Elevating Bitcoin: Unveiling the Multifaceted Landscape of Layer 2 Innovations
“Study the past if you would define the future.” — Confucius
For beginners: The Eternal Bitcoin Topic — Scalability
The Classic Blockchain Trilemma
The Blockchain Trilemma is a theoretical concept proposed by Ethereum’s founder, Vitalik Buterin, suggesting that it is impossible for a blockchain network to simultaneously achieve security, decentralization, and scalability.
Different blockchains make trade-offs among these three characteristics. For instance, Bitcoin is a blockchain that heavily prioritizes decentralization and security at the expense of scalability.
Let us now briefly discuss these three characteristics of blockchain:
Decentralization
Decentralization is the most significant attribute of blockchain, ensuring that the network is not under the control of any single entity or group. In a decentralized network, all participants have equal power to verify and authenticate transactions, making the network more resistant to attacks, capture, and censorship.
The decentralized nature of blockchain provides a higher level of resistance to attacks and disruptions compared to centralized systems, as they are not affected by the failure of a single node. By eliminating reliance on intermediaries and trusted third parties, blockchains sacrifice some efficiency in exchange for security and other features, such as censorship resistance and permissionlessness. In essence, thorough decentralization prevents network participants from colluding to alter or disrupt the blockchain.
Security
The security of a blockchain is directly proportional to its degree of decentralization. The more decentralized a blockchain is, the more secure it becomes.
Here, security refers to the ability of a blockchain to withstand various types of attacks and to continue operating. In blockchains that use Proof of Work (PoW), such as Bitcoin, security is measured by the cumulative computational power of the network. A higher and more evenly distributed computational power implies greater security. For blockchains based on Proof of Stake (PoS), security is typically measured by the total amount of staked assets and their distribution (although other metrics are also considered).
For instance, suppose a miner or validator controls more than half of the computational power or staked assets in the network. In this scenario, the miner or validator could relatively easily launch a 51% attack or attempt to censor transactions, thereby causing damage to the blockchain.
Another security feature of blockchains is the protection mechanisms provided by their underlying cryptography. Blockchain networks use cryptographic functions to encrypt and protect data. If the underlying cryptographic primitives or encryption mechanisms are easily cracked, the blockchain will also be threatened. For example, Bitcoin relies heavily on the SHA256 hash algorithm for encryption. If someone manages to crack this algorithm one day, whether by finding its private key or using quantum computing for brute-force attacks, the security of Bitcoin will be compromised.
Bitcoin Scalability Technology Roadmap Analysis
On December 6, 2023, amidst the jubilation of Bitcoin investors over the price surge brought about by Inscriptions, Luke Dashjr, a developer of the Bitcoin Core node client, cast a pall over the celebrations. He classified Inscriptions as a form of ‘spam’ attack and submitted a remedial code along with a CVE vulnerability report (CVE-2023–50428). This sparked a heated debate within the Bitcoin community, reminiscent of the chaos following the hard fork in 2017.
The crux of this dispute lies in the profound disagreement within the community regarding whether Bitcoin should undergo scaling, and if so, how this should be accomplished. Even though the popularity of Inscriptions has begun to wane, it is still imperative to discuss the perennial yet pressing issue of Bitcoin scaling as we enter a new bull market. As mentioned in the previous section, mainstream scaling solutions can be categorized into on-chain and off-chain scaling. In this section, we will delve into the specifics of these solutions.
Taproot Upgrade
The Taproot upgrade is a consolidation of three design documents introducing new features and information to Bitcoin, namely Bitcoin Improvement Proposals (BIPs) — Schnorr Signatures (BIP 340), Taproot (BIP 341), and Tapscript (BIP 342). It was first proposed by Bitcoin Core developer Gregory Maxwell in 2018 and launched in November 2021. The upgrade removes the restriction on the data volume in the witness section — the specific size of the data is only limited by the maximum 4MB block of the segregated witness area, allowing developers to write more advanced scripts in the segregated witness section.
Simultaneously, Schnorr signatures reduce transaction fees and memory load, while Taproot enhances the anonymity of Bitcoin addresses.
Taproot is a quintessential on-chain scaling solution that has had a profound impact on the development of the Bitcoin ecosystem. On one hand, the Taro protocol, launched based on the Taproot upgrade, has brought stablecoins like USDC into the Lightning Network, significantly expanding its use cases. On the other hand, the Taproot upgrade serves as the foundational implementation for the Ordinal protocol.
