In this post, you will learn what Bitcoin Layer 2 (L2) blockchain solutions are, their benefits, and how they operate.
The Bitcoin blockchain was launched in 2009 to support Bitcoin. Back then, the blockchain network could only process seven transactions per second (7TPS), and there was no hassle or congestion.
However, with Bitcoin’s increasing popularity and usage comes the struggle with scalability. The introduction of ordinals, BRC-20 tokens, and other Bitcoin-native on-chain apps further worsened the issue.
This scalability issue gradually gave birth to slow transaction speeds, high transaction fees, network congestion, and low throughput. All these made Bitcoin impractical for everyday use, especially during peak times.
To combat these ongoing scalability issues, Bitcoin scaling solutions are needed, and this is where the layer-2 protocols come in.
In this article, we will take an in-depth look at what Layer-2 Blockchain solutions are and how they work. Read on.
What is Bitcoin Layer 2?
While blockchain offers several advantages, including high security and decentralization, it also presents issues with scalability. As a result, several scaling solutions have been proposed in recent years to improve security, improve scalability, and lower network congestion.
However, two major solutions have stood out: Layer-1 and Layer-2 solutions. While the Layer-1 solution represents the core Bitcoin protocol, Layer-2 solutions are built on top of Layer 1 to enhance scalability.
Bitcoin Layer 2 Solutions Defined And Explained
In a nutshell, Bitcoin layer 2 solutions are off-chain protocols, systems, or technology built on top of the existing Bitcoin blockchain that help improve its scalability and transaction efficiency.
They are secondary protocols built on the main Bitcoin blockchain protocol with the purpose of addressing scalability issues, improving transaction speeds, and reducing transaction fees.
Layer-2 solutions increase at all times without changing any of the original decentralization or security features that are vital to the proper functioning of the original Bitcoin network.
This is possible by transferring the transactional load of a portion of Level-1 Blockchain to another system framework. From there, the Layer-2 will now deal with the processing load, reporting to the main blockchain to finalize the result.
This shift of the major data processing functions to the adjacent architecture leaves the Layer-1 blockchain less jammed, which ultimately enhances scalability.
One such architecture is the Lightning Network, which was designed to speed up transactions on the Bitcoin blockchain.
More so, some Layer 2 solutions introduce smart contract capabilities, which expand Bitcoin's potential use cases.
These systems generate a unique execution layer, enabling off-chain transactions and utilizing the main Bitcoin blockchain for the closing processes.
How Scalability and Programmability Can Transform Bitcoin
Scalability and programmability are both key to the future of the Bitcoin ecosystem. Scalability enables the network to process increasing transaction volumes, while programmability aids the support of broader apps. However, the current Bitcoin network is limited in both areas.
Scalability
This means a network’s capacity to carry and process more workload without affecting its efficiency, security, or performance.
Scalability is the ability of a network to process more work without compromising its performance, efficiency, or security. In this context, the Bitcoin network can process more transactions per second without lagging, slowing down, or increasing transaction fees.
As mentioned before, when the Bitcoin network was built, it had the capacity of processing an average of seven transactions per second. It takes an average of 10 minutes to complete a single block of transactions.
This low transaction throughput and limited block size are major limitations to Bitcoin’s wider adoption. They usually lead to slower transaction times, network congestion, and higher transaction fees as adoption and demand increase.
Since Bitcoin promises a faster, cheaper, more transparent, and more secure transaction alternative to traditional finance, its network needs to be scalable to accommodate the ever-increasing demand for transactions.
Scalability is important for Bitcoin to be widely adopted as a viable payment system and to support the growth of dApps.
Several scalability solutions have been adopted, which include Layer 2 Solutions (Lightning Network), On-Chain Solutions (SegWit), Sidechains (Rootstock (RSK), and Sharding.
In a nutshell, scalability is essential in the Bitcoin blockchain. Without it, the blockchain would be too slow, very expensive, and unable to compete with existing TradFi payment solutions.
Programmability
Bitcoin was created with the ‘Script’ programming language, which is relatively simple and limited. These properties make it difficult for developers to build complex Decentralized Applications (dApps) on the Bitcoin network despite its latest smart contract functionality.
To address this issue, there is, therefore, a need for more Bitcoin programmability, which can either be done with sidechains like RSK or layer-2 solutions like the Lightning Network.
Programmability is very important for Bitcoin to transcend beyond a simple payment solution to a platform for integrating a wider range of dApps.
Bitcoin Layer 2 Explained: What You Need to Know?
The Bitcoin blockchain is made up of two layers - the consensus layer and the execution layer. The execution layer is concerned with processing transactions, while the consensus layer is concerned with validating and approving these transactions.
BTC L2 solutions work on the execution layer. They create a separate execution layer to process transactions off-chain. These transactions are then submitted to the consensus layer for validation and approval.
The most commonly used Bitcoin Layer 2 solutions include:
Nested Blockchains
This type of chain is usually built on another blockchain. Their blockchain architecture includes a base chain that sets the rules for other networks to follow. Meanwhile, the blockchain executes instructions on a linked web of secondary chains on the network.
