Bitcoin, referred to as BTC, is an open source cryptocurrency system based on the decentralized consensus of the blockchain and operated through peer-to-peer network communication. It is jointly maintained by computer networks and nodes around the world. However, as the encryption community and ecology continue to develop and expand, early BTC technology can no longer meet users’ needs for the scalability of the cryptocurrency system. Directly modifying the underlying protocol of BTC is not only complex, but also faces huge community resistance, increases system risks, and may trigger hard forks and community splits. Therefore, the BTC Layer 2 solution has become a more suitable choice - by building a new layer, it is compatible with BTC without changing BTC, and meets users’ needs for scalability. The Chainsource security team comprehensively analyzed the security of BTC Layer 2 from multiple aspects such as L2 solutions, protective measures and future development, hoping to provide valuable reference for everyone.

BTC Layer2 solutions and potential security issues

BTC Layer2 refers to the second layer expansion technology of Bitcoin (BTC). This type of technology aims to increase Bitcoin’s transaction speed, reduce handling fees, increase scalability, and solve a series of problems faced by BTC. There are currently many BTC Layer2 solutions, the more well-known ones include Lightning Network, Rootstock, Stacks, etc. In addition, some projects and protocols such as Liquid, Rollkit, and RGB also have certain usage scenarios.

1.Lightning Network

The Lightning Network is probably the most well-known Layer 2 solution for BTC. It operates as an off-chain network, allowing participants to conduct fast, low-cost transactions without recording each transaction on the Bitcoin blockchain. By creating a network of payment channels, the Lightning Network enables micro-transactions and significantly reduces congestion on the main chain. Usage scenarios:

Micropayments/peer-to-peer payments/e-commerce and retail transactions for content creators. Key Features:

• Instant Payments: Transactions are settled immediately.
• Low Fees: Very low fees, suitable for microtransactions.
• Scalability: Ability to handle millions of transactions per second.

Security Question:

• Channel Attacks: The Lightning Network relies on payment channels, which can be attacked by attackers using stale transactions or fraudulent channel closures.
• Liquidity issues: If funds are concentrated on a few nodes, these nodes may become targets for attacks, resulting in a less decentralized network.
• Network Splitting Attacks An attacker may attempt to split the network, causing different parts of the network to become out of sync.

2.Rootstock (RSK) Rootstock, referred to as RSK, is a smart contract platform built on Bitcoin. It leverages the security of Bitcoin while supporting Ethereum-compatible smart contracts. RSK operates as a sidechain of Bitcoin, using a two-way peg mechanism to allow BTC to flow between the Bitcoin network and the RSK blockchain. Usage scenarios: decentralized finance (DeFi) applications/issuance of tokens on the Bitcoin network/cross-chain applications. Key Features:

• Smart Contract: Compatible with Ethereum and supports DeFi applications.
• Federated Mining: Bitcoin miners can mine RSK at the same time, enhancing network security.
• Interoperability: Bridging Bitcoin with Ethereum-like functionality.

Security Question:

• Double-Spending: RSK as a sidechain may be subject to a double-spending attack under certain circumstances, especially when transferring BTC between Bitcoin and RSK.
• Smart contract vulnerabilities: RSK allows the deployment of smart contracts, which exposes it to similar smart contract vulnerability risks as Ethereum, such as reentrancy attacks, integer overflows, etc.

3.StacksStacks is a unique Layer 2 solution that brings smart contracts and decentralized applications (dApps) to Bitcoin. Unlike other Layer 2, Stacks introduces a new consensus mechanism - Proof of Transfer (PoX), which anchors Stacks transactions to the Bitcoin blockchain. Usage scenarios: lNFT platform/decentralized finance (DeFi) services/governance and identity solutions. Key Features:

• Smart Contracts: Clarity, a security language designed for predictable smart contracts.

Bitcoin Anchored: Transactions are secured by Bitcoin.

• Decentralized Applications (dApps): Allow developers to build decentralized applications on Bitcoin.

