As the global adoption of Bitcoin and Crypto continues, Layer 2 solutions can unlock a significant part of the Crypto market. Here's everything you need to know about Bitcoin L2.
What are Layer 2 Bitcoin solutions
Layer 2 solutions for Bitcoin are secondary protocols built on Bitcoin blockchain. The L2s were developed to combat the various challenges of the original BTC design, some of them being related to scalability, high taxes and slow transaction times.
The advantages of Bitcoin L2
Bitcoin l2s improve the Bitcoin network by: processing transactions outside the main blockchain by creating a separate execution layer increasing the processing capacity to maintain security allowing new features, such as intelligent contracts Improving scalability Extending cases of use of Bitcoin Definition L2 It ranges from reliable solutions-Trusted (Sidechains) to Solutions with Trust-Trust Minimized (ZK Rollups) and more specialized protocols (payment channels).
Bitcoin Vs. Ethereum l2s
In an attempt to understand Bitcoin L2, some people are trying to make an analogy with Ethereum L2 (Ethereum scaling solutions), which leads to some incorrect conclusions, including the following:
Underestimation of market size -Lack of programmability at L1 level for Bitcoin means that programmable L2s could bring a larger market opportunity compared to Ethereum L2.
The lack of the element that determines the «winner» -Security will count more and earlier for BTC L2 compared to ETH L2.
Underestimation of what is possible to build -Recent developments have unlocked the ability to build ZK-Rollups Bitcoin with optimistic ZK bridges (with a reliable hypothesis 1 of N); Potential future updates could do them completely without confidence – Trustless (allowing Direct ZK verification and eliminating 1 from N).
ZK-rollups It supports the increase of blockchain scalability by moving the calculation and off-chain state while stores the transaction data in compact on-chain lots. Below, we will approach the three misunderstandings.
1.
TAM is the total available market and represents the total revenue opportunity available for a product/service if a 100%market share is reached.
Bitcoin L2s show a larger market opportunity compared to Ethereum L2 For the following reasons: the largest market capitalization of Bitcoin ETH L2s are for scaling-ETH L1 has a fully programmable execution, being a host for a more valuable condition than its L2; Also, L1 begins to scalify execution, and L2 allows the same cases of use, only faster and cheaper. BTC L2s are for scaling and programmability-the Bitcoin L1 has no programmability, necessary to unlock robust privacy, a better self-customs experience and basic BTC. Most market participants use ETH L2 as a mental model for BTC L2, but the current comparison is with the ETH L1. Also, the BTC's winning L2 will be the Bitcoin execution layer. The functionality of programmability is valuable and the L2s offer the opportunity to build it. This is important because The execution layers demonstrate extremely powerful power distributions (Power Law Distributions): Ethereum – ETH L1 facilitates the most valuable ETH execution, dominating metrics (rev), the total value blocked in Defi (TVL) and issuing stablecoins. Bitcoin – as L1 has no programmability, the dominant execution layer of the BTC must be a L2, and the only question is which will be. The main execution layer of Bitcoin: it must significantly improve the functionality of the BTC (unlock improved confidentiality, the experience of auto-customs and basic defects) should not significantly sacrifice the strengths of the BTC (secure auto-customs, resistance to confiscation and use without permission)
2. The element that determines the winner – the Security
All of the above highlights that security is essential and that it is a mistake to consider that high security will not count for BTC L2, because it did not matter for ETH L2. Drawing the conclusions from the patterns of the current ethic L2 users patterns is misleading and the security will count more and earlier for BTC L2 compared to ETH L2. This is not due to the divergent risk profiles of BTC and ETH users, because both groups have a comparable sensitivity to security risks. Overall, low security means high risk, which translates into high capital costs, which means less available capital. We can conclude that higher security means more capital. Certain users even consider the possession of ETH ETFs as a safer solution compared to the simple detention of ETH. This means that security keeps away the serious L2 capital. Bitcoin's programmable layer presents a huge market with a few competitors because building on BTC is a hard work. This leads to the next problem – underestimating what is possible to build on the BTC.
3. Underestimating what is possible to build
The main L2 solution for bitcoin should be as close as possible to bitcoin itself. As I explained above, Security is essentialso the construction of L2 will require a team at the head of research and development of Bitcoin scales.
Cultura Bitcoin It is also vital, and the team will have to include serious bitcoiners who have worked for years to meet the Bitcoin vision. Common approaches for L2 Bitcoin solutions include the following: State Channels-used by the Lightning network, allowing the two parties to carry out numerous off-chain transactions, and only the final condition is recorded on blockchain, increasing speed and reducing costs.
