensus layer, responsible for validating and approving those transactions. Bitcoin Layer 2 solutions create a separate execution layer to handle transactions off-chain before submitting them to the Bitcoin consensus layer for final settlement.

Common approaches include state channels, used by the Lightning Network, allowing multiple off-chain transactions with only the final state recorded on-chain. Sidechains, like Liquid Network, function as independent blockchains linked to Bitcoin, providing faster transactions and added features. On the other hand, Rollups, bundles several off-chain transactions into one, offering cryptographic proof of validity for settlement on the Bitcoin blockchain.

State Channels

Source: Chainlink

State channels, like those in the Lightning Network, allow two parties to exchange bitcoin off-chain, speeding up transactions and cutting costs. By locking bitcoin in a multi-signature address, they can make unlimited off-chain transfers, and only the final state is recorded on the Bitcoin blockchain when the channel closes.

Sidechains

Bitcoin sidechains, like the Liquid Network, operate as separate blockchains connected to Bitcoin through a “two-way peg”. This system allows users to lock their bitcoin on the mainchain and receive equivalent tokens, such as sBTC, on the sidechain for faster transactions and more features. A group of validators manages and secures the asset transfers between the two chains, ensuring accuracy and preventing double-spending. Sidechains also run on their own consensus mechanisms, allowing for custom block parameters and advanced features like smart contracts and privacy, making them more flexible than the Bitcoin mainchain.

Rollups

Source: Chainlink

Bitcoin layer-two rollups execute transactions off the main blockchain, compressing the data, and then submitting a cryptographic proof to Bitcoin for final settlement. This reduces the load on Bitcoin while maintaining its security. Although Bitcoin can’t natively verify these rollups yet, approaches like sovereign rollups, which use Bitcoin for data storage, and possible upgrades to Bitcoin’s script, are being explored. These innovations aim to enhance scalability and enable more efficient transaction processing.

Top Bitcoin Layer-2 Projects to Know in 2024

While discussing Bitcoin Layer-2 solutions, it’s good to note that most layer-2 projects do not have force exit. In the context of Bitcoin scaling solutions, force exit refers to the mechanism by which users can withdraw their funds from a layer-2 solution, such as a sidechain or state channel, even when the network experiences delays, disputes, or becomes unresponsive. This mechanism ensures that users can always retrieve their assets to the Bitcoin mainchain, offering a security guarantee against failures or malicious behavior within the layer-2 system.

Here’s a look at some of the most popular Layer-2 solutions for Bitcoin, which are pivotal in terms of their role in optimizing the blockchain for faster throughput, lower transaction fees, and bolstering adoption:

Lightning Network

Source: Lightning Network

The Lightning Network (LN) is a layer-two solution that boosts Bitcoin’s scalability by enabling fast, low-cost transactions off the main blockchain. By setting up payment channels between users, you can conduct countless transactions, only recording the channel’s opening and closing on Bitcoin’s base layer, more so, every transaction in between happens off-chain, bypassing the limitations of the Bitcoin protocol.

Both parties must lock up a certain amount of bitcoin to open a payment channel. This is held in the channel until it’s closed, and the total amount that can be transferred is equal to the amount committed by both parties. Let’s break this down with a simple example:

Imagine Jessica Pearson and Mike Ross want to open a payment channel. Jessica Pearson puts in 10 BTC, and Mike Ross adds 5 BTC. Together, they commit 15 BTC, and this initial opening transaction is added to the Bitcoin blockchain. Once that’s done, which could take about 10 minutes or more, Jessica Pearson and Mike Ross are free to transact unlimited times with near-instant speed and almost zero cost. Here’s how their transactions could unfold:

• Jessica Pearson sends Mike Ross 1 BTC (Jessica: 9 BTC, Mike: 6 BTC)
• Jessica Pearson sends Mike Ross 2 BTC (Jessica: 7 BTC, Mike: 8 BTC)
• Mike Ross sends Jessica Pearson 3 BTC (Jessica: 10 BTC, Mike: 5 BTC)
• Mike Ross sends Jessica Pearson 1 BTC (Jessica: 11 BTC, Mike: 4 BTC)

When either party decides to close the channel, the final balances are submitted to the blockchain. In this case, Jessica walks away with 11 BTC, and Mike gets 4 BTC.

