Bitcoin's Layer 1, revered for its unparalleled security and decentralization, has faced scrutiny over its scalability, cost, and throughput limitations. These constraints catalyzed the emergence of alternative networks like Ethereum, designed with smart contracting capabilities at their core. However, the narrative is shifting. With the introduction of Layer 2 solutions that integrate DeFi functionalities to Bitcoin, it’s poised to expand its utility far beyond a store of value.
In this article, we delve into the intricacies of Bitcoin Layers, and explore some of the projects in the space we’re most excited about.
As a team that is continually researching new technologies and exploring promising narratives, we’re thrilled to expand our expertise in the Bitcoin economy and collaborate with key players building in this ecosystem.
The Bitcoin Problem
Before delving into the nuances of Bitcoin Layer 2 solutions, let's take a step back and understand the core concept of Layer 2s. A Layer 2 is built on top of the base chain (Layer 1) to improve scalability and transaction throughput.
Bitcoin and Ethereum are Layer 1 protocols, serving as the settlement layer for all transactions on their respective networks. Layer 2 solutions offer a way to increase transaction speeds and scale the network while benefiting from the security of the main chain.
While numerous Layer 2 solutions, such as rollups, side chains, and channels, are already building on Ethereum, and Bitcoin Layer 2s have been in development for some time, several projects are now closer to launching and expanding Bitcoin's utility. However, scaling Bitcoin presents unique intricacies that need to be addressed.
The most crucial requirement for a Bitcoin Layer 2 solution lies in deriving its security from Bitcoin's own security model, a task that proves challenging in practice. To effectively secure a Layer 2, Bitcoin must possess the computational capability to validate the behavior of the Layer 2. However, Bitcoin's current computational capacity falls short compared to Ethereum's Layer 2 solutions.
For instance, Ethereum rollups derive their security from the Layer 1 by either verifying a zero-knowledge proof (zk-rollup) or confirming a fraud proof (optimistic rollup). Nevertheless, there are ongoing proposals aimed at enhancing Bitcoin's functionality to enable the base layer to validate zk-Proofs submitted by rollups. Additionally, initiatives like BitVM strive to implement fraud proofs without necessitating alterations to the base layer.
While solutions are emerging to address this challenge, they bring their own set of architectural choices and leverage novel technologies to find viable solutions. As the development of Bitcoin Layer 2s progresses, the ecosystem will need to carefully evaluate the trade-offs and implications of each approach.
Architecture Choices for Bitcoin's Layer 2
Bitcoin's Layer 2 solutions face unique challenges in trying to improve upon the base layer. These challenges revolve around three main goals: handling more transactions, maintaining robust security, and ensuring that the system remains decentralized. Here's a simpler look at each goal:
- Scalability (Handling More Transactions):
- Goal: To process more transactions than Bitcoin's main network and support more complex types of transactions.
- How It's Done: By using a Virtual Machine (VM) and an additional chain or blockspace, which is like a special computer system that can perform complex operations needed for advanced financial tasks.
- Balancing Act: It’s important that these systems are not too complex, so developers are willing to build on them and people want to use them.
- Current Solutions: Some solutions introduce new environments like VMs for handling these complex operations, or use off-chain contracts, which means some transactions are processed away from Bitcoin’s main network for efficiency. Stacks introduces clarityVM and microblocks between bitcoin blocks in a separate chain. Mezo has a EVM chain.
- Security (Keeping the System Safe):
- Goal: To ensure that transactions are secure, accessible, resistant to censorship, and protected.
- How It's Done: By using Bitcoin's existing security features and adapting them to work with new Layer 2 functionalities.
- Current Solutions: Some are using comprehensive VMs that try to settle transactions directly on the Bitcoin network or use specific contracts similar to the Lightning Network. In contrast to Ethereum, which can handle very complex security mechanisms, Bitcoin requires simpler solutions or entirely new coding instructions (opcodes) because its base layer is less complex. A common attempt to increase security is to decentralize the multisig of parties who settle transactions on Bitcoin. Twilight is a good example of a reinforced multisig. Mezo uses tBTC trustless bridging technology.
- Decentralization (Keeping the System Open and Accessible):
- Goal: To ensure that anyone can participate in verifying transactions and that the system does not rely heavily on central authorities.
- How It's Done: By making it easier for individuals to access and verify the blockchain's data.
- Current Solutions: Encouraging the use of an open network where anyone can join, or a federation system where a group of parties manage the system together, which still aims to distribute control rather than centralize it. StackingDAO for example builds onStacks and removes the stacking complexities for users who want to stake STX.
By focusing on these three areas, Bitcoin's Layer 2 aims to enhance the base layer's capabilities while adhering to the principles of scalability, security, and decentralization. This approach ensures that the network can grow and adapt to new demands without compromising on its core values.
Exploring Bitcoin Layers
In this section, we explore a few Bitcoin L2s that we’re excited about, and provide a quick overview of the project.
Stacks
Overview: Stacks brings smart contracts and decentralized apps to Bitcoin using a unique Proof-of-Transfer (PoX) mechanism. Key Features:
- Mechanism: Uses PoX alongside Bitcoin's Proof-of-Work, enabling Stacks to reuse Bitcoin's computational power.
- Security: Participants, or "Stackers", lock up STX tokens to support network operations and in return, earn Bitcoin as rewards. Post Nakamoto upgrade, “Stackers” will also validate blocks, hence the emergence of liquid stacking solutions like StackingDAO.
- Unique Aspect: Novel consensus mechanism and unique VM (Clarity) to maximize alignment with Bitcoin programming structure.
Lightning Network
Overview: Designed for fast and cost-effective micropayments on Bitcoin.