Sidechains – they work as separate blockchains related to bitcoin; An example is Liquid Network that allows faster transactions and additional features, periodically settling on the main Bitcoin chain.
Roll-ups -They groups multiple off-chain transactions in a single transaction, creating a cryptographic evidence of validity that is deposited on Blockchain Bitcoin for settlement.
The challenges of Bitcoin L2
Some of the biggest challenges that Bitcoin L2s meet are the following:
Safe (bridging) ties between BTC and L2
Bitcoin L2s, such as Sidechains, use bridges to connect with the main Bitcoin chain. They work by blocking assets on bitcoin and issuing equivalent tokens on L2. This connection structure presents security risks and UX problems that can lead to hacks and losses.
Speed and settlement costs on bitcoin
L2 solutions process off-chain transactions and have to settle the final condition on the main Bitcoin chain. The speed and costs of the settlement process on the basic chain of Bitcoin are important factors that impact the efficiency of L2.
Maintaining security without direct citcoin validation
Bitcoin L2s need to be based on their own independent security protocols, which makes it difficult to reach a high level of security as the basic layer of Bitcoin. Bitcoin L2s do not completely inherit the Security from the Bitcoin nodes, which validate the transactions.
Centralization risks
Some L2s require the establishment of payment channels and reports nodes or operating their own consensus mechanism. This can lead to concentration of control in the hands of only a few entities, which contravenes the decentralized principles of Bitcoin.
Technical Complexities/Integration Challenges
The integration of the L2s with the existing infrastructure of Bitcoin involves technical complexities, including: ensuring compatibility maintaining high security standards in the community regarding the proposed updates
Key projects L2 Bitcoin
1. Lightning Network
This is the most popular L2 solution for Bitcoin. Lightning Network uses State Channels to facilitate off-chain transactions between two parties, allowing almost instant and cheap transactions and improving Bitcoin use for daily payments.
Key features include: Low taxes off-chain instant settlements of improved privacy payments on January 30, Tether, the largest Crypto company, announced that USDT has been launched on Lightning of Bitcoin, opening the way to a new technological era and the doors of a huge sector. , supporting adoption.
2. Liquid Network
Developed by Blockstream, Liquid Network is a Sidechain Bitcoin designed for fast and confidential transactions. This allows the issuance and transfer of assets, including Bitcoin and Stablecoins, with small commissions and faster settlements compared to the main Bitcoin chain.
Key features include the following: Bidirectional bond for transfer Bitcoin Confidential Transactions Issuing and Managing Assets Fast Settlement Time
3. Stacks
Stacks is a unique L2 solution that integrates with Bitcoin blockchain to allow smart, DAPPS and digital assets. It uses a consensus mechanism called proof of transfer (POX) that is anchored to Bitcoin for security. The Stacks network also integrates a native token, stacks (STX).
Key features include the following: Intelligent Contracts Consens Proof of Transfer (POX) DAPPS Integration with Bitcoin Security Model
4. Strata
Alpen Labs builds the layer-a Zkevm Rollup on Bitcoin with an optimistic-zk hybrid bridge. The team worked to scale and extend bitcoin using ZK-Snarks from 2022.
Key features They include the following: Roll-up technology by ZK, reducing the computational load on the main BITVM Pod chain, ensuring Bitcoin interaction without compromising security or requires confidence from third parties improved scalability, increasing the processing of Bitcoin transactions by using ZK technology. Bitcoin security and decentralization is already in the center of the Crypto industry, having all the necessary features to win; It is the first digital asset with an anonymous founder and a fixed offer.
Building Bitcoin L2s without sacrificing the basic principles of BTC
The construction of Bitcoin L2 must bring scalability and programmability for bitcoin without sacrificing its basic principles-self-customs, confiscation resistance and use without permission. There are two main types of bitcoiners in the Crypto industry: those whose main objective is for Bitcoin to have a positive impact on the society whose main objective is for the price of the BTC to increase, no matter how the first group of bitcoiners requires a private, scalable use and The easier BTC to have a positive impact, and the second group wants to make Bitcoin a better form of money, which leads to an increase in adoption and price. However, both bitcoiners groups see a consistent security budget as an essential functionality. L2s are one of the best ways to ensure a consistent security budget for long-term Bitcoin miners, as the block reward decreases. Important cases of use for bitcoin are possible through a suitable L2 Bitcoin, including BTC guaranteed loans, stablecoins guaranteed by BTC, private and instant BTC payments, flexible and scalable Custia of the BTC and many more. Surrounded by long optimism and efforts, Bitcoin is on the right track to a bright future.