Now, what happens if Jessica wants to send bitcoin to Carol? Even though Jessica doesn’t have a direct channel with Carol, she can still transact with her because Mike has a channel open with Carol. Jessica can send her transaction through Mike, who will pass it on to Carol, potentially taking a small fee for facilitating the transfer. Over time, thanks to the theory of six degrees of separation, the Lightning Network makes it possible for anyone to transact with anyone else, creating a powerful and efficient layer on top of Bitcoin.

Finally, with support from former Twitter CEO, Jack Dorsey and integration into platforms like X (formerly Twitter), the Lightning Network is rapidly gaining momentum for mainstream adoption.

BEVM

Source: BEVM

BEVM is a Bitcoin Layer-2 network built on Substrate, fully compatible with the Ethereum Virtual Machine (EVM). This integration allows for seamless interaction with BEVM through the Ethereum API and Substrate API, making it highly versatile for developers and users. One of the standout features is that BEVM shares the same account system as Ethereum, allowing you to use your existing mnemonic phrase and private key from Ethereum wallets like Metamask to interact directly with BEVM.

With block finality achieved in approximately 18 seconds (3 blocks), BEVM offers an efficient and secure transaction platform, despite the potential fluctuations in a Proof of Stake (PoS) network. For added security, the network provides enhanced methods for finality detection, ensuring that your transactions are confirmed with high reliability and speed. For developers, BEVM’s compatibility with Substrate and Ethereum opens up many tools for building decentralized applications. Whether you prefer Substrate-based or Ethereum-based development tools, BEVM’s ecosystem supports flexible options to help you easily create and innovate.

BOB (Build on Bitcoin)

Source: BOB

BOB (“Build on Bitcoin”) is a groundbreaking hybrid Layer-2 solution that leverages the strengths of both Bitcoin and Ethereum. By combining Bitcoin’s unmatched security and liquidity with Ethereum’s innovative ecosystem, BOB bridges the gap between Bitcoin’s mass adoption and Ethereum’s thriving development landscape. Through its rollup architecture, BOB uses Bitcoin for security while allowing users to seamlessly access Ethereum’s vast range of decentralized applications (dApps), stablecoins, NFTs, DeFi platforms, and more.

The need for this hybrid approach stems from Bitcoin’s dominance in user base and market capitalization, contrasted by its slower pace of innovation compared to Ethereum. BOB solves this by combining Bitcoin’s Proof-of-Work security with Ethereum Virtual Machine (EVM), enabling developers to build on a network with the largest user base. Meanwhile, BTC holders can tap into Ethereum’s innovations without leaving the Bitcoin ecosystem, offering the best of both worlds for users and developers alike.

With backing from major investors like Castle Island Ventures, Coinbase Ventures, and Bankless Ventures, BOB is positioned to lead a new wave of Bitcoin innovation. It aims to build a decentralized rollup ecosystem that provides security and flexibility, allowing users to engage with a wide variety of applications while remaining anchored to Bitcoin’s robust security and Ethereum’s cutting-edge tools.

BABYLON

Source: Babylon

Babylon is leading the charge in developing security protocols that capitalize on Bitcoin’s strengths to protect the decentralized world. By utilizing Bitcoin’s PoW-secured timestamping and its censorship-resistant block space, Babylon aims to build a more secure, Bitcoin-centered ecosystem. Its two main protocols, Bitcoin Timestamping, and Bitcoin Staking ensure verifiable timestamps for data and allow Bitcoin to provide economic security to decentralized systems through trustless staking.

At the heart of Babylon’s innovation is its Shared Security Protocol, which integrates Bitcoin into other chains, fortifying them against potential PoS attacks while maintaining Bitcoin’s unmatched security. Babylon Chain’s growing network of partnerships demonstrates its versatility, positioning Bitcoin as a critical pillar of decentralized security solutions.

