Author: Weilin, PANews
Bitcoin Layer2 is a second-layer blockchain network built outside the main chain to improve the scalability, functionality, and transaction efficiency of the Bitcoin blockchain. Although it is often compared with Ethereum Layer2, it wasn't until May 2023, when the experimental token standard BRC20 based on the Ordinals protocol gained popularity, that more people believed that Bitcoin could not only issue coins but also achieve more complex and sustainable application scenarios.
Currently, according to l2.watch statistics, there are over 80 Layer2 projects focusing on Bitcoin scalability. In this article, PANews will sort out the main projects of Layer2 following different technical routes and introduce the latest project dynamics and financing situation of Bitcoin Layer2.
Current main technical routes of Bitcoin Layer 2
State Channels
State channels allow users to establish end-to-end encrypted channels, facilitating multiple off-chain transactions between two or more participants, ensuring that only the first and last transactions are recorded on the Bitcoin blockchain, without the need to broadcast every transaction to the main blockchain. Therefore, state channels can achieve as low gas fees as possible and support greater transaction throughput.
Representative project: Lightning Network
Sidechains
Sidechains run in parallel with the main chain but are separate and independent blockchains, allowing users to transfer assets (Bitcoin) from the main blockchain to the sidechain. After Bitcoin is transferred to the sidechain, users can use these assets for smart contracts, token issuance, or implement new consensus mechanisms. The sidechain will verify the information on the Bitcoin main blockchain and execute subsequent operations. A two-way peg mechanism connects the sidechain and the Bitcoin blockchain.
Representative projects: Established projects include Rootstock, Stacks; new projects include BEVM, Merlin Chain, Fractal Bitcoin, Liquid Network, Mint layer, Babylon, Bison, Botanix, Core, BounceBit, AILayer, etc.
Rollups
Rollup moves multiple off-chain transactions from the main Bitcoin blockchain to an independent network, processes them, and then submits a compressed transaction back to the chain. Unlike sidechains, Rollup regularly submits blocks to the main chain, thus inheriting the security and decentralization characteristics of the main chain, but the average transaction processing volume is generally not as high as sidechains. Common types of Rollups include optimistic rollups, ZK-Rollups, and sovereign rollups.
Representative projects: B² Network, Bitlayer, BOB, Citrea, QED Protocol, Zulu Network, GOAT Network, Mezo, Bitfinity Network, Arch Network, etc.
UTXO+ Client Verification
UTXO+ client verification is a scalability solution for the Bitcoin UTXO (Unspent Transaction Output) account model. It attempts to perform off-chain ledger calculations based on Bitcoin UTXO and ensure the authenticity of the ledger through client verification.
In 2016, Peter Todd proposed the concept of Single-use seal and Client-Side Validation, leading to the birth of the RGB protocol.
The RGB++ approach is similar to RGB, performing and verifying transactions off-chain, then settling on the Bitcoin chain. Nervos leverages the same POW+UTXO structure as Bitcoin and combines innovative "homomorphic mapping" technology to successfully replace the client verification of the RGB protocol with CKB. In this way, while maintaining the same security as Bitcoin, Nervos achieves the extension of the functionality and flexibility of the RGB protocol.
Representative projects: RGB, RGB++ (UTXO Stack)
Note: In addition to the above technical routes, there is also a classification method mentioning the BitVM technical path of Layer2, with representative projects such as Bitlayer and Citrea. This article categorizes these two projects as Rollups. In simple terms, BitVM is a computational model that allows developers to run complex contracts on Bitcoin without changing its basic rules. Since the concept of BitVM was proposed until the release of the white paper in October 2023, it has attracted widespread attention in the Bitcoin community. Under BitVM, computations will be performed off-chain and verified on-chain, similar to the optimistic rollup mechanism on Ethereum.
Recent developments of major Bitcoin Layer2 projects
Lightning Network
The Lightning Network was first proposed in 2015 and began full implementation in 2018. More transactions can be executed through smart contract applications. The Lightning Network uses revocable sequence maturity contracts (RSMC) and hash time-locked contracts (HTLC) to address off-chain transaction confirmation and payment channel issues.