Lightning Network
The Lightning Network, a second-layer solution constructed atop the Bitcoin blockchain, was conceived to address Bitcoin’s scalability issues and sluggish transaction speeds. This innovative solution was initially proposed by Joseph Poon and Thaddeus Dryja in 2015 and was fully implemented in 2018.
The Lightning Network is characterized by its speed, cost-effectiveness, and scalability. It facilitates Bitcoin transactions within a series of payment channels, eliminating the need for direct recording on the blockchain. This significantly reduces transaction confirmation times and fees, and supports a high volume of concurrent transactions. The network’s security and reliability are ensured by the Revocable Sequence Maturity Contract (RSMC) protocol, while the Hashed Timelock Contracts (HTLC) address its routability and scalability. The scalability of its architecture endows it with substantial performance capabilities.
Since its inception, the Lightning Network has garnered widespread attention and adoption. An increasing number of Bitcoin users, exchanges, and merchants are utilizing the Lightning Network for rapid cross-chain transactions and real-time payments. Additionally, developers are continually enhancing the network’s performance and user experience, providing it with additional functionality and extensibility.
Despite the significant improvements the Lightning Network offers in terms of scalability and transaction speed, it still faces several technical and adoption challenges. For instance, continuous improvements are needed in areas such as network stability, routing algorithms, and user interfaces. However, with the passage of time and technological advancements, the Lightning Network is poised to become a crucial payment solution for Bitcoin and other cryptocurrencies, offering users a faster, more cost-effective transaction experience.
RGB
The narrative of RGB traces back to 2016 when Giacomo Zucco aspired to develop an improved version of Colored Coins, utilizing the concepts of client-side validation and single-use seals proposed by Peter Todd. His aim was to integrate these tokens into the Lightning Network, which is the origin of the name “RGB”. It is an open protocol built on the Bitcoin blockchain, designed to offer enhanced functionalities for the creation, transaction, and management of digital assets. RGB is an expandable and confidential Bitcoin and Lightning Network smart contract system developed by the LNP/BP Standards Association. It employs the concepts of private and joint ownership, representing a Turing-complete, trustless form of distributed computation that does not necessitate the introduction of non-block tokens in a decentralized protocol.
The design objective of RGB is to operate scalable, robust, and private smart contracts on UTXO blockchains like Bitcoin, to realize all possibilities. With RGB, developers can execute a wide range of multi-category smart contracts, such as token issuance, NFT minting, DeFi, DAO, and more complex ones.
The RGB protocol is based on the concepts of client-side validation and single-use seals. It operates as a client-side state validation and smart contract system on the second and third layers (off-chain) of the Bitcoin ecosystem.
The Erupting of Bitcoin Layer 2
In addition to the aforementioned technological trajectory, a significant portion of innovation, or rather “old wine in new bottles”, is concentrated on Ethereum Virtual Machine (EVM) compatible Bitcoin Layer 2. Currently, there are over 60 such projects, and the number is rapidly increasing on a daily basis. These projects typically involve an EVM-compatible chain, aiming to combine the mature ecosystem of EVM with the massive liquidity of BTC on Bitcoin, thereby achieving the goal of scaling Bitcoin.
The market’s fervor often brings about a bubble, and among the explosively emerging Layer 2, there naturally exist numerous projects that are either not as good as they claim or lack any technical highlights.
However, as the saying goes, “true gold fears no fire”. Amidst these, some projects have emerged that have brought varying degrees of innovation on a technical level and have gained certain community recognition. In the following, we will select 10 of these for a brief review. Due to space constraints, the focus of the review will be solely on the highlights of the projects.
BEVM
In reality, the majority of BTC Layer 2 solutions, such as BEVM, adopt the sidechain approach used in ETH scaling. BEVM deploys a multisig address on BTC’s Layer 1 through the capabilities of Taproot and operates an EVM sidechain. Within the EVM, a smart contract is deployed to accept BTC withdrawal requests. The GAS used in BEVM is BTC that has been cross-chained. During deposit, the bridge operator synchronizes BTC data and notifies the sidechain. BEVM nodes also run a light client, synchronizing BTC block headers to verify deposits. During withdrawal, the bridge custodian signs, and once a certain number of signatures (threshold) are collected, the BTC withdrawal transaction is initiated. This facilitates asset interoperability between the sidechain and BTC.