Stacks

Source: Stacks

Stacks, formerly known as Blockstack, is a blockchain platform that enhances Bitcoin’s capabilities by enabling smart contracts, decentralized finance (DeFi), and decentralized applications (dApps). With its STX token, Stacks connects directly to Bitcoin, ensuring security while introducing features like Microblocks and the Clarity programming language for improved smart contract functionality. As Stacks grows, it expands the Bitcoin ecosystem with innovative solutions and applications, positioning itself as a vital player in the blockchain space.

Merlin Chain

Source: Merlin Chain

Merlin Chain is an innovative Bitcoin Layer-2 project from Bitmap Tech that boosts Bitcoin’s scalability using ZK-Rollup technology, allowing for quicker and cheaper transactions. With its testnet launched in early 2024 and a mainnet on the horizon, Merlin Chain features a decentralized oracle network and on-chain BTC fraud-proof modules for enhanced security. Its native token, MERL, serves as a governance token and enables compatibility with Ethereum-based dApps, making it a valuable asset in the crypto ecosystem.

Rootstock Infrastructure Framework (RIF)

Source: RIF

Rootstock (RSK), launched in 2018, features the Rootstock Infrastructure Framework (RIF), a set of open protocols that simplify the development of decentralized applications (dApps) on the Bitcoin network. RIF combines Bitcoin’s security with Ethereum Virtual Machine (EVM) compatibility, offering tools for payments, storage, and naming systems designed to create a more inclusive financial ecosystem. With initiatives like a $2.5 million grant program to support DeFi startups, RIF is dedicated to advancing decentralized finance and empowering developers.

Dovi

Source: DOVI

Launched in 2023, Dovi is a community-focused Bitcoin Layer 2 solution that enhances Bitcoin’s functionality through EVM integration, offering fast and low-cost smart contract capabilities. With features like Schnorr Signatures for improved security and support for various asset types, Dovi enables efficient cross-chain transfers and the deployment of Ethereum-style dApps on the Bitcoin network. Kucoin Labs’ strategic investment underscores Dovi’s potential for long-term growth and its commitment to optimizing user experiences in the Bitcoin ecosystem.

CKB Public Chain

Source: Nervos Network

The Nervos Network is advancing CKB as a unique Bitcoin Layer 2 project, combining Proof of Work with the UTXO model for better scalability and cross-chain functionality. This setup leverages Bitcoin’s security while allowing decentralized apps and token economies. With CKB as the native utility token, it powers transaction fees, resource management, and governance, thus offering strong potential for future development in the Bitcoin ecosystem.

Liquid Network

Source: Liquid Network

The Liquid Network is a Bitcoin layer-2 solution that increases transaction speed and privacy. By using Liquid Bitcoin (L-BTC), pegged 1:1 with BTC, it allows for faster, more confidential transfers. Key features include confidential transactions that hide asset details and atomic swaps for seamless asset exchanges. The network also supports the creation of utility tokens, stablecoins, and NFTs, broadening Bitcoin’s capabilities. Governed by the Liquid Federation, it caters to large-scale transactions, making it ideal for financial institutions and exchanges.

Statechains

Statechains offer a unique approach to Bitcoin scalability by allowing the transfer of coin ownership off-chain. Although still in development, this technology holds potential for micropayments and improved privacy. It’s an experimental solution at this stage, and its true impact will be seen once real-world testing and implementation occur.

Compared to other Bitcoin layer-2 solutions, Statechains focus on privacy and efficiency, while Lightning Network is optimized for micro-transactions, Stacks and RIF enable smart contract functionality. Each L2 network addresses different needs, balancing scalability, decentralization, and security.

Advantages of Bitcoin Layer-2 Solutions

• Scalability: Bitcoin layer-two solutions greatly boost the network’s ability to handle more transactions per second. By processing transactions off-chain, they alleviate congestion on the main blockchain, making it possible to support everyday payments and high-frequency trading efficiently.
• Lower Transaction Fees: With layer-two solutions, fewer transactions are recorded on Bitcoin’s main chain, significantly reducing data storage needs. This lowers fees, making small transactions like micropayments and remittances affordable.
• Faster Confirmations: Unlike the typical 10-minute wait on Bitcoin’s base layer, layer-two solutions offer almost instant transaction confirmations. This speed is crucial for real-time transactions such as retail payments and e-commerce, enhancing user experience.
• Enhanced Privacy: Some layer-two implementations improve transaction privacy, utilizing techniques like onion routing and payment channel anonymity to protect users’ identities and transaction details.
• Smart-Contract Capabilities: Certain layer-two networks introduce smart contract features, allowing for the development of decentralized applications (dApps) and decentralized finance (DeFi) platforms on Bitcoin, expanding its use beyond value transfers.
• Security: Layer-two solutions inherit part of their security from Bitcoin’s proof-of-work system. They benefit from its secure and decentralized consensus model by anchoring to Bitcoin.

