Explore the BTC Layer 2 track and opportunities

Slow Bitcoin transaction throughput has long been a concern for its users. While Bitcoin's security and decentralization have always been its strengths, its limited transaction speed hampers its ability to efficiently process large volumes of transactions.

In the first half of the year, from Bitcoin ecological NFT to BRC-20 tokens swept the entire Bitcoin network. As more and more people entered the market, the BTC miner network became more congested and the cost was higher. To solve the congestion on the Bitcoin chain, Reducing Gas fees has become a demand of users, and discussions on Bitcoin expansion have become popular again.

In addition, Ethereum founder Vitalik (V God) also recently expressed his views on Bitcoin. Vitalik recognized the development potential of Bitcoin outside the payment system and emphasized the importance of Bitcoin development scalability. Bitcoin's status as the world's largest cryptocurrency by market capitalization is undisputed. However, Vitalik believes that Bitcoin has the potential to surpass its current role as a payment system, and to achieve this goal, more scaling solutions need to be implemented.

In this article, we will explore the various scaling solutions and participation opportunities of Bitcoin's Layer 2.

Why does Bitcoin expand

Bitcoin is a decentralized digital currency. Its blockchain technology and various advantages make it the choice of many investors. However, the expansion of Bitcoin has plagued its development.

Bitcoin's block size has been hotly debated. In fact, at the beginning of Bitcoin's birth, there was no limit to the block size, and its own data structure can reach a maximum of 32MB. At that time, the average packaged block size was 1-2KB. Some people believed that the upper limit of the blockchain was too high, which would easily lead to waste of computing resources and DDOS attacks. Therefore, in order to ensure the security and stability of the Bitcoin system, Satoshi Nakamoto decided to limit the block size to 1MB. Based on the fact that each transaction accounts for 250B and an average of one block is generated every ten minutes, the Bitcoin network can theoretically process up to 7 transactions per second. However, at that time, the number of Bitcoin users was small, and the transaction volume was also very small, which did not cause congestion in the blockchain network. However, after 2013, the number of Bitcoin users has increased, and the problems of Bitcoin network congestion and rising transaction costs have gradually emerged.

According to the Bitcoin browser, there are currently 138,448 unconfirmed transactions on the Bitcoin network, and this data reaches a maximum of 440,765. The processing speed of 7 transactions per second obviously cannot meet the needs of users. At the same time, Bitcoin network transaction fees have also soared.

Slow transaction speed, long transaction confirmation time, high transaction fees, and limitations in network scalability have all hindered the development of the Bitcoin ecosystem at this stage, and are also important reasons why Bitcoin urgently needs to expand at this stage. In order to solve these problems, the Bitcoin Layer 2 expansion solution (BTC Layer 2) has once again become the focus of the encryption market: in order to solve the chain congestion and high fees, we need Lightning Network to improve transaction efficiency; in order to solve the issue of Bitcoin network assets in the future, We need the RGB protocol; in order to realize the safe transfer of assets, we need the support of the BTC side chain.

BTC Layer2 development history

BTC Layer 2 is a layer above the BTC network. Its main purpose is to solve the problems of insufficient transaction throughput, high transaction fees and difficult expansion of the BTC network. In layman's terms, Layer 1 refers to the Bitcoin public chain. In order to solve the throughput problem of the BTC network and avoid high fees, transactions can be moved to Layer 2 for processing, and the results will be returned to Layer 1 after processing, thereby reducing network pressure on the Bitcoin network. The result is increased liquidity and scalability for Bitcoin.

Compared with the prosperity of Ethereum and other ecology, there are few ecological projects in Bitcoin. At present, the TVL market value of the entire Ethereum ecosystem has reached about 26 billion U.S. dollars, and the TVL of the Bitcoin ecosystem is about 180 million U.S. dollars. However, Bitcoin The market value of Bitcoin is nearly 600 billion U.S. dollars, and the market value of Ethereum is about 230 billion U.S. dollars. Therefore, in the long run, the Bitcoin ecosystem still has considerable room for growth.

In fact, the expansion plan of BTC is much earlier than the expansion proposal of Ethereum. As early as 2012, different protocols and architectures have appeared. Using Bitcoin as the characteristic of the settlement network, the whole idea is to increase the function of the main chain and Do not put it at risk.

In 2012, Colored Coins (Colored Coins) took advantage of the Bitcoin blockchain and aimed to "color" a specific Bitcoin to distinguish it from other Bitcoins. The goal was to take advantage of Bitcoin and its existing Infrastructure for non-monetary transactions. Although colored coins never fully evolved independently, they inspired new technologies that are widely used today. In 2017, SegWit (isolated witness) was upgraded and activated, expanding the block space to 4MB, thereby increasing transaction throughput. Until 2018, developers gradually launched the Lightning Network (Lightning Network) and Sidechains (Sidechains), and the second layer of Bitcoin entered the public eye. The Taproot upgrade in 2021 will bring a more secure, efficient, and private Bitcoin. This year, the emergence of the BRC-20 protocol has further enriched the related ecology of Bitcoin. In the current Bitcoin ecosystem, the more mainstream protocols include sidechains and lightning networks.