Unlike traditional $RSK $STX solutions, BEVM uses BTC multisig via Taproot to implement threshold signatures. Theoretically, there can be more bridge administrators, which adds a certain degree of fault tolerance to BTC cross-chain operations and further decentralizes the process. However, BEVM does not utilize any of BTC’s security measures, only enabling BTC asset interoperability. Its nodes run their own internal consensus and EVM, without uploading proofs to the BTC network, hence there is no L1 DA. The network’s transaction censorship resistance relies on the network itself. Therefore, if nodes refuse to package your BTC withdrawal transaction, you will be unable to retrieve BTC from L1, which poses a potential risk.
The advantage of this approach is that it can be quickly implemented and verified. The Taproot multisig implemented by BEVM further enhances the security of the bridge. It is one of the few BTC sidechains that have been launched on the mainnet.
MAP Protocol
To be precise, MAP Protocol is not merely a Bitcoin Layer 2 solution, but a comprehensive cross-chain interoperability protocol for Web3, with its core technologies being light node and Zero-Knowledge (ZK) proofs. Leveraging the light node cross-chain verification mechanism, MAP Protocol has successfully integrated various Layer 1 signature algorithms, hash algorithms, and Merkle Tree proofs into the MAP Relay Chain virtual machine layer through precompiled contracts. This allows the MAP Relay Chain to achieve isomorphism with all chains. Furthermore, it incorporates ZK proofs to further optimize cross-chain verification rates, thereby reducing gas fee costs.
B² Network
The B² Network is a ZK Rollup on BTC that incorporates a “commit-challenge” mechanism. The network is bifurcated into two layers: the Rollup layer and the Data Availability (DA) layer. The Rollup layer employs zkEVM to execute smart contract logic. This layer encompasses multiple modules, including transaction acceptance, sorting, and packaging, ZK proof generation, BTC address account abstraction, and synchronous reading of BTC L1 data (BTC and BRC20 balances). The DA layer provides data storage for Rollup, with storage nodes performing off-chain zk verification of Rollup transactions. Upon verification completion, DA layer nodes inscribe the Rollup data into BTC’s Ordinals, which includes the location of Rollup data in the DA layer, the Merkle tree root of the transaction, ZK proof data, and the hash of the previous BTC proof inscription.
Merlin Protocol
Merlin Chain is a Bitcoin Layer 2 solution that integrates a ZK-Rollup network, a decentralized oracle network, and an on-chain BTC anti-fraud module. It has mastered the art of stake-based marketing, making it a hot topic in recent times.
SatoshiVM
SatoshiVM, akin to the B² Network, is a ZK-Rollup based on Bitcoin. Both systems generate zk proofs within the Rollup, and after the prover uploads the proof data to the Bitcoin network, they send a ‘fraud proof’ challenge containing Bitcoin. The successful challenger is rewarded with Bitcoin. However, SatoshiVM distinguishes itself by incorporating two time-locks in the ‘fraud proof’ challenge, corresponding to the challenge start and end times. By comparing how many blocks have been waited for a Bitcoin transfer, one can discern whether the zk proof is valid and effective. As for its cross-chain bridge component, it merely employs a multi-signature scheme, which lacks novelty.
Babylon
Babylon’s Bitcoin staking protocol employs a remote staking approach, overcoming the absence of smart contracts through cryptographic innovation, consensus protocol optimization, and refined usage of Bitcoin scripting language. This staking protocol allows Bitcoin holders to trustlessly stake their Bitcoin, providing full slashing security guarantees for the chain, without the need for bridging to a PoS chain. This innovative protocol by Babylon eliminates the need for bridging, wrapping, or custodial services for the staked Bitcoin.
A key aspect of Babylon is its BTC timestamping protocol. It timestamps events from other blockchains onto Bitcoin, allowing these events to enjoy the timestamping security of Bitcoin transactions. This effectively leverages Bitcoin’s security as a timestamp server. The BTC timestamping protocol facilitates rapid stake unbonding, composable trust, and reduced security costs, maximizing liquidity for Bitcoin holders. The protocol is designed as a modular plug-in, applicable atop various PoS consensus algorithms, and provides a foundation for building reset protocols.
