Cregis Research: Analysis of the Bitcoin Layer 2 Track

Author: 0xCregis

I. Introduction

In 2023, Bitcoin inscriptions brought new vitality and possibilities to the Bitcoin ecosystem. Subsequently, in early 2024, Bitcoin reached a historic high of $73,000 and experienced a halving event, which once again attracted market attention.

The proven security and network effect of Bitcoin have attracted many developers who view Bitcoin as the foundational layer of blockchain. These developers are dedicated to building various Layer 2 projects on top of the Bitcoin base layer. In this article, we will introduce early and recent Layer 2 projects on Bitcoin.

Why does Bitcoin need Layer 2?

According to the "scalability trilemma," it is challenging for distributed networks to simultaneously balance decentralization, security, and scalability. The Bitcoin network has over 75,000 core nodes, making it extremely decentralized and widely recognized as the most secure blockchain. However, the Bitcoin network can only process 3-5 transactions per second, making it unable to scale. One potential solution to the scalability issue is Bitcoin Layer 2 technology, which aims to enhance Bitcoin's scalability, allowing it to handle a large number of transactions without compromising transaction speed or increasing transaction costs.

II. Early Layer 2 Projects on Bitcoin

Currently, the total locked value (TVL) of Bitcoin's Layer 2 (L2) projects is only a small fraction of Bitcoin's market value. The total TVL of the four most well-known L2 projects is approximately $700 million, accounting for only about 0.15% of the entire L2 market. This indicates that Bitcoin's Layer 2 ecosystem is still in its initial stages, which is particularly evident compared to the Layer 2 markets on other blockchains.

However, the situation is quietly changing. The Lightning Network continues to grow steadily, Stacks is committed to significant upgrades to promote the development of the Bitcoin smart contract market, and Rootstock is also undergoing continuous upgrades. Currently, the existing L2 solutions on Bitcoin have different goals; some aim to enhance the scalability of the Bitcoin network, while others aim to improve its expressive programmability.

(1) Lightning Network

The Lightning Network, as a second-layer solution for Bitcoin, aims to address Bitcoin's scalability issues, increase transaction throughput, and reduce transaction fees. Through payment channels, users can transact off-chain, thereby avoiding competition for block space on the Bitcoin blockchain or waiting for L1 consensus time, thus improving efficiency. When users decide to finalize transactions made through payment channels, they can choose to close the channel and settle the off-chain activities on the Bitcoin network. The current total locked value of the Lightning Network is:

The design of the Lightning Network allows for over 40 million transactions per second, far exceeding other blockchains and traditional payment channels. Additionally, the Lightning Network significantly reduces transaction fees, with basic costs and rates being very low. As the usage of the Lightning Network increases, these fees continue to decline.

An increasing number of users and businesses are adopting the Lightning Network to lower transaction costs and enhance the utility of Bitcoin. Integration at the government and corporate levels has also driven the adoption of the Lightning Network, such as the Salvadoran government's designation of Bitcoin as legal tender and its compatibility with the government-commissioned Chivo Wallet. Companies like 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, with many projects and investors dedicated to building L2 networks. For example, Jack Dorsey's Bitcoin startup Block has launched a new venture capital firm called "c=" focused on providing new financing tools and services on the Lightning Network. At the same time, companies like Spiral are developing the Lightning Development Kit (LDK) to enhance the user experience of the Lightning Network and increase its appeal to mainstream users. Additionally, the core team of the Lightning Network, Lightning Labs, has launched the "Taro" upgrade to leverage Bitcoin's Taproot upgrade to bring new assets to the Bitcoin network, allowing users to issue and transfer synthetic assets, tokens, and NFTs on Bitcoin.