The Lightning Network has received widespread attention and adoption, but it mainly focuses on Bitcoin payment scenarios. On July 23 of this year, Lightning Labs, the developer of the Lightning Network, announced a significant update of Taproot Assets on the Lightning Network, enabling the Lightning Network to support the transfer of multiple assets other than BTC. Lightning Labs believes that this update is significant and can help bring the tens of trillions of dollars stablecoin market into Bitcoin, making the dollar and world financial assets Bitcoinized.
Stacks
Stacks (formerly Blockstack) was first proposed in 2013 and conducted its first token issuance (ICO) in 2017. The Stacks Network adopts the Proof of Transfer (PoX) consensus mechanism, which is an adaptation of the concept of proof of burn, involving miners transferring Bitcoin to ensure the security of the Stacks blockchain and receive rewards.
On August 28, after several months of delay, Stacks launched the long-awaited Nakamoto upgrade. This upgrade will increase the block production speed of the Stacks network by 120 times, reducing the average confirmation time of Bitcoin from 10 minutes to just a few seconds. This upgrade also prepares Stacks for the launch of sBTC, a "programmable Bitcoin asset" that allows users to bridge their BTC to the Stacks network in a relatively decentralized manner. The sBTC is expected to complete its code in September.
Rootstock
Rootstock (RSK) was first proposed in 2015 and officially launched in 2018. In addition to Rootstock, the team has developed various products based on RSK, including DEX, wallets, domain services, and other dApps. These dApps are built on a universal protocol covering payments, storage, computation, communication, and gateways/bridges. The goal is to establish a comprehensive RIF ecosystem (RSK Infrastructure Framework) and unify under RIF OS technology.
The Rootstock team closely monitors the progress of the Bitcoin ecosystem, especially the BitVM technology, which is the basis of their upcoming BitVMX plan. In addition, from 2024 to 2025, the team will focus on developing RBTC super applications, consolidating their latest progress in DeFi tools on the Rootstock network.
Merlin Chain
Bitmap Tech, launched in February this year, is a Bitcoin Layer2 solution that integrates the ZK-Rollup network, decentralized oracles, and on-chain BTC anti-fraud modules. The Metaverse platform and Bitmap.Game under Bitmap Tech and the BRC-420 asset protocol have received a very positive response in the market this year.
At the end of August, the ZK interoperable infrastructure Polyhedra Network announced the integration of its decentralized verification network (DVN) with Merlin Chain through LayerZero, allowing over 100 applications in Merlin's ecosystem to benefit from ZK security interoperability.
On September 9, Merlin Chain released its semi-annual report, reviewing its growth trajectory in the first half of 2024, including $12 billion TVL, $16 billion bridging volume, 1.9 million on-chain addresses, and 12.7 million transactions. Within 50 days of the mainnet launch, the TVL exceeded $3.9 billion (88% in BTC, Ordinals, and other native assets), and the market value of M-BTC reached $1.2 billion in the first half of the year. The asset trading volume exceeded $3 billion, and DEX liquidity exceeded $78 million. It is reported that Merlin Chain plans to continue to focus on technology, ecology, and community in the second half of the year to promote the continuous development of the Bitcoin ecosystem.
Fractal Bitcoin
Fractal Bitcoin aims to increase transaction processing capacity and speed by recursively creating an infinite expansion layer on the BTC main chain using BTC core code, while maintaining full compatibility with the existing Bitcoin ecosystem. The block confirmation time on the Fractal network is approximately 30 seconds, and the transaction processing capacity is claimed to be 20 times that of the BTC main chain.
The development team behind Unisat has been continuously attracting market attention, with the entire team consisting of developers proficient in Bitcoin technologies such as SegWit, Lightning Network, and TapRoot. The team's previous projects have also performed well in the BRC20 trading market, and the token $PIZZA issued by the team has also shown excellent performance in the market, with investors including Binance and OKX.
On September 9, the mainnet of Fractal Bitcoin was officially launched, bringing renewed attention to the Bitcoin ecosystem. As of 5:00 PM on September 12, the number of addresses holding FB across the network reached 200,165, with an increase of 79,484 in the past 24 hours, and the number of active addresses reached 118,454.