Rootstock
Rootstock aims to facilitate the execution of smart contracts on the Bitcoin blockchain by utilizing a token pegged to Bitcoin, which can be redeemed at an equivalent rate. Other smart contract providers, such as Counterparty and OMNI, also operate on the Bitcoin blockchain and thus share similar limitations. However, Rootstock offers security on par with Bitcoin and flexibility akin to Ethereum. If such a platform gains popularity, it could not only foster collaboration among members but also enhance the value of the Bitcoin network and currency. Moreover, if Rootstock can generate additional income for miners, it could alleviate transaction volume pressure on the Bitcoin blockchain, benefiting the entire ecosystem.
BitVM
BitVM innovatively proposes a method of conducting fraud challenges on Bitcoin (BTC), where both the prover and the challenger deposit an equal amount of BTC into a single transaction as a wager (as input). The output of this transaction will encompass a logic circuit. BTC scripts can be viewed as logic gates that handle the simplest logic, which are the fundamental components of a computer. If logic gate circuits are combined in a tree-like manner, they can form a circuit that encapsulates specific logic (akin to the human computer in the “Three-Body Problem”).
BitVM embeds a fraud proof into a circuit composed of a multitude of BTC scripts. The structure of this proof circuit is determined by a series of nodes packaged by the sorter in Rollup. The challenger can continuously upload hash values to this fraud proof circuit, while the verifier runs the corresponding scripts and reveals the output to confirm its correctness. Through a series of transactions, the challenger can continuously challenge the prover until the prover has verified that each circuit gate is correct. Consequently, the BTC network completes the verification of Rollup, and the prover can claim their funds. Otherwise, the challenger will receive the BTC pledged by the prover. To put it in an understandable way, the relationship between BitVM and BTC is similar to that between OP and the Ethereum network, with its security being the highest among all scalability solutions. BitVM will generate a vast number of transactions, which are costly, and a significant amount of pre-signing, i.e., a large amount of off-chain computation, is required before the two parties can perform on-chain verification.
Liquid Network
The Liquid Network is not merely a sidechain of Bitcoin, but also a decentralized financial instrument with multiple core functionalities. In the Liquid Network, block generation does not rely on Proof-of-Work, but is accomplished through a rotating signature process by 15 specialized hardware units, known as Functionaries, within the Liquid Federation. In a cycle, these 15 Functionaries take turns proposing blocks. A block is only added to the chain once it has been validated and signed by at least 11 of the Functionaries.
These hardware units, distributed globally, constitute the “heart” of the Liquid Network, responsible for signing transactions, generating blocks, and safeguarding the BTC locked within the Liquid Network. The Functionaries can be considered the nucleus of the Liquid Network, playing a pivotal role in providing network connectivity, block generation, and ensuring the bidirectional pegging of Bitcoin.
Chainway
Chainway is a Zero-Knowledge (ZK) Sovereign Rollup of Bitcoin (BTC), which not only utilizes BTC as a data publishing layer but also employs BTC data as a source for generating ZK proofs. The prover in Chainway is required to meticulously scan each BTC block. The generation of a comprehensive ZK proof is contingent upon reading the block header, the previous ZK proof, and the ‘forced transactions’ inscribed within the BTC block.
In every BTC block, Chainway submits a transaction that records a ZK proof, thereby forming a recursive proof. This process is not merely a data recording mechanism, but a sophisticated cryptographic procedure that ensures the integrity and security of the transactions within the Chainway network.
The Next Wave Impacting the Bitcoin Ecosystem — Future Outlook of Bitcoin Layer 2
The Bitcoin ecosystem is undergoing a series of transformative shocks that are not only defining the community consensus process but also propelling significant advancements in technology and culture. From the fair distribution consensus to the renaissance of BTC culture, the explosion of ‘inscription-based’ expansion plans, and the ultimate pursuit of more comprehensive expansion solutions, the Bitcoin ecosystem is in a state of rapid evolution.
Bitcoin Layer 2 represents the full maturity of the ‘BTC-based’ ultimate expansion solution, which includes complete smart contract capabilities, improved performance, and strong security shared with BTC. High-value inscription assets will demand more in terms of security, making it crucial to have a more native, more orthodox, and safer second-layer expansion solution. This requires the second layer to use the BTC chain as the DA layer, upload proofs, and even allow the BTC network to perform verification, such as the AVM of the BitVM and Atomicals protocols. Under the strong orthodoxy guarantee, BTC will be more absorbed into the inscription ecosystem.
Ultimately, we will obtain an experience, performance, and smart contract functionality almost identical to ETH and its L2, but backed by the massive community and funds of BTC, while centering on ‘fair distribution’ as the core culture and ‘inscription’ as the native asset of the new ecosystem.
