Original title: Cregis Reseach: Bitcoin Layer2 Track Analysis

Original source: Cregis Reseach

I. Introduction

In 2023, Bitcoin Inscription brought new vitality and possibilities to the Bitcoin ecosystem. Then in early 2024, Bitcoin hit a record high of $73,000 and the Bitcoin halving event, which once again attracted market attention.

Bitcoin's proven security and network effects have attracted many developers who see Bitcoin as the base layer of the blockchain. These developers are working on building many different Layer 2 projects on top of the Bitcoin base layer. In this article, we will introduce Bitcoin's early and recent Layer 2 projects.

Why does Bitcoin need Layer 2?

According to the "scalability trilemma", it is difficult for a distributed network to balance decentralization, security, and scalability. The Bitcoin network has more than 75,000 core nodes, making it extremely decentralized and recognized as the most secure blockchain, but the Bitcoin network can only process 3-5 transactions per second, making it unscalable. A potential solution to the scalability problem is Bitcoin Layer 2 technology, which aims to improve Bitcoin's scalability, enabling it to handle a large number of transactions without reducing transaction speed or increasing transaction prices.

II. Bitcoin Layer 2 Early Construction Projects

Currently, the total locked value (TVL) of Bitcoin's Layer 2 (L2) projects is only a small part of Bitcoin's market value. The total TVL of the four most well-known L2 projects is about US$700 million, accounting for only about 0.15% of the entire L2 market. This shows that Bitcoin's Layer 2 ecosystem is still in its infancy, especially compared to the Layer 2 markets on other blockchains.

However, things are changing quietly. The Lightning Network continues to grow steadily, Stacks is committed to major upgrades to promote the development of the Bitcoin smart contract market, and Rootstock is also constantly upgrading. Currently, the existing L2 solutions on Bitcoin have different goals, some aiming to improve the scalability of the Bitcoin network, while others aim to enhance its more expressive programmability.

(I) Lightning Network

As a second-layer solution for Bitcoin, the Lightning Network aims to solve Bitcoin's scalability issues and increase transaction throughput and reduce transaction fees. Through payment channels, users can conduct transactions off-chain, thereby avoiding the time of competing for block space or waiting for L1 consensus on the Bitcoin blockchain, thereby improving efficiency. When users decide to complete a transaction conducted through a payment channel, they can choose to close the channel and aggregate the off-chain activities to the Bitcoin network for settlement. The current total locked value of the Lightning Network is:

The Lightning Network is designed to facilitate more than 40 million transactions per second, which is much higher than other blockchains and traditional payment channels. In addition, the Lightning Network greatly reduces transaction fees, and the base fee and rate are very low. As the use of the Lightning Network increases, these fees continue to decline.

More and more users and businesses are beginning to adopt the Lightning Network to reduce transaction costs and increase the practicality of Bitcoin. Integration at the government and corporate levels has also driven the application of the Lightning Network, such as the government of El Salvador setting Bitcoin as the national legal currency and being compatible with the government-commissioned ChivoWallet. Companies such as Twitter and CashApp have also added support for the Lightning Network on their platforms.

The market is optimistic about the future prospects of the Lightning Network, and many projects and investors are committed to building L2 networks. For example, Jack Dorsey's Bitcoin startup Block launched a new venture capital institution called "c=", focusing on providing new financing tools and services on the Lightning Network. At the same time, companies such as Spiral are developing a Lightning Network Development Kit (LDK) to improve the user experience of the Lightning Network and increase its appeal to mainstream users. In addition, the Lightning Network core team LightningLabs launched the "Taro" upgrade to bring new assets to the Bitcoin network using Bitcoin's Taproot upgrade, enabling users to issue and transfer synthetic assets, tokens and NFTs on Bitcoin.

Finally, some companies such as Zeebeedee and Strike are negotiating with different countries on fiat currency deposits, aiming to attract more users to join the Lightning Network and provide international remittance services to expand its application scenarios.

(II) Stacks

Stacks calls itself a "Bitcoin layer", which means it is a second-layer solution that runs on the Bitcoin blockchain. Although it is not a sidechain, it takes advantage of Bitcoin's security and incentivizes miners and processes transactions by introducing STX tokens and a consensus mechanism called PoX. Stacks allows developers to build a variety of DApps, especially in the fields of DeFi and NFT. Stacks' current total locked value:

Now, Stacks introduces sBTC, an asset pegged to Bitcoin, allowing users to trade with sBTC equivalent to Bitcoin on the Stacks layer. This will help further drive the development of DeFi and NFT use cases on Stacks and is expected to unlock capital within the Bitcoin ecosystem. In addition, Stacks is undergoing an upgrade called Nakamoto to fully utilize Bitcoin's security to determine transaction confirmations on the Stacks layer.