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

(2) Stacks

Stacks claims to be the "Bitcoin layer," meaning it is a second-layer solution that runs on the Bitcoin blockchain. Although it is not a sidechain, it leverages Bitcoin's security and incentivizes miners and processes transactions through the introduction of the STX token and a consensus mechanism called PoX. Stacks allows developers to build various DApps, particularly in the DeFi and NFT sectors. The current total locked value of Stacks is:

Now, Stacks has introduced sBTC, an asset pegged to Bitcoin, allowing users to transact with sBTC equivalent to Bitcoin on the Stacks layer. This will further promote the development of DeFi and NFT use cases on Stacks and is expected to unlock capital within the Bitcoin ecosystem. Additionally, Stacks is undergoing an upgrade called Nakamoto to fully utilize Bitcoin's security for transaction confirmations on the Stacks layer.

Recently, interest in Stacks has noticeably increased due to discussions around Ordinals and Runes and Stacks' role in increasing Bitcoin use cases. Founder Muneeb Ali has also actively participated in top cryptocurrency-related podcasts. Investors may be preparing for the upcoming Stacks upgrade, with everyone closely watching sBTC and its potential impact on Bitcoin.

(3) Rootstock

Rootstock (RSK) is an EVM-compatible sidechain for general Bitcoin smart contracts. It employs a unique variant of Bitcoin's Satoshi consensus called DECOR+, enabling RSK to merge mine with Bitcoin. SmartBitcoin (RBTC) is the native currency within RSK, pegged 1:1 to Bitcoin, used for paying transaction fees. The current total locked value of Rootstock is:

RSK connects to Bitcoin L1 through Powpeg, allowing BTC to be transferred between the two chains. Powpeg was initially managed by a consortium responsible for managing a multi-signature wallet, and RSK has further decentralized Powpeg. Nevertheless, Powpeg still requires a certain level of trust, as BTC withdrawal requests need at least 51% of the consortium members' signatures to be approved. Currently, there are nine members supporting Powpeg.

One of RSK's key advantages is its virtual machine (RVM) being compatible with the Ethereum Virtual Machine (EVM), meaning RSK smart contracts can be written in Solidity. Sovryn is a well-known RSK project that is a non-custodial smart contract platform supporting Bitcoin lending and leveraged trading. RSK recently announced the removal of the RBTC supply cap, expanding the RBTC supply to match BTC, which is 21 million. This move is significant for Bitcoin DeFi, as the previous RBTC supply cap limited activities on RSK. Removing the supply cap may attract more developers' attention and encourage them to build more DApps on RSK.

We should closely monitor the development of any new DApps launched on RSK, as RSK provides a strong foundation for enabling DeFi on Bitcoin.

(4) Liquid Network

Liquid Network 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, Liquid Network is relatively centralized, ensuring its security through a consortium consensus mechanism managed by 60 staff members. The staff's task is to validate blocks and add transactions to the Liquid Network sidechain.

Similar to RSK, Liquid Network has a token called "L-BTC," pegged 1:1 to BTC. At the time of writing, the circulating supply of L-BTC tokens is approximately 3,534. This token is primarily used on the Lightning Network, with relatively higher transaction speeds and throughput compared to the Bitcoin main chain. Additionally, Liquid Network users can use their L-BTC for other applications that support Liquid Network, such as lending or purchasing security tokens.

III. New Layer 2 Projects on Bitcoin

(1) BEVM

Established in 2023, BEVM is a decentralized Bitcoin L2 compatible with EVM. Based on technologies brought by the Taproot upgrade, such as the Schnorr signature algorithm, BEVM allows BTC to cross-chain to the second layer in a decentralized manner. Since BEVM is EVM-compatible, all DApps running in the Ethereum ecosystem can operate on BTCLayer 2, using BTC as gas.

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

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

Currently, the BEVM ecosystem includes over 20 ecological projects such as the BTC full-chain DEX OmniSwap and the decentralized signature protocol BoolNetwork.

(2) B²Network

B²Network, established in 2022, is a Bitcoin Layer 2 network developed based on ZK-Rollup, while also being EVM compatible, allowing EVM ecosystem developers to seamlessly deploy DApps. The network participated in the ABCDE Bitcoin ecosystem project roadshow in November 2023 and ultimately secured 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 grants. The team specializes in blockchain Layer 1, Layer 2, cross-chain, account abstraction, and other Web3 Infra products, possessing mature engineering capabilities.