Challenges of Bitcoin Layer-2 Solutions

• Secure Bridging Between Bitcoin and L2 Networks: A major challenge for Bitcoin L2 networks lies in secure bridging. These bridges lock assets on the Bitcoin mainchain and mint equivalent tokens on the L2 chain, but this process carries significant security risks. Over time, numerous hacks and vulnerabilities expose users to losses, making bridging a key area that needs improvement.
• Speed and Cost of Settling on the Bitcoin Network: While L2 solutions process transactions off-chain, the final state must be settled on the Bitcoin mainchain. The speed and cost of these settlements are crucial factors affecting overall efficiency. If we want L2 networks to scale effectively, we need faster and cheaper settlement processes on the base layer.
• Maintaining Security Without Direct Bitcoin Validation: Unlike Ethereum L2 networks, where validators directly verify L2 transactions, Bitcoin L2s don’t inherit direct security from Bitcoin’s nodes. Instead, they depend on their own independent security protocols, making it more difficult to match the security provided by Bitcoin’s base layer. L2 networks must find ways to maintain strong security while still benefiting from Bitcoin’s core strengths.
• Increased Centralization Risks: Some L2 solutions require setting up payment channels, relay nodes, or running independent consensus mechanisms. This can lead to a concentration of power in the hands of a few, raising concerns about centralization and potentially threatening Bitcoin’s decentralized nature.
• Technical Complexities and Integration Challenges: Integrating L2 solutions with Bitcoin’s infrastructure presents technical hurdles. Ensuring compatibility, maintaining high-security standards, and achieving consensus within the network pose significant challenges.

Solving these technical complexities or challenges is key to driving broader adoption.

Key Differences Between Bitcoin and Ethereum Layer-2 Solutions

As major players in the cryptocurrency industry, it’s increasingly common to refer to Ethereum as Bitcoin’s twin, due to the unique roles each has played in the successful development, innovative applications, and optimal use cases that have contributed to the ecosystem’s development.

However, this perspective invites further analysis and direct comparisons between the two projects, allowing us to assess where each has distinct strengths and what makes those features noteworthy. Bitcoin and Ethereum utilize layer-two (L2) solutions, but their differences arise from their core architectures. The following analysis focuses specifically on their respective Layer 2 blockchains.

From the analysis above, it’s evident that Ethereum offers more unique features compared to Bitcoin, as it was developed with insights from Bitcoin’s framework, and is built with smart contracts compatibility.

Risk Analysis

The ability to selectively choose Bitcoin Layer-2 projects can stem from having a fair knowledge of the various risks involved with each platform and knowing how best to navigate them. As of October 2024, BTCEden listed the following risk analysis for the following Bitcoin L2 projects, capturing the Bridge Custody of each project, Forced Exit status, State Validation, Data Availability, Censorship Resistance state, and Rollback Resistance as well.

Conclusion

Bitcoin Layer-2 solutions are essential for the development of the Bitcoin ecosystem. They address scalability challenges within the Bitcoin chain offering faster, cheaper transactions, and unlocking new use cases, especially in decentralized finance. With these advancements, Bitcoin is poised for further innovation and institutional adoption.

In addition, the article looked at major Bitcoin L2 solutions, notably Lighting Network, BEVM, Stacks, etc, and compared them with Ethereum’s L2 solutions, noting that both focus on scalability but differ due to their core architectures. Bitcoin’s L2s emphasize security and simplicity, while Ethereum’s L2s tend to offer more advanced features like smart contracts and dApps.

It is believed that the emergence of these L2 solutions will lead to a greater use case for Bitcoin beyond being a store of value or a medium of exchange for peer-to-peer transactions.