Original title: "The Curious Case of Bitcoin L2s"
Original author: Arjun Chand, Banklees
Original translation: Lucy, BlockBeats

Editor's note:
The vision of Bitcoin is to be universally accessible and adopted, and for this it must be expanded to handle more traffic, and L2 is a good solution. So we can see L2 projects blossoming everywhere in the Bitcoin ecosystem, but given that BitVM is still in its early stages and Bitcoin is neither optimistic nor ZK rollup, technically speaking, real Bitcoin rollups do not exist yet. Banklees author Arjun Chand explores the importance, current status, future, and final form of Bitcoin L2, and BlockBeats translates the original text as follows:

Bitcoin's development is exploding.

New primitives such as ordinals, runes, and BRC-20 are taking center stage. This marks a major shift in the atmosphere of the Bitcoin ecosystem. It’s evolving from a singular view of BTC as an asset to a more vibrant ecosystem of different things for people to use, build, and speculate on.

In the Bitcoin ecosystem, L2 is the new hot thing right now. Everyone wants a piece of the Bitcoin L2 pie. But what’s all the hype about?

In today’s story, we’ll take a comprehensive look at the Bitcoin L2 scene. We’ll answer key questions for those new to the concept of Bitcoin L2: why L2s are necessary, where they are, where they are going, and where they’ll end up. Let’s get started!

Why Bitcoin Needs L2

The Bitcoin network was designed to prioritize security and decentralization, with tradeoffs around scalability and expressiveness as a blockchain. While this makes BTC a more valuable asset, it also means that the network is not as ideal infrastructure for building financial applications as Ethereum.

For nearly a decade, the Bitcoin community has struggled with scalability issues, with transaction costs reaching tens of dollars during peak network traffic. And today, driven by experiments such as Ordinals, Runes, BRC-20, and more, demand for Bitcoin block space is exploring new heights:

Ordinals caused Bitcoin fees to rise 280% year-to-date in December 2023. Rune transactions account for 68% of total Bitcoin transactions since Bitcoin's inception. Over the past year, BRC-20 has caused Bitcoin transaction fees to skyrocket at times, with these fees accounting for 74% of the block reward at one point.

The vision of Bitcoin is to be universally accessible and adopted. To achieve this, it must scale to handle more traffic without spending a lot of money on each transaction. The growing demand for Bitcoin block space highlights the need to scale Bitcoin, which reflects the need for Bitcoin L2.

The Current State of Bitcoin L2

For years, the Bitcoin community has been actively working to improve the scalability of transactions. A key development in this area is the Lightning Network - a payment channel protocol that aims to enable faster and more affordable transactions by processing transactions outside of Bitcoin L1.

While the Lightning Network has long been the flagship solution for Bitcoin's scalability vision, the community is increasingly recognizing its limitations. There is a consensus that the Lightning Network may not be the ultimate scaling solution for Bitcoin, and a better Bitcoin L2 is needed.

Eric Wall discussed the need for improvements to L2 in a recent episode of Bankless, suggesting that the future of Bitcoin's scalability may extend beyond what the Lightning Network currently offers.

《But where does this leave us? How can we build a more efficient Bitcoin L2? 》

BitVM’s Trust Minimization Promise

Currently, the focus is on BitVM, a new model for executing Turing-complete contracts on Bitcoin that could pave the way for optimistic rollups on Bitcoin.

The main reason the community supports BitVM over any other approach stems from its compatibility with the Taproot upgrade. This means that BitVM can be deployed without further modifications to the Bitcoin network, preserving the network’s existing rules. It’s a win-win for all types of people in the Bitcoin community.

BitVM’s approach involves executing transactions off-chain, with the function of validating them on-chain within a challenge window via fraud proofs, a mechanism similar to Ethereum’s optimistic rollups.

The system can even run with a single Proover, but has the trust assumption that there must always be at least one honest validator in the system who can detect and broadcast malicious transactions. However, this also means that if all validators are compromised, the integrity of Bitcoin will be threatened, as the attacker could publish fraudulent transactions on the network.

BitVM operation diagram. Source: Bitcoin L2 Opportunities

BitVM only allows the creation of trust-minimized Bitcoin L2s such as optimistic rollups, but not trustless Bitcoin L2s such as ZK-rollups. In addition, similar to optimistic rollups on Ethereum, BitVM also faces challenges such as lengthy dispute resolution times and the fact that operators must lock up large amounts of funds to ensure liquidity for potential withdrawals.

Therefore, there is a certain degree of skepticism in the Bitcoin community about the practicality of BitVM. However, it is worth noting that BitVM is still in the early stages of development and is expected to scale Bitcoin through optimistic rollups.

The Dream of Zero Knowledge

This brings us to a major question - what is the final state of Bitcoin L2? The answer is, ZK-rollups!

But building ZK-rollups on Bitcoin is not easy, or even technically feasible. It would require changing the Bitcoin network via a soft fork, which we all know is easier said than done.

A soft fork would add a new opcode to Bitcoin that would enable it to natively recognize and verify zero-knowledge proofs, allowing trustless interaction between Bitcoin and rollups. However, as mentioned above, this is a significant technical hurdle and its feasibility remains uncertain.

But wait. Given that BitVM is still in its early stages and that neither optimistic nor ZK rollups are currently possible on Bitcoin, how come we have so many Bitcoin L2s in the ecosystem?

Well, the reality is that, technically speaking, true Bitcoin rollups don’t exist yet. What we are seeing is a group of dedicated teams laying the foundation for a future Bitcoin L2.

BOB's phased approach to building Bitcoin L2. Source: BOB official website

For example, some rollups teams, like BOB, are taking a phased approach. They are first bootstrapping the ecosystem as EVM rollups to attract users, liquidity, and applications. Then, they plan to transition to optimistic rollups using BitVM once the technology matures, and eventually, they aim to evolve into zk-rollups, depending on whether Bitcoin undergoes a soft fork to add the necessary opcodes.

Conclusion

With hype comes great potential for scams. Amid the buzz, there are many projects falsely claiming to be Bitcoin L2, so it’s important for investors and users to be cautious. The jury is still out on whether many of the self-proclaimed projects are truly L2, or if they are simply using buzzwords to attract VC and retail investment.

Nevertheless, these are exciting times for the Bitcoin community. From the launch of a Bitcoin spot ETF, to primitives like Ordinals, BRC-20s, and Runes, the Bitcoin ecosystem is experiencing unprecedented growth and innovation.

The prospect of Bitcoin L2 has increased excitement about the future of Bitcoin. What do you think of the potential impact of Bitcoin L2 on overall BTC adoption? Do you think they are here to stay, or is this just a fleeting trend?

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