On December 18, 2023, B²Network announced the launch of the Alpha testnet MYTICA for partners and publicly recruited ecological developers. Partners and developers can deploy DApps on the B²Network testnet. The network's cross-chain protocol Meson has deployed the stablecoin USDC on the B²Network Alpha testnet. Meson is a cross-chain protocol focusing on speed, stability, security, and low fees, supporting mainstream digital assets such as ETH, BNB, USDC, and USDT to circulate freely between B²Network and over 30 mainstream public chains.

(3) Dovi

Dovi, established in 2023, is a Bitcoin Layer 2 compatible with EVM smart contracts. In November 2023, Dovi officially released its white paper, which introduced technologies integrating Schnorr signatures and MAST structures, aiming to enhance transaction privacy, optimize data size, and improve the verification process. Additionally, Dovi has implemented a flexible framework for issuing various asset types beyond Bitcoin, enabling cross-chain asset transfers.

KuCoin Labs announced a strategic investment in Dovi in December 2023, and its native token DOVI was listed on the KuCoin trading platform on December 12 of the same year. The distribution of the DOVI token adopted a fair release model, with all 15 million tokens claimed within 4 hours of launch. As of January 15, the fully diluted market cap of DOVI is approximately $9.4 million. Users can currently stake DOVI on the official website to earn rewards.

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

(4) Map Protocol

MAP Protocol is a promising project, especially in addressing cross-chain interoperability. By leveraging Bitcoin's security, MAP Protocol provides a seamless way for other public chain assets and users to interact with the Bitcoin network, which will help enhance the security and interoperability of the entire blockchain ecosystem.

The recent strategic investments from DWFLabs and WaterdripCapital will undoubtedly provide strong support for the project's development, indicating market recognition and anticipation for the project.

Regarding the token burn initiatives for MAP and MAPO tokens, this not only helps reduce the circulating supply and increase token scarcity but also contributes to enhancing the token's value. The current fully diluted market cap is approximately $260 million, reflecting market recognition of MAP Protocol's potential value, and this figure is expected to grow further as the project develops and adoption increases.

Overall, MAP Protocol's innovations in cross-chain interoperability and the investment support it has received lay a solid foundation for its future development.

(5) MerlinChain

MerlinChain is a ZK-Rollup Bitcoin Layer 2 network launched by the well-known BRC-420 Blue Box and Bitmap development team, supporting various native Bitcoin assets and EVM compatibility. According to the official website and some research reports, Merlin is a Bitcoin Layer 2 solution that integrates ZK-Rollup networks, decentralized oracles, and on-chain BTC anti-fraud modules.

From MerlinChain's official website, we can see the attributes of its Bridge, which can transfer assets on BTC to the second-layer network, thereby reducing transaction costs, representing a typical solution to address pain points.

This integration of ZK-Rollup, oracles, and anti-fraud modules is expected to bring more innovation and development to the Bitcoin ecosystem, providing a more efficient and secure trading experience, attracting more users and developers to participate.

(6) Bison

Bison, established in 2023, is a Bitcoin-native zk-rollup aimed at improving transaction speed while achieving advanced functionalities on native Bitcoin. Developers can leverage zk-rollup to build innovative DeFi solutions, such as trading platforms, lending services, and automated market makers.

Bison also participated in the ABCDE Bitcoin ecosystem project roadshow, where it was reported that the Bison solution utilizes zero-knowledge proofs and Ordinals for fast and secure transactions. All data is anchored back to Bitcoin to enhance security. Bison can achieve 2,200 transactions per second, with fees only 1/36 of Bitcoin's.

The Bison team includes contributors from Starknet, indicating that the team possesses rich blockchain technology experience and expertise, capable of developing efficient and secure solutions. As Bison continues to develop within the Bitcoin ecosystem, it is expected to bring more innovation and convenience to Bitcoin users and developers.

