Enabling the Bitcoin Economy; leading layer 2's for Bitcoin

Introduction

Introduced in 2009, Bitcoin was a revolutionary technology designed for secure, decentralized, and speedy person-to-person payments. However, as its usage soared, the network's scalability problems started to surface. Bitcoin's block size and frequency - with a limit of 1MB of transactions every ten minutes - couldn't keep pace with the demand, leading to backlogged transactions, increased fees, and longer confirmation times.

Simultaneously, Bitcoin's main chain programmability constraints became apparent. Unlike more programmable blockchains, like Ethereum, Bitcoin's scripting language lacks Turing completeness, limiting developers from building complex applications directly on the Bitcoin blockchain. In essence, while the total number of transactions increased, the capacity for new transactions relative to the growing demand dropped. Thus, Bitcoin's block size limit, slow transaction speed, and programmability constraints led to reduced network performance and utility, hampering its future potential.

So, how can we solve this issue?

The answer lies in Bitcoin Layer 2 solutions. Bitcoin Layer 2 solutions are like adding an extra lane to a one-lane highway, which is our Bitcoin network. These extra lanes help manage the traffic and ensure a smoother ride for everyone. They are built over the existing Bitcoin highway, but they work independently, while still enjoying the security provided by the main road.

In this comprehensive review, we will be diving into the world of Bitcoin Layer 2 solutions, examining how they work, and exploring their potential for addressing the current scalability challenges that Bitcoin faces. We will be discussing the top Layer 2 solutions on the market. In addition, we will delve into their distinctive characteristics, examine their recent developments, and assess how these solutions are shaping the future of the Bitcoin network. By gaining insights into these Layer 2 solutions, you will have a clearer understanding of the strategies and technologies currently being used to enhance the performance and capabilities of Bitcoin.

What is Bitcoin Layer 2

Bitcoin Layer 2 refers to a secondary framework or protocol built on top of the existing Bitcoin blockchain system. The primary goal of Layer 2 solutions is to address the transaction speed, programmability and scaling difficulties faced by major cryptocurrency networks like Bitcoin and Ethereum.

Layer 2 solutions are important because they allow for programmability, scalability and lower transaction fees, which are essential for the long-term expansion of cryptocurrencies like Bitcoin. They run on top of the leading blockchain and enhance transaction speed and scalability without requiring changes to the Layer 1 blockchain or mainnet. Layer 2 solutions still leverage the security of the consensus mechanism on the Layer 1 network, but can drastically speed up transactions by handling them off the mainnet. They can also allow for new functionalities such as decentralized applications (dapps) to be added to the main chain without affecting its workings.

Bitcoin Layer 2 is a set of protocols and solutions built on top of the Bitcoin blockchain to improve transaction speed, scalability, and overall performance. The Lightning Network is a prominent example of a Layer 2 solution for Bitcoin, enabling faster and more efficient transactions while maintaining the security and decentralization of the underlying blockchain.

How Does it Work

Think of Bitcoin Layer 2 solutions as keeping an open tab at a restaurant. When you go to a restaurant, instead of paying separately for each item you order, you can start a tab. All your orders are added to this tab as you enjoy your meal. Once you're ready to leave, you pay for everything all at once. This method is efficient because it reduces the number of transactions with the cashier.

Bitcoin Layer 2 solutions, like the Lightning Network, work similarly. Instead of recording each transaction separately on the Bitcoin blockchain (akin to paying for each item separately), multiple transactions can take place off-chain between parties (just like adding orders to your tab). These transactions are fast and cost-effective.

When the parties are ready, they settle their tab - that is, they take the final balance of their off-chain transactions and record it on the Bitcoin blockchain. This process allows for more transactions to occur quickly and at a lower cost, all while maintaining the security and decentralization that the Bitcoin blockchain offers. So, in essence, Bitcoin Layer 2 solutions are like keeping a tab open on the Bitcoin network, making it more scalable and efficient. Bitcoin Layer 2 solutions are clever traffic management systems that allow the Bitcoin network to function more efficiently, handle more transactions, and remain secure and decentralized.

Given the promising potential of this innovative sector, we're excited to delve deeper into the world of Bitcoin Layer 2’s. Next, we will spotlight seven prominent projects making waves in the Bitcoin Layer 2 space.

Leading Bitcoin Layer 2 Projects

Lighting Network

The Lightning Network (website) is a second layer added to Bitcoin's blockchain that allows off-chain transactions between parties. It is a decentralized network that enables instant payments across a network of participants. The Lightning Network is a decentralized network that facilitates instant, high-volume transactions among participants. Instead of recording every single transaction on the Bitcoin blockchain, the Lightning Network allows users to establish payment channels between each other.