Recently, interest in Stacks has increased significantly due to discussions about Ordinals and Runes and the role of Stacks in increasing Bitcoin's use cases. Founder MuneebAli has also been active in top cryptocurrency-related podcasts. Investors may be preparing for the upcoming Stacks upgrade, and everyone is keeping a close eye on sBTC and the impact it may have on Bitcoin.

(III) Rootstock

Rootstock (RSK) is an EVM-compatible sidechain for general-purpose Bitcoin smart contracts. It uses a unique variant of the Bitcoin Nakamoto consensus called DECOR+, which enables RSK to merge mining with Bitcoin. SmartBitcoin (RBTC) is the native currency within RSK, pegged 1:1 to Bitcoin and used to pay transaction fees. Rootstock's current total locked value:

RSK is connected to Bitcoin L1 through Powpeg, allowing BTC to be transferred between the two chains. Powpeg was originally managed by a consortium responsible for managing multi-signature wallets, and RSK later further increased the degree of decentralization of Powpeg. Despite this, Powpeg still requires a certain degree of trust, as BTC transfer applications require signatures from at least 51% of the consortium members. Currently, there are nine members supporting Powpeg.

One of RSK’s key advantages is that its virtual machine (RVM) is compatible with the Ethereum Virtual Machine (EVM), which means that RSK smart contracts can be written in Solidity. One of the more well-known RSK projects is Sovryn, a non-custodial smart contract platform that supports Bitcoin lending and leveraged trading. RSK recently announced the removal of the supply cap on RBTC, which will expand the supply of RBTC to 21 million, which is comparable to BTC. This move is significant for Bitcoin DeFi, as the supply of RBTC previously limited the activities that could be conducted on RSK. The removal of the supply cap may attract more developers’ attention and prompt them to build more DApps on RSK.

Any new DApp launched on RSK should be closely followed as RSK provides a strong foundation for the goal of enabling DeFi on Bitcoin.

(IV) LiquidNetwork

LiquidNetwork is an L2 sidechain that can settle and issue digital assets such as stablecoins, security tokens, and other financial instruments on top of the Bitcoin blockchain. Unlike other L2 solutions, LiquidNetwork is relatively centralized and secure through a federation consensus mechanism managed by 60 workers. The workers are tasked with validating blocks and adding transactions to the LiquidNetwork sidechain.

Similar to RSK, LiquidNetwork also has a token called "L-BTC" that is pegged 1:1 to BTC. At the time of writing, the circulating supply of L-BTC tokens is approximately 3,534. The token is mainly used in the Lightning Network, which has a relatively higher transaction speed and throughput than the Bitcoin main chain. In addition, LiquidNetwork users can also use their L-BTC for other applications that support LiquidNetwork, such as lending or purchasing security tokens.

III. New Bitcoin Layer 2 Projects

(I) BEVM

Founded in 2023, BEVM is a decentralized Bitcoin L2 compatible with EVM. Based on technologies such as the Schnorr signature algorithm brought by the Taproot upgrade, BEVM allows BTC to cross-chain from the Bitcoin mainnet to Layer 2 in a decentralized manner. Since BEVM is compatible with EVM, all DApps running in the Ethereum ecosystem can run on BTCLayer 2 and use BTC as Gas.

On November 29, 2023, BEVM released its white paper. Currently, BEVM has launched the pioneer network ChainX. According to the 2023 BEVM pioneer network annual data, its total transaction volume is 2.77 million, the total number of active addresses is 55,000; TVL reached 119.56 BTC (about 5.09 million US dollars); the total bridge capacity to and from Ethereum L2 is 11.53 million US dollars. Recently, the BEVM pioneer network launched the first inscription protocol Bevscriptions, which processed 3 million transactions in 6 hours, with a tps of about 150.

In December 2023, BEVM launched the first Odyssey event, which has now ended. BEVM founder Gavin (@gguoss) said that the second phase is expected to start on January 15, and 10-20 ecological projects will be invited to participate. The name of the second phase of the event will not use "Odyssey", but will be named after the place name "Helsinki" where the first BTC block mined by Satoshi Nakamoto was mined.

Currently, the BEVM ecosystem has more than 20 ecological projects, including BTC full-chain DEXOmniSwap and decentralized signature protocol BoolNetwork.