Additionally, the main chain can accommodate multiple blockchain levels, interconnected to form a parent-chain relationship. However, their way of operation is not complicated, with the parent chain delegating to the child chains, which then process the data and send updates to the parent when they are done.
A good example is the Layer-2 nested blockchain platform, OMG Plasma. The chain functions on the Layer-1 Ethereum network, which enables it to facilitate cheaper and faster transactions.
State Channels And Payment Channels
This ensures proper communication between the off-chain transaction networks and the main blockchain infrastructure. It uses smart or multi-signature contracts to facilitate this process. This makes it easier for users to easily and quickly carry out off-chain transactions. Once the State Channel completes all sets of transactions, it adds them to the underlying blockchain to complete the process.
On the other hand, the Payment Channel plays its own important role in making payments between users or participants on the network. The architecture comes in handy for participants looking for high transactions at very low transaction costs. A very popular state channel solution is the Ethereum Raiden Network.
Sidechains
Sidechains are generally regarded as the bridge between the Layer-1 solutions and Layer-2 solutions. They are high-value blockchains that use their own blockchain parameters and consensus mechanisms.
Sidechains work hand-in-hand with the main blockchain, mostly operating as a blockchain extension using a two-way hybrid capability. They are basically utilized for large batch transactions while the mainchain maintains security and confirms batched transaction records. A good example of a sidechain solution is Ethereum-based xDai, which offers low gas fees and short 5-second block times.
Rollups
Rollups, as its name implies, rolls up sidechain transactions into a unified platform. After this process, it generates what is called SNARK, a cryptographic proof, and submits the update to the main blockchain.
Rollups come in two types - optimistic and zero-knowledge rollups. They deal with transaction execution and data management.
In a nutshell, State Channels offers several benefits, including giving several participants the opportunity to transact off-chain. But PAyment channels only have provision for two participants. Rollups, on the other hand, enable multiple transactions under one network, reducing the high amount of data needed for transactions on the main chain.
Sidechains are linked to the main blockchain, but they work independently. Sidechains carry out the transactions before they send the result to the main chain.
Any of these L2 solutions significantly enhance transactions and reduce transaction fees, making them particularly useful in the DeFi sector.
Bitcoin Layer Two: Faster, Cheaper, Smarter
Bitcoin Layer Two solutions offer several benefits, which include:
Greater scalability: Bitcoin L2 effectively increases Bitcoin transaction speed and throughput. Transactions are processed off-chain before they are transferred back to the main chain, which reduces the workload on the main blockchain.
Reduced fees: Low transactions in the blockchain lead to higher transaction fees and slower transactions. This further opens up new use cases, such as micropayments, that were initially not possible on the main chain
Programmable smart contracts: Originally, Bitcoin was not designed to support smart contracts. However, with Layer 2 solutions, this functionality is now possible, enabling complex dApps and DeFi protocols and new programmable FinTech tools to be built on the Bitcoin network.
Deeper liquidity: The BTC L2 solution aids deeper liquidity and increased access to Bitcoin, unlocking decentralized finance (DeFi) on Bitcoin with capital efficiency.
Faster confirmations: Generally, the Bitcoin mainchain spends an average of 10 minutes to complete a full block of transactions However, L2s offer near-instant transaction confirmations. This makes Bitcoin useful for point-of-sale transactions and online commerce, further broadening the range of Bitcoin’s practical applications.
Other benefits include enhanced privacy and inherent security.
Key Bitcoin Layer 2 Projects
Here are some of the most popular Layer-2 projects for Bitcoin. These projects help to optimize the Bitcoin blockchain for faster transactions per second, lower transaction fees, and greater adoption.
Lightning Network: In 2015, the Lightning Network (LN) was first proposed in a whitepaper, but it became operational in 2018.
The Lightning Network resolves scalability issues and significantly enhances transaction efficiency by creating payment channels between users. This enables users to carry out an unlimited number of Bitcoin transactions without necessarily recording each of them on the blockchain.
Currently, the LN can handle up to about 1M transactions per second compared to Bitcoin's main chain. Lightning Network is the best for instant Bitcoin payments.
Stacks: Stacks, formerly called Blockstack, was launched in 2013 by Ryan Shea and Muneeb Ali but rebranded to Stacks in 2020.
Stacks and the Lightning Network have similar operation modules, as the former is designed to enhance Bitcoin’s functionality with the introduction of NFTs, DeFi, dApps, and other smart contracts.
Stack works using STX, its native token, which executes smart contracts and processes transactions. Additionally, STX tokenomics use token locking to facilitate network consensus, similar to how BTC facilitates and secures its network.
Merlin Chain: Launched by Bitmap Tech., Merlin Chain is gearing up for the launch of its mainnet after launching its testnet early last year. The network uses ZK-Rollup technology to strengthen Bitcoin’s efficiency and operability. Merlin Chain ensures faster and cheaper transactions by compressing transaction data considerably.