The Lightning Network allows users to quickly send and receive Bitcoin with virtually no or minimal fees while achieving a throughput of approximately 1 million transactions per second. The Lightning Network has been gaining traction in recent years, with over 630 Bitcoin, more than 23,000 channels, and a total network capacity of $2 million on the Bitcoin mainnet. Lightning Network capacity surpassed 630 BTC in April 2023 . Products, users, and the amount of Bitcoin sent on the Lightning Network have skyrocketed in 2023.

The Lightning Network is being developed by several teams, including Lightning Labs, which develops software that powers the Lightning Network. The team includes Elizabeth Stark as CEO and co-founder, Olaoluwa Osuntokun as CTO and co-founder, Alex Bosworth as Head of Lightning Liquidity, and Oliver Gugger as Senior Software Engineer The Lightning Network has received $10 million in funding from different backers, some notable backers including Twitter founder Jack Dorsey, who also backs Spiral, one of the main implementations of the network.

Recent developments on the Lightning Network include the release of Core Lightning v23.02, codenamed CBDC Backing Layer, which has some exciting features in store for CLN users, including the commando plugin that allows remote access to a wide variety of data while allowing the Lightning node to perform all filtering and return only the desired data. Another novel feature being developed by LDK is “async payments,” which aims to tackle the issue of Lightning mobile users needing to be online to accept payments

Stacks

Stacks (website), a Layer 2 blockchain protocol, seeks to amplify the functionality of Bitcoin through the introduction of smart contracts and decentralized applications. By doing so, it provides a solution that doesn't necessitate a Bitcoin fork, thus retaining the integrity of the original blockchain. Stacks leverages the Proof-of-Transfer (PoX) consensus mechanism to achieve its objectives and aspires to render Bitcoin programmable, akin to Ethereum and Solana.

One of the primary attributes of Stacks is its innovation. By extending Bitcoin's functionalities, it paves the way for developers to construct decentralized applications (dApps), non-fungible tokens (NFTs), and decentralized finance (DeFi) products atop the Bitcoin blockchain. The first batch of NFT and DeFi dapps went live only recently and hence, it is the perfect time to start exploring the project that is set to bring more use cases directly to Bitcoin. Some projects that are growing exponentially are: Alex, Velar, UWU and gamma.io.

The driving force behind Stacks is a team led by Muneeb Ali, a Princeton Ph.D. holder with a wealth of experience in building apps and protocols on Bitcoin. Supported by a funding of over $200 million, the Stacks team is dedicated to constructing an array of software tools designed specifically for Bitcoin developers. In terms of traction, Stacks has recently garnered considerable attention, primarily due to its native token STX performing exceptionally well in March 2023.

Stacks is in a continual state of evolution, persistently focusing on network upgrades and improvements. The highly anticipated Nakamoto upgrade, slated for later this year, promises to bring substantial improvements to the Stacks ecosystem, including full smart contract functionality on a Layer 2 chain and enhanced security via the Bitcoin Layer 1 network.

Statechains

Statechains (website) are an innovative Layer 2 protocol that empowers Bitcoin users to transfer value without imposing an additional burden on the Bitcoin blockchain. They thus aid in scaling and conserving transaction fees. Essentially, Statechains are a variant of sidechain technology, specifically designed for the Bitcoin protocol. They permit users to move their coins off-chain, facilitating cost-effective transactions that necessitate minimal trust in other participants. One of the primary motivations behind the development of Statechains is to overcome the constraints of on-chain Bitcoin transaction space, which is significantly limited. This limitation poses a hurdle for Bitcoin enthusiasts aiming to make the digital currency accessible to a broader audience.

Statechains offer a non-custodial, off-chain Bitcoin transfer protocol that provides a straightforward alternative for transferring Bitcoins among parties. The layer-one blockchain is only involved when entering or exiting the system, or in case of disputes. Statechain users manage bitcoin in a 2-of-2 multisig wallet, jointly controlled by the user and a statechain federation, a conglomerate of entities. To transfer funds, users pass their private key (also termed as the transitory key) to the recipient, and since these transactions are conducted off-chain, Statechains offer a scaling advantage similar to the Lightning Network.