(II) B²Network

Founded in 2022, B²Network is a Bitcoin second-layer network developed based on ZK-Rollup. It is also compatible with EVM, which can enable EVM ecological developers to seamlessly deploy DApps. The network participated in ABCDE's Bitcoin Ecosystem Project Roadshow in November 2023 and eventually received investment. According to ABCDE, the core members of the B²Network technical team come from mainstream Web3 open source communities such as Ethereum, Bitcoin, Cosmos, and Sui, and have received multiple Grant support. The team is good at Web3 Infra products such as blockchain Layer 1, Layer 2, cross-chain, and account abstraction, and has mature engineering capabilities.

On December 18, 2023, B²Network announced the launch of the Alpha test network MYTICA for partners and publicly recruited ecological developers. Partners and developers can deploy DApps on the B²Network test network. The network's ecological project cross-chain protocol Meson has deployed stablecoin USDC on the B²Network Alpha test network. Meson is a cross-chain protocol that focuses on speed, stability, security and low fees. It supports the free circulation of mainstream digital assets such as ETH, BNB, USDC, USDT between B²Network and more than 30 mainstream public chains.

(III) Dovi

Founded in 2023, Dovi is a Bitcoin Layer 2 compatible with EVM smart contracts. In November 2023, Dovi officially released a white paper, which introduced the technology that integrates Schnorr signatures and MAST structures, aiming to improve transaction privacy, optimize data size and verification processes. In addition, Dovi has also implemented a flexible framework for issuing various asset types other than Bitcoin, realizing cross-chain asset transfers.

KuCoinLabs announced a strategic investment in Dovi in December 2023, and its native token DOVI was launched on the KuCoin trading platform on December 12 of that year. The distribution of DOVI tokens adopts a fair release model. Within 4 hours of going online, all 15 million tokens have been claimed. As of January 15, the fully diluted market value of DOVI is approximately US$9.4 million. Currently, users can stake DOVI on the official website to receive rewards.

The Dovi official website announced that the next step will be to release a test network, establish developer community and ecosystem support, and launch Dovi V1. This move will help further develop Dovi's ecosystem and attract more developers and users to participate.

(IV) MapProtocol

MAPProtocol is a very promising project, especially in solving cross-chain interoperability. By leveraging the security of Bitcoin, MAP Protocol provides a way for other public chain assets and users to seamlessly interact with the Bitcoin network, which will help strengthen the security and interoperability of the entire blockchain ecosystem.

The latest strategic investment from DWFLabs and WaterdripCapital will undoubtedly provide strong support for the development of the project, which shows the market's recognition and expectations for the project.

Regarding the destruction of MAP and MAPO tokens, this will not only help reduce the circulation of tokens, increase the scarcity of tokens, but also help increase the value of tokens. The current fully diluted market value is approximately US$260 million, which shows the market's recognition of the potential value of MAP Protocol, and this number is expected to grow further as the project develops and adoption increases.

In general, MAP Protocol's innovation in cross-chain interoperability and the investment support it has received have laid a solid foundation for its future development.

(V) MerlinChain

MerlinChain is a ZKRollup Bitcoin Layer 2 network that supports multiple types of native Bitcoin assets and is compatible with EVM, launched by the well-known BRC-420 Blue Box and Bitmap development team. According to the official website and some research reports, Merlin is a Bitcoin Layer 2 solution that integrates the ZK-Rollup network, decentralized oracle, and on-chain BTC fraud prevention module.

From MerlinChain's official website, you can see the properties of its Bridge. It can transfer assets on BTC to the second-layer network, thereby reducing transaction fees. It is a typical representative of solving pain points first.

This solution that integrates ZK-Rollup, oracle, and anti-fraud modules is expected to bring more innovation and development to the Bitcoin ecosystem, provide a more efficient and secure transaction experience, and attract more users and developers to participate.

(VI) Bison

Founded in 2023, Bison is a Bitcoin-native zk-rollup designed to increase transaction speed while implementing advanced features on native Bitcoin. Developers can use zk-rollup to build innovative DeFi solutions such as trading platforms, lending services, and automated market makers.

Bison also participated in the roadshow of the ABCDE Bitcoin Ecosystem Project. It is reported that the Bison solution uses zero-knowledge proofs and Ordinals for fast and secure transactions. All data is anchored back to Bitcoin for enhanced security. Bison is able to achieve 2,200 transactions per second, and its fee is only 1/36 of Bitcoin.

The Bison team includes Starknet's own code contributors, which means that the team has rich experience and expertise in blockchain technology and is capable of developing efficient and secure solutions. As Bison continues to develop in the Bitcoin ecosystem, it is expected to bring more innovation and convenience to Bitcoin users and developers.

