The Top Bitcoin Layer-2 Projects
While no one gets excited anymore about the launch of a new L2 or an alt-L1 converting, there is one ecosystem where L2s are still hype: Bitcoin. The rise of more things to do on Bitcoin might even contribute to diversifying the usual Bitcoin-heavy believer crowd away from just being laser-eyed guys touting the “Have fun staying poor” on innocent bystanders and aiming to build a citadel to a more open-minded group. We can hope.
After all, Layer-2s on top of Bitcoin offes a way for people to do more than just HODL or amass wealth (like Michael Saylor). Instead, with the rise of Layer-2s, crypto users have gotten to leverage the security of Bitcoin to get down to degen business.
But before we get into the top layer-2 projects on the OG chain, let’s start with:
What are Bitcoin Layer-2s to begin with?
Technically, Bitcoin has had Layer-2s for years. Take Liquid, a sidechain that Bitstream runs to facilitate non-custodial swaps and cheap USDT transfers for exchanges run by Bitcoin maxis. Nevertheless, it wasn’t until earlier this year that people started recognizing Bitcoin L2s as the next big thing.
Bitcoin was designed as a payments network, not a smart contract engine. Consequently, programs that could be created on top were limited to pretty simple swaps powered by hashed time-locked contracts and tokenizing via colored coins.
That was, until the introduction of SegWit, an update that laid the foundation for smart contracts, the ordinals craze, and now L2s.
Just like Ethereum L2s, Bitcoin L2s batch transactions and submit the final state to the Bitcoin blockchain. This offers users of the L2s similar settlement guarantees and levels of security as Bitcoin.
Additionally, Bitcoin L2s bring something to Bitcoin that wasn’t there before: a virtual machine that can execute complex smart contracts. A significant difference between Bitcoin L2s and Ethereum L2s is that the latter focus on scaling the overall throughput of Ethereum itself, while Bitcoin L2s do not attempt to increase Bitcoin’s tps. Instead, they are scaling the applications by building layers that enable complex programs to run.
Thanks to L2s, Bitcoin gains indirect VM capability.
Yet, not all Bitcoin L2s are the same.
Types of Bitcoin L2s
State Channels
Among the oldest attempts to enable execution outside of the mainchain are state channels. These are simply payment channels between two or more transacting parties. Let’s say I’d be a loyal customer of the local beer garden that recently started accepting Bitcoin. 🍺
One option for us would be to execute transactions on the mainchain and pay the associated fees. However, this is not a great option for low-value transfers (beer costs around $4), so we’d open a payment channel instead.
- Opening channel
- Both parties deposit funds held in the channel’s multisig
- With each purchase, the change of balance for each would be reflected - no fees attached
- Eventually, I decide to go on a detox and close the channel. Only the final state is submitted to the mainchain, reflecting all the beers I bought over time.
Instead of executing 10s of transactions on Bitcoin, with state channels, most activity happens off-chain, and only the final transaction is submitted, saving fees and enhancing speed. The Lightning Network is built on combining state channels to facilitate small payments with Nodes running separate Lightning Network software.
Sidechains
Sidechains are another type of Layer-2 on Bitcoin that are semi-autonomous networks, running their own consensus algorithm. To communicate with Bitcoin, they establish two-way bridges that lock and mint assets on the sidechain to facilitate asset movements.
The largest challenges of sidechains are securing a sufficiently big pool of validators and the bridge connecting with the main chain. That’s why many Bitcoin sidechains have chosen approaches that allow Bitcoin miners to merge-mine or offer them additional benefits for contributing computing power to their network.
Rollups
Finally, rollups are the most recent addition to the Bitcoin L2 stack. They bundle transactions and batch them before submitting them to the Bitcoin mainchain. They focus mostly on execution, allowing users to transact at lower costs and faster speeds. A rollup batch can host up to 10k transactions, tremendously increasing efficiency. Like in the Ethereum rollup world, Bitcoin also has Optimistic and ZK rollups competing.
Challenges
All of the above approaches to bringing new functionality to Bitcoin have their own drawbacks and benefits. State channels require users to lock up funds, which explains why Lightning never took off.