RGB++
Recently, the first stablecoin protocol Stable++, based on RGB++, was launched, using BTC and CKB as collateral to mint the stablecoin RUSD pegged to the US dollar. By leveraging the advanced Leap feature of RGB++, Stable++ achieves seamless asset transfer within the Bitcoin ecosystem.
In addition, on August 23, the next-generation public Lightning Network Fiber Network, built on Nervos CKB and off-chain channels, was launched, providing fast, low-cost, and decentralized multi-currency payments and peer-to-peer transactions for RGB++ assets.
Babylon
On August 22, the Bitcoin collateral protocol Babylon launched the first phase of the Bitcoin collateral mainnet, bringing a third local use case for Bitcoin assets beyond value storage and simple payments: collateral to protect PoS networks and earn rewards. The launch of the first phase of the Babylon collateral mainnet initially caused a surge in Bitcoin network gas, but also sparked more contemplation in the market about the returns of Bitcoin collateral projects.
B²Network
Established in 2022, B²Network is a Bitcoin Layer2 network based on ZK-Rollup, compatible with EVM, and allows seamless deployment of DApps for EVM ecosystem developers. On August 28, B²Network reached a strategic cooperation with Aptos and Echo Protocol to promote BTCFi expansion into the Move ecosystem, marking BTCFi's first attempt in the Move ecosystem.
Bitlayer
On March 29, Bitlayer announced the launch of a $50 million ecological incentive plan to promote the development of its mainnet ecosystem.
On September 2, Bitlayer announced the official launch of its ecological application center, the DApp Center. The Bitlayer App Center aims to provide users with a one-stop platform to explore and experience innovative applications in the Bitlayer ecosystem. The App Center is an important gateway to the Bitlayer ecosystem, gathering the latest and most popular applications in the ecosystem.
Financing situation of Bitcoin Layer2 in the past 5 months
In the past 5 months, there have been frequent investment and financing activities in the BTC Layer2 track, with 14 public financings totaling over $71.1 million. The highest financing amount was $21 million in Series A financing for Mezo.
On August 22, the Bitcoin L2 project Ark Labs raised $2.5 million in pre-seed round financing; on the same day, the Bitcoin Lightning Network payment startup TMRW announced the completion of a $1.3 million pre-seed round financing; on July 26, the Bitcoin scaling network Mezo completed a $7.5 million financing, led by Ledger Cathay Fund. In addition, Bitlayer, BOB, QED Protocol, and others have also demonstrated strong fundraising capabilities and received favor from capital.
Currently, active VCs in the Bitcoin Layer2 field include Draper Dragon, ABCDE Capital, Ledger Cathay Capital, Waterdrip Capital, Polychain, and others. Some domestic investment institutions familiar to Chinese users, such as Hashkey Capital, OKX Ventures, and Binance Labs, have also made significant investments.
Overall, there are numerous Bitcoin Layer2 projects at present, and even a "inflation" phenomenon has emerged. Each project adopts different technical routes. Well-known Bitcoin Layer2 projects such as Stacks and Rootstock were established relatively early and have been exploring related technologies for a long time, but the projects currently lack more highlights. With the maturity of the Bitcoin base protocol, projects such as Merlin, RGB++, and Babylon are enriching the possibilities of the Bitcoin ecosystem, bringing more richness to the development of Layer2.
However, the development of Bitcoin Layer2 also faces some bottlenecks. According to independent researcher Haotian from CryptoInsight, the melee in the BTC Layer2 market has not significantly increased the BTC ecosystem. In the midst of a quiet market, there are occasional controversies about whether BTC Layer2 is a false proposition. Although the lack of standards gives BTC Layer2 more possibilities for "appropriation," directly stitching mature expansion solutions onto the already limited BTC mainnet may not necessarily feed the expansion gains of Layer2 back to the mainnet. Instead, it may harm the BTC mainnet user base due to security and stability issues. In his view, the prosperity of the BTC Layer2 without standards is coming to an end, and BTC Layer2 will advance towards a direction with higher technical barriers.
As Haotian said, the narrowing of technical standards for Layer2 may be a future trend. Currently, challenges and opportunities coexist. In the future, we still look forward to more Layer2 projects that can "break through," bringing more innovation and surprises to crypto users and the market.
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