BTC Layer2 ecological development status

At present, there are many BTCLayer2 solutions, the more well-known ones are Lightning Network, Rootstock, Stacks and so on. In addition, some projects and protocols such as Liquid, Rollkit, and RGB also have certain usage scenarios.

Lightning Network

Lightning Network (Lightning Network) is a BTC layer-2 expansion solution designed to make Bitcoin transactions faster and cheaper. The reason why Bitcoin is congested is that its main network TPS can only carry out 7 transactions per second. In order to package the transactions submitted by users as soon as possible, users need to increase the payment of Gas fees to obtain the priority of miners for packaging. This is why BRC After the -20 agreement came out, the reasons for the congestion and high fees on the Bitcoin chain. The core logic of the Lightning Network is to put the user's transaction link off the chain, and the final transaction result on the chain, so as to improve the transaction efficiency of the Bitcoin network, and the user can complete the payment quickly and efficiently.

The concept of the Lightning Network was first proposed by Joseph Poon and Thaddeus Dryja in 2015. The idea is to have two people block a series of bitcoins in a multi-signature address they control, thereby establishing a collaborative agreement governed by the agreement itself. The creation of this new address is done through a real transaction on the Bitcoin network, known as "opening a payment channel". BTC transactions made between two participants will not be recorded in the Bitcoin blockchain, instead the state is stored by Lightning nodes. Once both parties decide to close the payment channel, all transactions that occurred inside will be merged and then broadcast to the main blockchain ledger to register the final balance of their wallets after deducting all transactions made during the period.

The Lightning Network improves off-chain transaction channels by introducing the idea of smart contracts. There are two core concepts: RSMC (Recoverable Sequence Maturity Contract) and HTLC (Hashed Timelock Contract). The former ensures that direct transactions between two people can be completed off-chain, and that transfers between any two people can be completed through a "payment" channel. By integrating these two mechanisms, transactions between any two people can be completed off-chain. Throughout the transaction, the smart contract plays an important role as an intermediary, while the blockchain network ensures that the final transaction result is confirmed.

Since the birth of the Lightning Network, the ecology has developed rapidly, and currently has a TVL of 140 million US dollars. The principle of the Lightning Network is relatively easy to implement, but when it is applied to the protocol, its technology is relatively simple, especially in the case of Bitcoin’s limited programming. , How to deal with the communication and application processing on Layer1, this is a problem that needs to be solved. With the continuous development of Lightning Network, various protocols for Lightning Network supporting facilities have gradually developed, one of which is OmniBOLT.

OmniBOLT is a protocol built on top of Bitcoin and the OmniLayer network, allowing the use of Lightning Network for native OmniLayer encrypted asset transactions, and the OmniBOLT channel allows instant transactions of encrypted assets issued on top of OmniLayer. OmniBOLT itself does not issue encrypted currency tokens, but only provides more functions to enable wider adoption and use of OmniLayer. With the help of OmniBOLT solutions, cross-channel atomic swaps of different assets can be realized, and more flexible Defi contracts can be achieved through OmniLayer easily issues and interacts with decentralized smart assets and smart contracts directly on top of Bitcoin.

At its core, OmniBOLT takes the ease of use and functionality found in the already established DeFi ecosystem and brings it to the Bitcoin network. Allows instant payment of assets via OmniLayer and easy deployment of Bitcoin-based smart contracts. OmniBolt takes the development and functionality of the Lightning Network to a new level, allowing decentralized finance applications to run on top of the Bitcoin network. The protocol will create a robust ecosystem around Bitcoin to accelerate Bitcoin innovation and commercial adoption. By bringing DeFi to the Bitcoin network in a highly scalable and cost-effective manner, OmniBOLT ushers in a new era of smart contracts and DeFi functionality. But at present, OmniBOTL involves multiple protocol systems, and the technology is relatively complicated, so its security needs to be tested.

Rootstock

Rootstock is an EVM-compatible sidechain on the Bitcoin network. It is a smart contract platform that allows developers to use the language of Ethereum to build smart contracts. The highlight of Rootstock is merged mining, that is, Bitcoin miners can mine Bitcoin and RSK blocks at the same time, allowing developers to obtain better benefits.

Rootstock is a side chain of Bitcoin, so it has its own network and blockchain. Compared with Bitcoin, Rootstock provides richer functions. Rootstock uses RBTC as a transaction and contract fee, issued by BTC on the main network through the cross-chain bridge 1:1, and can be converted to Bitcoin at any time. The cost consumed by developers when deploying smart contracts in the RSK network is settled with RBTC tokens. RBTC is mainly used to pay for the execution of smart contracts, similar to ETH used to pay Ethereum gas fees, and Rootstock rewards them To miners who provide computing power to run smart contracts.

RIF OS is a set of protocols built on Rootstock. It serves as an infrastructure to provide developers with blockchain infrastructure and services. The RIF ecosystem includes a series of products, including DeFi, storage, domain name services, payment solutions, etc. . It has its own native token $RIF, which is mainly used as a payment medium when accessing RIF OS services. For example, $RIF is used as the underlying payment token when building a dApp on the network. In addition, it can be used as collateral for custody to mint Various assets in the RIF DeFi ecosystem.