Key Features:
- Mechanism: Operates using off-chain payment channels for transaction handling, with settlements finalized on Bitcoin’s blockchain.
- Performance: Enables instant transactions, dramatically reducing the costs and delays typical of Bitcoin’s main network.
Rootstock (RSK)
Overview: Introduces Ethereum-compatible smart contracts to Bitcoin.
Key Features:
- Mechanism: Combines Bitcoin’s Proof-of-Work through merged mining with a smart contract layer.
- Compatibility: Allows existing Ethereum applications to transition to the Bitcoin ecosystem seamlessly.
Mezo
Overview: Builds on BTC to EVM bridging technologies, offering a novel dual-token staking model via $HODL.
Key Features:
- Mechanism: Based on a PoS consensus and supports BTC as a gas asset, facilitating integration between Bitcoin and Ethereum systems.
- Staking: Allows BTC holders to stake directly, potentially earning higher rewards through a structured reward system.
BitLayer
Overview: The first implementation using BitVM, focusing on scalable and efficient transaction processing.
Key Features:
- Mechanism: Utilizes optimistic rollups and a combination of virtual machines for executing and verifying transactions.
- BitVM: Aims to implement fraud proofs to Bitcoin L1 by acting as a translator for Bitcoin scripts.
Babylon
Overview: Merges Proof-of-Stake with Bitcoin’s robustness, focusing on cross-chain functionalities to offer Bitcoin restaking.
Key Features:
- Mechanism: Leverages Bitcoin for timestamping and enables trustless staking on Bitcoin through its unique protocols. Timestaming is used to secure other PoS chains with Bitcoin, with the idea that block state can be recreated at any point in time.
- Integration: Aims to provide security to decentralized systems via Bitcoin’s network.
- Use cases: Fast un-bonding (e.g. reduce Cosmos staking 21 day un-bonding period), restaking or shared security, transaction protection and more.
Ark
Overview: Offers private and scalable off-chain Bitcoin payments.
Key Features:
- Mechanism: Uses off-chain transaction outputs managed by service providers to facilitate transactions.
- Privacy: Maintains user anonymity while reducing transaction costs compared to traditional Bitcoin transfers.
Bison
Overview: Implements a zk-rollup model to improve transaction efficiency and security on Bitcoin.
Key Features:
- Mechanism: Utilizes zk-STARKs and ordinals for enhanced scalability and security, integrating smart contract capabilities.
- Security: Uses discrete log contracts for bridging, relying on external oracles for state verification.
Botanix
Overview: An Ethereum-based Proof-of-Stake Layer 2 that uses Bitcoin as its core asset for staking and governance.
Key Features:
- Mechanism: Orchestrator nodes manage a multisig setup, enhancing interoperability and security. Offers a robust distributed network for it’s multisig operation, called the Spiderchain.
- Currency: Features synthetic BTC as its native currency, pegged 1:1 with Bitcoin, aligning closely with Bitcoin’s value.
Chainway
Overview: A zk-rollup solution that stores proofs and transaction data directly on Bitcoin's blockchain.
Key Features:
- Mechanism: Utilizes recursive proofs to build a chain of trust, ensuring security and verifiability.
- Inclusion: Allows users to force transaction inclusion via L1, promoting transparency and reducing potential for censorship.
BOB (Build-on-Bitcoin)
Overview: BOB is an Ethereum-based Layer 2 solution designed to integrate closely with Bitcoin, maintaining alignment with Bitcoin's principles.
Key Features:
- Mechanism: Utilizes an Optimistic rollup approach on Ethereum, using Ethereum's Virtual Machine (EVM) for executing smart contracts. This positions it somewhat like a sidechain since its security is underpinned by Ethereum's Layer 1.
- Interoperability: Supports different forms of Bitcoin on Ethereum, like Wrapped Bitcoin (WBTC) and TBTC, ensuring easy transition and integration within the Ethereum ecosystem.
- Future Plans: Aims to implement a more robust and secure two-way bridge utilizing BitVM, enhancing connectivity between Bitcoin and Ethereum networks and improving overall security and functionality.
Twilight
Overview: Twilight offers a platform for deploying privacy-focused decentralized exchanges and other applications, using advanced cryptographic methods to ensure security and privacy.
Key Features:
- Mechanism: Employs the Boomerang trustless bridge, which uses a series of multisignature wallets with decremental time locks, releasing only a fraction of funds with each Bitcoin block, thus securing large amounts with a relatively smaller stake.
- Security: Boomerang also uses Bitcoin for data availability, posting refund transactions at every Bitcoin block to ensure users can always retrieve their funds, even if the Layer 2 network goes offline.
- Versatility: Twilight is designed to be virtual machine and stack agnostic, meaning it can work with various underlying technologies like the Cosmos SDK or the Polygon SDK, making it a flexible foundation for launching Layer 2 solutions with a focus on privacy.
…and more! Stay tuned for Part 2, where we'll delve into even more exciting projects emerging within the ecosystem.
Final Word
As a forward-thinking infrastructure provider, Chorus One is thrilled about the immense potential of integrating DeFi functionalities into Bitcoin and witnessing its evolution beyond being a store of value. Engaging in in-depth research into promising new technologies and projects, we're excited to explore a new landscape beyond Proof of Stake-based networks.
We're actively collaborating with L2s to delve deeper into the ecosystem. If you're interested in learning more or getting involved with some of the projects we're working with, please reach out to us at staking@chorus.one. We'd be delighted to connect with you.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally, operating infrastructure for 50+ Proof-of-Stake networks, including Ethereum, Cosmos, Solana, Avalanche, and Near, amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures. We are a team of over 50 passionate individuals spread throughout the globe who believe in the transformative power of blockchain technology.