Bridges are still a sore spot in crypto, often falling prey to hackers, and the lock and mint mechanism isn’t without its risk. If the Bitcoin price keeps increasing, alongside demand for Bitcoin block space, operating Bitcoin L2s could become expensive and require updates to the underlying mainchain, similar to Ethereum’s Dencun upgrade.
Bitcoiners have always prided themselves on the network's simplicity and consistency. So, such big updates could challenge the community, especially with enthusiasts' opposing views on the benefits of L2s and other “non-payment” activities on Bitcoin. Let’s call them Bitcoin puritans.
Still, with very bright minds working on Bitcoin Layer-2s and their potential to offer a path to sustaining miner income once mining rewards run out, it’s hard not to be excited about them.
So below are some examples of Bitcoin Layer-2s. Not financial advice, DYOR before yolo-ing into anything.
Stacks
Stacks is a semi-standalone blockchain, somewhere between a Layer-2 and a sidechain. It runs its own consensus algorithm called Proof of Transfer (PoX) and requires native tokens STX for gas.
PoX is a combination of Proof of Stake and Proof of Burn, which connects miners on Bitcoin with stakers (also called stackers) on Stacks. Stackers stake their STX, and miners on Bitcoin then bribe them to earn rights to validate blocks on Stacks for additional income. The Stackers themselves receive rewards in Bitcoin to lock up their tokens.
In essence, Stacks borrows miners' computing power to validate transactions but does not settle on Bitcoin. Recently, the protocol underwent an upgrade to further enhance transaction speed by improving block production and increasing the security of Stacks transactions.
With a two-way bridge to Bitcoin and a variety of dApps running on top, Stacks is arguably the most mature DeFi ecosystem on Bitcoin to date.
Rootstock
Rootstock is an EVM-compatible Bitcoin side chain that allows EVM dApps to expand to the Bitcoin ecosystem without making drastic changes to their code. It runs on a Proof-of-Work consensus, just like Bitcoin, and allows the transfer of assets via a two-way Proof-of-Work consensus.
By allowing Bitcoin miners to secure the Rootstock chain simultaneously, the chain can tap into one of the most powerful validator pools, securing it with the same hash rate as Bitcoin.
Lastly, RIF features an execution layer capable of advanced smart contracts, such as the Uniswap DEX contracts.
For more on Rootstock go to their website.
Merlin
Merlin is a Bitcoin-native EVM-compatible L2 rollup that launched its testnet early this year. Unlike other EVM L2s, users on Merlin can connect using their Bitcoin wallets, a connection established through BTC Connect, a Bitcoin-native wallet protocol.
Of course, the Meta Mask maxis aren’t left out either, as they, too can connect using EVM wallets. (But why use MM when Rainbow exists and has managed to add native chain icons🌈)
To compress transaction data, Merlin relies on zk proofs to batch transactions for final settlement on Bitcoin. It improves speed and resource management while claiming to achieve similar security to Bitcoin.
Find out more here
SatoshiVM
Like Merlin, SatoshiVM relies on zerk-knowledge tech to operate its execution layer. However, instead of having another native token (naming it Satoshi would have been problematic anyway), SatoshiVM relies on Bitcoin as a native and gas token.
However, not just any Bitcoin; you do have to bridge before being able to use it in DeFi. For those not interested in farming or swapping, SatoshiVM also supports other advanced operations like minting one’s favorite poem as an inscription.
For now, SatoshiVM is in testnet. You can learn more about them here.
BOB
BOB isn’t about the builder, but short for Build on Bitcoin. It’s the first Bitcoin L2 with full EVM compatibility, with the goal of bridging the gap between Bitocin’s security and decentralization and the innovation happening in the Ethereum ecosystem.
It features Rust smart contracts compatible with Bitcoin Ordinals and lightning and combines them with full support for EVM. The ecosystem is further complemented by a trustless bridge, allowing for secure asset transfers between other chains and Bob.
You can find out more about Bob and their future roadmap on their website.
At Subsquid, we’re gearing up to integrate various Bitcoin L2s in our data lake. Watch this space.
Can we fix decentralized data access? As Bob, the builder, and friends would say, “Yes, we can”. 💪