It can be seen that in the entire architectural relationship, BTC is the value storage for the first layer, the Rootstock smart contract network is for the execution of the second layer, and the RIF OS protocol provides infrastructure services for the third layer.

The RIF OS protocol enables broad interoperability and faster deployment times. It bridges the gap between blockchain technology and its mass market adoption. The RIF OS protocol realizes the RSK smart contract network's vision of bringing the Internet of Value to life. At present, there are already DeFi applications on the RSK chain, such as Sovryn, a platform that supports trading and lending Bitcoin, and RSK Swap, a DEX platform, with a total TVL of 94 million US dollars on the chain.

Stacks

Stacks is Bitcoin's smart contract layer, which brings smart contract functionality to Bitcoin without modifying Bitcoin itself. Stacks takes a pyramid approach with a base settlement layer at the bottom (Bitcoin), then adds a smart contract and programmability layer on top of it (Stacks), and then layers above it for scalability and speed (Hiro subnet). By taking this layered approach, it is able to have the same functionality as chains like Ethereum.

As such, Stacks can be seen as a Bitcoin Layer 2, with some unique properties such as having its own token, which acts as an incentive mechanism to maintain a historical ledger of all transactions and operate with its own security budget. Stacks add extra functionality to Bitcoin compared to the Lightning Network, but ultimately stay on Bitcoin. At the same time, Stacks allows the use of Bitcoin as the basic settlement layer to build decentralized and anti-censorship software, which is also the difference between Stacks and Layer 2 scaling solutions on Ethereum. Stacks can maintain the security of the Bitcoin mainnet, produce blocks quickly, and add additional layers to increase functionality and speed. But if other layers are compromised, it won't affect the base layer at all. Therefore, it is not a Layer 2 like Ethereum.

$STX is a token on the Stacks chain, which is mainly used for pledge rewards, liquidity mining and voting governance. In addition, $STX is also used to pay gas fees for transactions. It is expected that in the second half of the year, Stacks will usher in the Nakamoto upgrade, which will optimize the Clarity language and introduce subnets and SBTC. This upgrade will provide relatively complete basic conditions for the next outbreak of the BTC ecosystem. In particular, the introduction of SBTC will solve the problem of native assets on Stacks. In the future, smart contracts on the main network can use SBTC to carry out various DeFi businesses such as lending, exchanging, and casting stable coins, expanding the ecological application of BTC.

Other BTC Layer2 projects

In addition to the more well-known BTC Layer 2 projects such as Lightning Network, Rootstok, and Stacks, there are other BTC Layer 2 projects that are also under development.

Liquid Network: Liquid Network is a Bitcoin-based sidechain network designed to solve the liquidity problem of Bitcoin, enhance the speed and privacy of Bitcoin transactions, and issue new digital assets on this chain. Like RSK, the L-BTC used by Liquid is also anchored to the main network BTC 1:1. At the same time, it also supports the deployment of smart contracts. The applications that have been built so far include DEX Sideswap and the lending platform Hodl.

RGB protocol: RGB protocol is a protocol based on Bitcoin network for asset issuance, asset transfer and smart contract implementation. It is scalable and can support developers to deploy smart contracts on Bitcoin and Lightning Network to maintain developers' data security . Its vision is to make the Bitcoin network based on the development of smart contracts like Ethereum, which can deploy tokens, issue NFT assets, and implement Defi applications on the network. The RGB protocol mainly supports RGB20 (for issuing homogeneous tokens) and RGB21 (for issuing NFT). Currently, the protocol is still in the development stage, and more developers and projects are needed to join in to improve the ecology together.

Rollkit: Rollkit is a modular framework for Bitcoin Rolup developed by Celestia. It renders Bitcoin into a modular framework and separates Bitcoin's consensus, data availability and execution process. Rollkit allows developers to deploy sovereign rollups, using Bitcoin as a data availability layer, providing Rollup transactions with security equivalent to the Bitcoin mainnet.

Summary and Outlook

With more and more transactions on the Bitcoin network, how to make Bitcoin carry more transactions and ecology is the main development direction at present. Whether it is Lightning Network, side chain or RGB protocol, the development of the second layer of Bitcoin is also It is continuing to achieve the compatibility of Bitcoin network security and scalability.

The scale of the current Bitcoin ecosystem is far behind that of Ethereum. One is that there are fewer well-known projects than Ethereum, and the second is that the user scale is not as good as Ethereum. However, as the current blockchain network with the highest market value, its growth potential Still big.

As the various infrastructures of the Bitcoin ecosystem improve day by day, it will attract more and more projects and investors. Projects such as OmniBOLT and RGB protocols based on Lightning Network will be able to obtain more powerful development capabilities, and some BTC Layer 2 projects compatible with Ethereum will also benefit from the ecology. In the future, the Bitcoin ecosystem will accelerate its development in payment, DeFi, NFT and other fields, covering more tracks and users.