Fourth, the next step of Bitcoin ecology: the smart contract market

For many years, Bitcoin has been facing various problems, including a lack of developer tools, slow and cumbersome infrastructure, and seemingly relatively limited innovation relative to smart contract platforms such as Ethereum, BNBChain, and Solana. However, things seem to have changed recently. Developers can finally show their skills within the Bitcoin ecosystem, and they push updates day and night to advance Bitcoin at an unprecedented rate. And all of this is driven by natural demand. This is the key point. When an ecosystem faces real and natural user needs, these needs will essentially continue to drive innovation and product development, forming a virtuous cycle, and the situation will improve rapidly.

(I) BitVM

RobinLinus, the head of the ZeroSync project, published a paper on BitVM on October 9. Simply put, BitVM is the virtual machine of the Bitcoin network. It achieves Turing completeness without changing the consensus rules of the Bitcoin network through off-chain execution and on-chain verification.

There is still a big difference between BitVM and Ethereum smart contracts. Ethereum smart contracts can support multi-party transactions, but BitVM is designed to support only two-party transaction exchanges. Most of BitVM's transaction processing is done off-chain, minimizing the impact on the underlying Bitcoin blockchain; unlike BitVM, EVM is an on-chain engine, and all operations are performed in the native environment of Ethereum; BitVM is an optional additional engine for the Bitcoin blockchain, and its own operations do not require BitVM. In contrast, EVM is an integral part of the Ethereum blockchain; without EVM, there is no Ethereum.

The functionality of BitVM is implemented through the Bitcoin Taproot upgrade. BitVM mainly relies on the taproot address matrix (taptree), which is similar to the program instructions of a binary circuit. In this framework, the UTXO spending conditional instruction in each Script script is regarded as a minimum unit of the program, and 0 or 1 is generated through the specific code in the taproot address to form a taptree. The execution result of the entire taptree is a binary circuit text effect, which is equivalent to an executable binary program. The complexity of the program depends on the number of combined taproot addresses. The more addresses there are, the richer the instructions preset in the Script, and the more complex the program that taptree can execute.

Most of the processing of BitVM is carried out off-chain. The transactions processed off-chain are bundled into batches and published to the underlying Bitcoin blockchain, using a validity confirmation model similar to that used in optimistic rollups. At the same time, BitVM uses a model that combines fraud proofs with a challenge-response protocol to process and verify transactions between two parties (provers and verifiers). The prover initiates a computational task and sends it through a channel established between himself and the verifier, who then confirms the validity of the computation. Once verified, the transaction is added to the entire batch that has been collated so that it can be published to the underlying Bitcoin blockchain.

(II) RGB

RGB is maintained and updated by the LNP/BP Association and is a smart contract system that supports the Bitcoin network and the Lightning Network. The RGB protocol proposes a more scalable, more private, and more future-proof solution, building on the concepts of client-side validation and single-use-seals proposed by Peter Todd in 2017.

The core idea of RGB is to use the Bitcoin blockchain only when necessary, that is, to use proof of work and the decentralization of the network to achieve double-spending protection and censorship resistance. All verification of token transfers is removed from the global consensus layer and placed off-chain, and only verified by the client of the receiving party.

So how does it work? In RGB, basically all tokens belong to a Bitcoin UTXO (whether it is an existing UTXO or a temporary creation), and in order to transfer tokens, you need to spend this UTXO. When spending this UTXO, the Bitcoin transaction must contain a commitment to a message, the content of which is RGB's payment information, which defines the input, which UTXO these tokens will be sent to, the asset's id, the amount, the transaction to spend, and other data that needs to be attached.

The specific payment information of RGB tokens is transmitted off-chain through a dedicated communication channel, from the payer to the recipient's client, and the latter verifies that it does not violate the rules of the RGB protocol. This way, blockchain observers will not be able to obtain any information about RGB user activity.

However, verifying the incoming payment information is not enough to ensure that the sender actually owns the assets they are sending you, so in order to ensure the finality of the incoming transaction, you must also receive the history of all transactions involving these tokens from the payer, from the current one all the way back to the one that originally issued them. By verifying all transaction history, you can ensure that the assets have not been inflated and that all spending conditions attached to the assets have been met.

Conclusion

Bitcoin Layer 2 is an important part of the development of modern Web3. If Bitcoin wants to maintain its position as one of the main blockchain networks, it needs a way to process transactions quickly and affordably. Fortunately, many developers have decided to tackle Bitcoin's scaling challenges, so there are many different Bitcoin Layer 2s to choose from when people want to reduce transaction fees and expand Bitcoin's functionality.

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