Usage scenarios: lNFT platform/decentralized finance (DeFi) services/governance and identity solutions. Security Question:

• Consensus Attacks: Since PoX, the consensus mechanism of Stacks, relies on the Bitcoin network, attackers may try to affect the consensus of Stacks by manipulating the Bitcoin network.

• Smart Contract Vulnerabilities: Similar to other smart contract platforms, Stacks faces potential vulnerabilities in the smart contract code.

  4.LiquidLiquid is a sidechain-based Layer 2 solution dedicated to improving Bitcoin transaction speed and privacy. Developed by Blockstream, Liquid is ideal for traders and exchanges, enabling faster settlements and confidential transactions. Usage scenarios: high-frequency trading/cross-border payment/tokenized asset issuance. Key Features:

• Confidential transactions: The transaction amount is hidden to enhance privacy.
• Fast Settlement: Transactions settle in approximately 2 minutes.
• Asset Issuance: Allows the creation of digital assets on the Bitcoin network.

Security Question:

• Mainchain Dependency Risks: Liquid, as a side chain, relies on the security of the Bitcoin main network. Any attacks or vulnerabilities on the main network may affect Liquid.
• Privacy risk: Although Liquid supports confidential transactions, privacy may still be compromised if keys are not managed properly.

5.Rollkit Rollkit is an emerging project that aims to bring Rollups, a popular scaling solution in the Ethereum ecosystem, to Bitcoin. Rollups aggregate multiple transactions into a batch that is then submitted to the Bitcoin blockchain, reducing network load and lowering fees. Usage scenarios: Scalable DeFi applications/aggregation of micropayments/high-throughput decentralized applications. Key Features:

• Scalability: Dramatically increase transaction throughput.
• Cost efficiency: Reduce fees by processing transactions in batches.
• Security: Inherit Bitcoin’s security model.

Security Question:

• Data Availability Attacks: In the Rollups scheme, if the data is unavailable, the verifier may not be able to verify the validity of the transaction.
• Economic incentive issues: Rollups need to design a strong economic incentive mechanism to prevent participants from trying to obtain benefits through unfair means.

6.RGBRGB is a smart contract system that utilizes Bitcoin’s UTXO model. It is designed to support complex smart contracts while maintaining the privacy and scalability of Bitcoin. RGB focuses on creating an off-chain environment where smart contracts can be executed with minimal impact on the main chain. Usage scenarios: asset tokenization/privacy applications/flexible smart contract development. Key Features:

• Based on UTXO: Maintaining the security and privacy features of Bitcoin.
• Off-chain execution: Minimize on-chain occupancy.
• Customization: Supports a wide range of smart contract application scenarios.

Security Question:

• Smart contract complexity risk: Smart contracts in RGB systems can be very complex, leading to increased potential security vulnerabilities.
• Credibility issues in off-chain execution: RGB relies on the off-chain environment for the execution of smart contracts. If the execution environment is attacked or manipulated, the security of the contract may be affected.

Existing security measuresThe BTC Layer 2 solution shows great potential in improving the scalability and functionality of the Bitcoin network, but it also introduces a new set of security challenges. Security will become one of the key factors for its success and widespread adoption. . In order to deal with potential security risks, BTC Layer2 can take the following main security precautions:

• Channel security and financial protection

Multisig & Timelocks (Multisig & Timelocks): As in the Lightning Network, funds are usually stored in multi-signature addresses, and funds can only be transferred after all relevant parties reach a consensus. The time lock mechanism ensures that in the event of a dispute, funds are not permanently locked and can eventually be returned to the owner. Reliability of off-chain transactions: By using off-chain transactions, users can conduct transactions quickly, but these transactions still need to be synchronized with the main chain regularly to prevent double spending or loss of funds.

• Fraud proof and challenge mechanisms

Fraud Proofs: In some Layer 2 solutions (such as Rollup), fraud proofs are used to detect and respond to malicious operations. For example, if a party attempts to submit an invalid status update, other participants can challenge it with a fraud proof to prevent invalid transactions from being uploaded to the chain. Challenge Period: Give users a period of time to review and challenge suspicious transactions, thereby improving the security of the network.

