In addition to the emergence of Ordinals, the Bitcoin Layer 2 (L2) ecosystem has been evolving rapidly. To keep you up to date, DWF Ventures compiled insights on the latest developments and traction across 23 BTC L2 projects, 13 of which are planning the launch of their tokens in the foreseeable future:
This article delves into the classification of BTC L2s and examines Bitcoin’s scalability journey to draw conclusions about their potential to enhance the ecosystem around the first cryptocurrency.
Issues With Scaling Bitcoin
The blockchain trilemma—scalability, decentralisation, and security—has challenged early “monolithic” blockchains like Bitcoin and Ethereum. Both platforms prioritised decentralisation and security, aligning with the core philosophies of blockchain technology, but this came at the cost of scalability in their early stages.
However, it has been especially challenging to create viable Layer 2 (L2) solutions for Bitcoin, since its limited scripting capabilities make it difficult to implement complex smart contracts required for technologies like rollups or sidechains. Security remains a major concern, as ensuring trust-minimised and censorship-resistant off-chain transactions without introducing centralisation risks is complex.
Despite these challenges, several classes of L2 solutions gradually emerged as the Bitcoin protocol has been steadily upgrading.
Sidechains
Sidechains became one of the earliest and, subsequently, primary solution for scaling Bitcoin, designed to enhance functionality, to being DeFi and smart contracts to the first cryptocurrency’s protocol. Projects like Liquid Network and Rootstock (RSK) allow Bitcoin interoperability through mechanisms like two-way pegs and cross-chain bridges, so BTC could be transferred and utilised within programmable environments.
However, sidechains do not fully inherit Bitcoin’s decentralisation and security layers, as they rely on their own consensus mechanisms: Liquid uses a federated model, while RSK employs merge mining with Bitcoin miners. The latter is especially notable technology intended to better align scalability with security.
Merge Mining Explained
Merge mining allows Bitcoin miners to extend their computational power to secure additional blockchains while reusing Bitcoin’s Proof-of-Work consensus, providing enhanced security without additional energy costs.
Sidechains Rootstock and Syscoin, for example, leverage merge mining to create a secure data availability layer, further serving as a foundation for L2 solutions like Rollux L2, which benefit from Bitcoin’s security while offering scalable smart contract functionality. This approach provides miners with additional incentives and enhances the resilience of secondary blockchains against attacks.
However, challenges such as miner apathy and governance centralisation persist, as merge-mined chains do not fully inherit Bitcoin’s decentralisation model. Despite these limitations, merge-mining presents a viable way to extend Bitcoin’s security to new applications in DeFi, NFTs, and enterprise solutions, with ongoing advancements aimed at improving miner participation and long-term sustainability.
Approximately half of Bitcoin miners were involved in securing Syscoin's infrastructure at the end of March 2024. Although a significant number, it raises the question: is this level of security sufficient? In Ethereum’s case, rollups seem to be the premier way to scale a blockchain, as proofs are posted and secured by the entire network.
BitVM in Bitcoin Rollups
Ethereum has made strides in scalability with rollups, protocols that process transactions off-chain yet verify them and post their proofs in the base layer. Because of Bitcoin’s Script language, the same design would lack the capability to verify proofs. This limitation has been addressed with the recent introduction of the Bitcoin Virtual Machine (BitVM).
BitVM introduces a novel way to verify computations on Bitcoin without requiring a network fork (which is needed for major protocol upgrades). It achieves this by representing NAND logic gates within Bitcoin’s existing Script language. NAND logic gates are considered universal logic gates because they can perform any other logic gate function.
Through BitVM, computations can be verified optimistically rather than being executed directly on Bitcoin. This enables optimistic rollups, as seen with projects like BitLayer Labs, and allows the optimistic verification of zero-knowledge (ZK) proofs. Projects like Citrea and SatoshiVM leverage BitVM to implement these capabilities.
Alternative Approaches to Scaling Bitcoin
Other Bitcoin rollups, such as BSquared Network, Bison Labs, and LumiBit L2, have developed their own methods for settling computation verification on Bitcoin without specifically using BitVM.
BSquared Network, for example, focuses on optimising Bitcoin’s data anchoring capabilities to enable efficient rollup settlements, while Bison Labs offers hybrid models that blend on-chain and off-chain verification to enhance performance. LumiBit L2, on the other hand, utilises cryptographic proofs and compression techniques to validate transactions off-chain before anchoring them to Bitcoin, improving throughput while minimizing fees.
The Future of Bitcoin L2s
With the potential for further development of L2 solutions, Bitcoin’s role as both a secure and scalable base layer will likely continue to strengthen.
Varying approaches to improve Bitcoin’s scalability and functionality reflect the broader trend of adapting rollup technology, originally popularised in Ethereum, to Bitcoin’s more limited scripting environment.
Unlike Ethereum rollups, which benefit from the flexibility of the Ethereum Virtual Machine (EVM), Bitcoin rollups must overcome challenges posed by Bitcoin’s minimalistic and security-focused design, relying on technologies like ZKPs, fraud proofs, and multi-signature schemes to achieve trust-minimised scalability.
If you are developing a Bitcoin L2 solution in the space, don’t hesitate to contact DWF Ventures, to discuss potential opportunities for partnering with our crypto venture capital firm.
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