What is Bitcoin Layer 2? Bitcoin Layer 2 is the underlying Blockchain built on the Bitcoin network to solve the Smart Contract problem. Currently, projects in this segment have been receiving attention from many large investment funds.
So what’s interesting about Bitcoin Layer 2? Let’s find out together in the article below.
Overview of Bitcoin Layer 2
Background of Bitcoin Layer 2
Bitcoin is famous as a Blockchain with the number one security and decentralization in the Crypto market. However, the Bitcoin network can only solve problems related to money transfers and nothing else, making the security and decentralization that comes from a large number of miners redundant.
Looking at one of the competitors known as Blockchain 2.0 with the integration of Smart Contract, thereby creating a vibrant and diverse world with DeFi, NFT, GameFi, SocialFi,… it is clear that the support team Bitcoin also wishes Bitcoin had a similarly diverse ecosystem.
What is Bitcoin Layer 2?
Bitcoin Layer 2 is a Blockchain platform built on the Bitcoin network using many different technologies to authenticate and agree on transactions by miners on the network, thereby inheriting security. confidential and decentralized from the Bitcoin network. This is similar to Layer 2 solutions on Ethereum such as Rollup, Plasma, State Channel, Validium,… The difference here is that if Layer 2 platforms on Ethereum focus on solving the problem of expansion, then Layer 2 on Bitcoin solves two problems of Smart Contract and scalability.
Because Layer 2 on the Bitcoin network supports smart contracts, it also creates an ecosystem similar to Ethereum, Solana, Arbitrum, Optimism,…
One of the first Bitcoin Layer 2 solutions, Lightning Network, is a Layer 2 solution developed to solve the scaling problem of Bitcoin. Lightning Network’s goals include:
- Increase Transaction Speed: Lightning Network allows transactions to be made almost instantly, without waiting for confirmation from the blockchain.
- Reduced Transaction Fees: Since transactions do not require confirmation on the main blockchain, transaction fees become very low, even for small transactions.
The operating mechanism of Lightning Network is also relatively simple such as:
- Payment Channel: A user opens a payment channel with another user by depositing Bitcoin to a special wallet address. Once this channel is open, they can make an unlimited number of transactions quickly and efficiently.
- Off-Chain Transactions: Transactions performed off the main Bitcoin Blockchain chain. They are only recorded on the Blockchain when the payment channel closes.
Classification of Bitcoin Layer 2
Obviously we can divide Bitcoin Layer 2 into two types:
- Layer 2 solutions focus on scalability.
- Layer 2 solutions focus on the ability to support smart contract types.
Besides Bitcoin Layer 2, recently with the Taproot update, the Bitcoin network has created a completely new trend, which is Bitcoin Ordinals (roughly understood as NFTs on the Bitcoin network), the difference is This is if NFTs on Ethereum are only partly on-chain, then Bitcoin Ordinals is 100% on-chain. This wave has moved to many different Blockchain platforms under the name Inscription.
In 2023, there were many breakthroughs around the Bitcoin network when Bitcoin Ordinals first appeared and caused a storm, thereby making the Bitcoin Layer 2 trend hot again.
Some challenges of Bitcoin Layer 2
Some of the major challenges in developing and popularizing Bitcoin Layer 2 include:
- Layer 2 solutions often require more technical understanding than using Bitcoin on Layer 1. This can reduce accessibility for new users.
- In systems like the Lightning Network, the payment channel can present security risks, especially if one of the parties does not monitor the channel on a regular basis.
- Some Layer 2 solutions risk creating centralization, which can lead to bottlenecks and increase security risks.
- Updates to Bitcoin Core may impact the operation of Layer 2 solutions, which require high flexibility and adaptability.
Collection of Outstanding Layer 2 Bitcoin Projects
Stacks – One of the first Layer 2 Bitcoins
Stacks is a notable Bitcoin Layer 2 platform on the Bitcoin ecosystem. Stacks is designed to extend Bitcoin’s capabilities by delivering smart contracts and decentralized applications (DApps) through a separate Blockchain layer. The goal of Stacks is to leverage the security and stability of Bitcoin, while providing a powerful platform for building complex applications.
The special feature of Stacks is the Proof of Transfer (PoX) consensus mechanism. In PoX, miners use Bitcoin to participate in the mining process on the Stacks network. They “transfer” their Bitcoin (this is the “Transfer” part of the PoX name) as part of the mining process, instead of using computing power as in PoW.
Additionally, important transactions and the status of Stacks are recorded on the Bitcoin Blockchain through special transactions. This provides an additional level of security and authentication to the Stacks network. This mechanism of Stacks has many similarities to the Rollup solution on Ethereum where data will be agreed and stored on Layer 1.
Some differences of Stacks include:
- Clarity language will be the main language to build Dapps on the Stacks ecosystem.
Rootstock
Rootstock (RSK) is a notable Bitcoin Layer 2 platform. Rootstock is designed to expand Bitcoin’s functionality by adding support for smart contracts and decentralized applications (DApps). Rootstock also understands the security and decentralization capabilities of the Bitcoin network when using a mixed consensus mechanism called Merge – Mining.
Rootstock is essentially a Sidechain of the Bitcoin network.
Some outstanding features of Rootstock include:
- Rootstock operates as a sidechain of Bitcoin, and Rootstock uses a “2-way peg” (2WP) mechanism to enable the secure movement of Bitcoin between the two chains. This allows users to send Bitcoin from the main Blockchain to RSK and vice versa.
- RSK is compatible with the Ethereum Virtual Machine (EVM), allowing developers to use the same tools and programming languages when building on Ethereum.
- RSK uses a hybrid consensus mechanism, combining Bitcoin’s Proof of Work (PoW) and its own consensus mechanism. This allows Bitcoin miners to “merge-mine” RSK, increasing security for both networks.
However, Rootstock still has certain disadvantages such as:
- Although RSK expands the functionality of Bitcoin, its ecosystem is still not as rich as Ethereum.
- User awareness and understanding of Rootstock is still one of the project’s major challenges in the long term.
- Rootstock does not have many strategies to attract users and developers to its ecosystem.
Babylon
Babylon is also a Layer 2 solution on the Bitcoin network. However, it takes some approaches that are quite different from its peers. First, Babylon allows users to stake BTC directly on the Bitcoin network into the Babylon platform. Users can simply stake for profit but can stake to become a Validator on the network.
Next, Babylon introduced a new concept called Bitcoin Timestamping to solve the problem of network security. Bitcoin Timestamping was born to solve the problems surrounding malicious Node Operators to avoid network Hard Fork.
Currently, Babylon is still in the early stages of construction and development.
Summary
Bitcoin Layer 2 is still in the research, testing and development stages, it will certainly take a lot of time for these platforms to perfect themselves. Hopefully through this article, everyone can understand more about what Bitcoin Layer 2 is?