Statechains is being developed by CommerceBlock, which is aimed towards enhanced privacy and scaling. London-based startup CommerceBlock, is reportedly developing a new tool that leverages statechains to enhance Bitcoin privacy. The Mercury Wallet, currently undergoing testing, utilizes this novel technology and is poised for implementation soon. While Statechains are not entirely trustless, they uphold a high degree of censorship resistance, as on-chain withdrawals are permissionless. By mitigating the constraint of limited on-chain Bitcoin transaction space, Statechains are making significant strides in facilitating wider access to the digital currency. There is a code implementation called Mercury that makes this layer accessible to average users with Mercury Wallet.

Liquid Network

The Liquid Network (website), a Bitcoin Layer-2 settlement network, employs sidechain technology to interlink cryptocurrency exchanges and institutions worldwide. Its aim is to expedite Bitcoin transactions and make them more private, while also supporting the issuance of digital assets. It functions as an implementation of Elements, an open-source platform that is sidechain-capable and based on the Bitcoin codebase. For Bitcoin exchanges and traders, the Liquid Network offers an array of potent features, such as swift final settlements, enabling Bitcoin moved to the Liquid sidechain (referred to as Liquid Bitcoin or "L-BTC") to achieve final settlement within just two minutes.

The Liquid Network enhances Bitcoin's network effects by offering a secure platform for issuing digital assets. By facilitating the introduction of new financial instruments and distributed trust models, investors and institutions can leverage the Liquid Network effectively. The process of creating L-BTC involves moving BTC to the Liquid Network and subsequently destroying it. As such, L-BTC's supply is verifiably backed on a 1-to-1 basis with bitcoin (BTC) held on the Bitcoin mainchain.

Blockstream, the company behind the Liquid Network, has raised $266 million CAD in the first close of its Series B round. The company aims to monetize the Liquid Network and has a valuation of $4 billion.

In recent times, the Liquid Network has witnessed the emergence of Liquid staking tokens, which are set to catalyze the next wave of DeFi adoption. This rise in Liquid staking tokens, promising enhanced rewards and opportunities for users, follows the Ethereum network's upgrade to a proof-of-stake (PoS) consensus mechanism. Liquid staking protocols provide users with Liquid Staking Tokens (LSTs) in return for staked L-BTC. These tokens can then be used to earn rewards and participate in governance. L-BTC has grown to over 3500 BTC in May 2023.

Drive Chain

Drivechain (website) is a Bitcoin layer 2 project that enables altcoins to operate on top of a Bitcoin network. This would have a number of advantages, including greater scalability, new features and r use cases, the flexibility to experiment without permissions, and the eradication of blockchain rivalry. Drivechain is a proposed soft fork, which could introduce a portfolio of sidechains to Bitcoin and replicate any altcoin use.

Drivechain is an innovative project that seeks to leverage sidechain technology in order to introduce additional functionality to Bitcoin. The project aims to achieve this by using pegged sidechains, which would allow any individual to move their bitcoins to a variety of pegged blockchains. Drivechain allows Bitcoin to create, delete, send BTC to, and receive BTC from “Layer-2”s called “sidechains”. Sidechains are Altcoins that lack a native “coin” – instead, pre-existing coins [from a different blockchain] must first be sent over.

Drivechain was proposed by Paul Sztorc, a Bitcoin developer and economist. He has been working on the project since 2015. Drivechain has received support from a number of notable figures in the Bitcoin community, including Adam Back, CEO of Blockstream, and Andreas Antonopoulos, author of "Mastering Bitcoin." Layer 2 Labs, the company behind Drivechain, raised $3 million at launch to supercharge Bitcoin's ecosystem.

As of May 2023, Drivechain has zero sidechains. The project is still in development, and not enough developer mindshare has been dedicated toward the development of drivechains and to exploring all the intricacies concerning the security and the incentive structure of drivechains.

Rootstock

Bitcoin Layer 2 Rootstock (website) is a smart contract platform built on top of the Bitcoin blockchain, designed to overcome certain limitations of the Bitcoin network and enhance its functionality. Launched in 2014, Rootstock aims to speed up Bitcoin transactions and offer smart contract capabilities. It is secured by over 50% of Bitcoin's hashing power through merged mining, which allows miners to mine both Bitcoin and Rootstock simultaneously without additional effort or resources

Rootstock adds value and functionality to the core Bitcoin network by implementing sophisticated smart contracts as a sidechain . It is fully compatible with Ethereum's EVM (Ethereum Virtual Machine), allowing developers to deploy smart contracts on both platforms . Rootstock also uses a built-in two-way peg protocol called PowPeg, which enables users to convert BTC to RBTC (Smart Bitcoin) and vice versa

Rootstock's team consists of experienced professionals with backgrounds in software architecture, engineering, and management. Pat Garrehy, the founder of Rootstock Software, has over 30 years of experience in the industry. Rootstock has gained significant traction in the market, with its platform being used by various decentralized applications built on top of the Bitcoin network such as Sovryn Swap, Riskswap and MetaMask. Rootstock Software, the company behind Rootstock, has also formed strategic alliances to expand its reach and capabilities

As for its current status and recent developments, Rootstock continues to grow and evolve. According to DeFiLlama, Rootstock has over $80 million in Total Value Locked. The platform has a net hashrate of over 100EHs, making it the most secure smart contract network in the world. Rootstock's merged-mining techniques and built-in Powpeg allow users to reap the benefits of a secure, scalable, and decentralized financial ecosystem built on top of the Bitcoin network.