The platform improves security and enhances transparency using a Decentralized Oracle network while integrating on-chain BTC fraud-proof systems. Another interesting aspect about the network is its use of MERL, its native BRC-20 token. This token represents a vital part of the entire network, especially when it comes to the platform’s governance framework
Rootstock Infrastructure Framework (RIF): This provides decentralized services, such as naming systems, payments, and storage. It was launched in 2018 and is powered by the Rootstock Blockchain.
The platform utilizes the RIF token to manage its utility , giving access to holders for the payment of decentralized services. RIF comes with features such as cheaper, efficient, and faster transactions.
There are other Layer-2 projects for Bitcoin that deserve recognition. These include Liquid Network, Chain, CKB, and Dovi Network.
Shaping the Future of Bitcoin
Here are some of the main ways through which the Bitcoin L2 enhances the Bitcoin ecosystem:
Increased adoption: Bitcoin L2 solutions not only promote faster and cheaper Bitcoin transactions but also enhance functionality. All of these can attract more developers and users to the Bitcoin ecosystem.
Long-term sustainability: Layer 2 solutions address scalability issues, ensuring Bitcoin’s long-term sustainability. L2s ensure that Bitcoin remains a viable and competitive technology for the future.
Innovation: Finally, L2s provide a platform where developers can build innovative dApps and financial services on top of the Bitcoin network.
Security and Risks
Although Layer 2 solutions are developed to improve scalability and transaction speed on the Bitcoin network, they are not without new security issues and risks.
Some of these security issues and risks include the following:
Technical complexity: Normally, all L2 solutions add a level of complexity to the BTC ecosystem, which may negatively impact user adoption. For instance, users must trust and understand these new solutions, making user-friendliness and security two important challenges.
Channel attacks: Since the LN relies on payment channels, it is susceptible to attacks using stale transactions or fraudulent channel closures.
Liquidity concerns: Layer-2 solutions like Lightning Network demand that participants keep their funds in payment platforms, which could cause liquidity problems. When funds are locked up, they are unavailable for other uses.
Smart contract vulnerabilities: Since Rootstock supports the deployment of smart contracts, the platform is exposed to smart contract vulnerabilities like integer overflows and reentrancy attacks.
Centralization risks: Inadvertently, some L2s may introduce centralization risks, potentially undermining the decentralized nature of BTC. For example, a few dominant nodes may centralize transactions in larger payment channels in the LN.
Integration and interoperability issues: L2s must seamlessly integrate with the existing Bitcoin main block. Also, interoperability must exist between different L2 solutions. The lack of any of these can lead to fragmentation in the infrastructure, reducing the overall efficacy of the solutions.
Double-spending: Under certain circumstances, Rootstock (RSK), being a sidechain, is susceptible to a double-spending attack, especially when moving Bitcoin between the network and RSK.
Future Outlook
It is key to note that research on Bitcoin network scalability is still in progress and many more solutions could be built in the future. These new solutions will be necessary to correct some of the challenges the current L2 solutions are facing
Current L2 solutions, such as the LN, Stacks, Rootstock, Liquid Network, etc., have brought scalability and programmability to the Bitcoin main chain. However, Layer 2 solutions will play an important role in the future of Bitcoin blockchains by:
- Further scaling the network
- Creating app ecosystems
- Enhancing privacy
- Broadening accessibility and adoption, and
- Maintaining decentralization and security
- Improving technological advancements
- Promoting widespread adoption
- Aiding integration with traditional finance (TradFi)
- Collaboration between different L2 projects
Conclusion
Experts are of the opinion that the scalability of networks is the main issue preventing the widespread adoption of Bitcoin. As a result, many researchers are looking for possible solutions to this problem. While the L2 solution is one of the solutions they have come up with, it still lacks the level of scalability needed to process high levels of data in record time.
Layer-2 solutions are secondary protocols or frameworks that are built on an existing blockchain. However, they function independently without altering the functionality of the main chain.
They help the main chain by taking responsibility for a greater part of the work that would have been left for the main chain to perform. In this way, the L2 solutions offer high scalability, completing thousands of transactions per second at optimum levels. These solutions also ensure low fees and micro transactions.
Additionally, they are built for speedy transactions, making them an improvement on the usually slow transaction process of the main chain. Users on the protocol are not bothered by miner verification. The introduction of Layer 2 protocols has improved the overall transaction speed on the blockchain, which marks a new turning point for the Bitcoin network.
Moreover, L2 solutions are designed in such a way that they improve speed, as users don’t have to waste time on miner verification. Overall, the advent of the Bitcoin L2 protocols marks a new milestone for the Bitcoin network.
However, these protocols still come with their own limitations. For instance, while Plasma Chains offer low cost and high frequency per transaction, they are not suitable for high-level transactions.
However, these Bitcoin L2 protocols are not free of limitations. For example, while plasma chains ensure high throughput and low costs per transaction, they only allow for basic transactions, such as swaps and token transfers.
As researchers and experts continue to unravel more solutions, we hope to see a blockchain protocol that is super fast and highly scalable to encourage more adoption in the industry.
We hope you’ve learned new things in this post. If you have any questions about Bitcoin Layer-2 blockchain solutions, don't hesitate to tell us in the comment section.