• Network and protocol robustness

Protocol upgrades and audits: Protocols are regularly reviewed and upgraded to fix known vulnerabilities and enhance security. For example, in Rootstock or Stacks, code audits and community reviews are crucial to keeping smart contracts safe. Decentralized operating nodes: By increasing the degree of node distribution, the possibility of single point failure in the network is reduced, thereby improving the network’s resistance to attacks.

• Privacy and data protection

Encrypted communications: Ensure communications between all participants are encrypted, preventing man-in-the-middle attacks or data leaks. Zero-Knowledge Proofs: In some Layer 2 solutions, zero-knowledge proofs are introduced to enhance privacy and security and avoid leaking sensitive information of transaction parties.

• User Education and Risk Warning

Improve user security awareness: Educate users about the risks of layer 2 networks and encourage them to use reliable wallets and safe operating methods. Risk warning: When using Layer 2 solutions, users are reminded of possible risks, such as the complexity of off-chain transactions or disputes when channels are closed.

• Security of off-chain transactions

State Channel Security: Ensure the integrity of off-chain status and regularly submit status updates to the main chain to reduce the risk of fund theft or fraud. These measures work together to ensure the security of the Bitcoin second-layer network and provide users with a reliable and scalable trading environment.

Future security development trends

The industry is changing rapidly, and new BTC L2s are born every second, but what remains unchanged is the inevitable trend of the BTC ecosystem developing towards the second layer. BTC is a train that everyone wants to get on. Despite the challenges, the future of the BTC ecosystem is full of infinite possibilities. From a consensus of fair distribution to an inscription-based scaling solution, to a fully mature scaling solution that pursues strong security shared with BTC, the Bitcoin ecosystem is undergoing historic changes:

• Unlocking the DeFi market: By enabling features like EVM-compatible Layer 2 solutions, Bitcoin can tap into the multi-billion dollar DeFi market. Not only does this expand Bitcoin’s utility, it also unlocks new financial markets that were previously only accessible through Ethereum and similar programmable blockchains.
• Expanded usage scenarios: These Layer 2 platforms not only support financial transactions, but also support various applications in fields such as finance, games, NFT or identity systems, thus greatly expanding the original scope of Bitcoin as a simple currency

The second-layer network uses zero-knowledge proof to enhance security, Rollup technology improves scalability, fraud proof ensures the security of its transactions, etc. These technologies are not only expected to significantly improve the scalability and efficiency of the BTC network, but also introduce new Asset types and transaction methods open up new opportunities for users and developers. However, successfully achieving these goals requires a concerted effort of community consensus, technical maturity, and practical validation. In the search for the most effective L2 solutions, security, decentralization, and optimizing user experience will remain top priorities. Looking to the future, with technological advancement and community collaboration, BTC L2 technology is expected to unleash new potential in the Bitcoin ecosystem and bring more innovation and value to the cryptocurrency world.

Conclusion

The huge market demand and the free competition in the market will definitely give rise to technological innovation. The future of L2 solutions is closely related to the overall development of blockchain technology. Through in-depth analysis of BTC Layer2 solutions and potential security challenges , we reveal the risks it faces in smart contracts, identity verification, data protection, and more. Although there are currently a variety of protective measures in place, with the continuous development of technology, BTC Layer2 still needs to continue to innovate in areas such as ZK technology, cross-chain security, and even quantum encryption to cope with future security challenges. As blockchain technology further matures, we can expect more innovation and change to occur. First, as technology continues to mature and standardize, L2 solutions will be more stable and reliable. Second, as the ecosystem continues to expand, Bitcoin will be applied in more scenarios and industries, further promoting the development of the entire cryptocurrency industry. . Overall, the intensive launch of the Bitcoin Layer 2 project’s mainnet marks a new milestone for the Bitcoin network.

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