Mintlayer

Mintlayer (website), a Layer 2 scaling solution, is engineered atop the Bitcoin blockchain with an aim to amplify its functionality and introduce new use cases to the network. With a focus on facilitating decentralized finance (DeFi), non-fungible tokens (NFTs), and smart contracts on the Bitcoin network, Mintlayer brings forth several key innovations. One of the standout features of Mintlayer is its native Bitcoin support, which allows Bitcoin holders to access DeFi and other applications without the necessity for wrapped tokens or token bridges. Through the atomic swap mechanism, users will trade any token in the Mintlayer ecosystem for native Bitcoin, removing the need for a trusted third party.

Interoperability is another strength of Mintlayer. It supports cross-blockchain transfers, multiple token transaction grouping, and peg-in/out capabilities, which simplifies the interaction with various cryptocurrencies on a single protocol for users. In terms of scalability, Mintlayer is designed to be compatible with the Bitcoin Lightning Network, which facilitates limitless scaling of network assets. For developers, Mintlayer presents a user-friendly environment with a simple API and comprehensive documentation.

The team at Mintlayer comprises experienced professionals like CEO Enrico Rubboli and CTO Ben Marsh, and notable advisors such as Charlie Shrem from the Bitcoin Foundation, and Michael Terpin from Transform Ventures. Recently, Mintlayer managed to secure $5.2 million in seed funding and forged a strategic partnership with San Marino Innovation. Among its recent developments, the native token of Mintlayer (ML) was listed on Gate.io, a leading cryptocurrency exchange. The token launch event transpired on March 21, 2023. Mintlayer also collaborated with Portal, a self-hosted wallet and a cross-chain Layer-2 DEX built on Bitcoin. This partnership aims to enhance the number of available trading pairs for Portal DEX users and broaden the accessibility of Mintlayer's digital assets to a larger user base.

Currently, Mintlayer has rolled out the "Lovelace" testnet, a full node release candidate for Linux, Windows, and Mac, along with the wallet integration of ML tokens. Additionally, the Mintlayer Staking Program, which allows users to stake and earn ML tokens, is scheduled to launch on June 5th.

Final Thoughts

Bitcoin Layer 2 solutions hold the key to the future of Bitcoin, shaping a more scalable and faster network. The projects discussed - Lightning Network, Stacks, Statechains, Liquid Network, Drivechain, Rootstock, and Mintlayer - represent diverse approaches to Layer 2 solutions, but they share a common trend: enhancing Bitcoin's scalability, transaction speed, and interoperability, all while ensuring security and preserving the decentralized nature of the Bitcoin network.

These projects also represent a shift in the cryptocurrency world, moving away from a model that relies heavily on the Bitcoin mainnet to handle all transactions, to a more efficient model where the mainnet serves as a security layer, and Layer 2 solutions handle the majority of transactions. This trend not only allows for faster transactions and lower fees but also makes it possible for the Bitcoin network to support more complex functionalities like smart contracts and decentralized applications, contributing to the expansion of the DeFi ecosystem.

Several of these Layer 2 solutions have gained considerable traction, securing funding, forming partnerships, launching products, and seeing increased user adoption. Their recent developments suggest an exciting future where Bitcoin becomes not just a digital currency but also a platform for a myriad of financial applications. However, it's also clear that challenges lie ahead. For these solutions to be widely adopted, they must prove their security, reliability, and user-friendliness.

In conclusion, Bitcoin Layer 2 solutions offer promising solutions to Bitcoin's scalability problem, and their growth and evolution will be critical to the future of Bitcoin and the broader cryptocurrency ecosystem. While the journey is still ongoing, the recent advancements and innovations paint a picture of an exciting future, one where Bitcoin can serve not just as a store of value but also as a platform for a wide range of financial applications and services. As we move forward, these Layer 2 solutions are likely to continue playing an increasingly important role in shaping the cryptocurrency landscape.