IV. The Next Step for the Bitcoin Ecosystem: Smart Contract Market

For years, Bitcoin has faced various issues, including a lack of developer tools, slow and cumbersome infrastructure, and relatively limited innovation compared to smart contract platforms like Ethereum, BNB Chain, and Solana. However, the situation seems to be changing recently. Developers can finally showcase their skills within the Bitcoin ecosystem, working tirelessly to push updates and drive Bitcoin's development at an unprecedented pace. All of this is driven by natural demand. This is the key point: when an ecosystem faces real, natural user demand, these demands inherently drive continuous innovation and product development, creating a virtuous cycle and rapidly improving the situation.

(1) BitVM

Robin Linus, the head of the ZeroSync project, published a paper on BitVM on October 9. In simple terms, BitVM is a virtual machine for the Bitcoin network that achieves Turing completeness through off-chain execution and on-chain verification without changing the consensus rules of the Bitcoin network.

BitVM differs significantly from Ethereum smart contracts, which can support multi-party transactions, while BitVM's design only supports two-party transaction exchanges. Most transaction processing in BitVM occurs off-chain, minimizing the impact on the underlying Bitcoin blockchain; in contrast, EVM is an on-chain engine where all operations occur in Ethereum's native environment; BitVM is an optional additional engine for the Bitcoin blockchain, and its operations do not require BitVM. In comparison, EVM is an integral part of the Ethereum blockchain; without EVM, there is no Ethereum.

The functionality of BitVM is achieved through the Bitcoin Taproot upgrade. BitVM primarily relies on a taproot address matrix (taptree), similar to the program instructions of binary circuits. Within this framework, the UTXO spending condition instructions in each Script are viewed as the smallest unit of a program, generating 0 or 1 through specific code in the taproot address, forming the taptree. The execution result of the entire taptree is a binary circuit text effect, equivalent to an executable binary program. The complexity of the program depends on the number of combined taproot addresses; the more addresses, the richer the pre-set instructions in the Script, and the more complex the programs that the taptree can execute.

Most processing in BitVM occurs off-chain, and off-chain processed transactions are bundled into batches and published to the underlying Bitcoin blockchain, utilizing a validity confirmation model similar to that used in optimistic rollups. At the same time, BitVM employs a model that combines fraud proofs with challenge-response protocols to process and verify transactions between two parties (prover and verifier). The prover initiates a computation task and sends it through a channel established between themselves and the verifier, who then confirms the validity of the computation. Once verified, the transaction will be added to the entire batch for publication to the underlying Bitcoin blockchain.

(2) RGB

RGB, maintained and updated by the LNP/BP Association, is a smart contract system supporting the Bitcoin network and the Lightning Network. The RGB protocol proposes a more scalable, privacy-focused, and future-oriented solution, with its foundation based 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, leveraging proof of work and the network's decentralization to achieve protection against double spending and censorship resistance. All verification work for token transfers is removed from the global consensus layer and placed off-chain, verified solely by the client of the receiving party.

So how does it work? In RGB, tokens essentially belong to a Bitcoin UTXO (whether an existing UTXO or a temporarily created one), and to transfer tokens, you need to spend this UTXO. When spending this UTXO, the Bitcoin transaction must include a commitment to a message, the content of which is the RGB payment information, defining the input, which UTXO these tokens will be sent to, the asset ID, quantity, spending transaction, and any other necessary additional data.

The specific payment information for RGB tokens is transmitted off-chain through dedicated communication channels from the payer's client to the receiver's client, which verifies that it does not violate the rules of the RGB protocol. This way, blockchain observers cannot obtain any information about RGB user activities.

However, verifying the incoming payment information is not enough to ensure that the sender truly owns the assets they are sending to you. Therefore, to ensure the finality of the incoming transaction, you must also receive the entire transaction history regarding these tokens from the payer, tracing back to the very first issuance. Once all transaction history is verified, you can ensure that these assets have not been inflated and that all spending conditions attached to the assets have been met.

Conclusion

Bitcoin Layer 2 is an important component of modern Web3 development. If Bitcoin wants to maintain its position as one of the major blockchain networks, it needs a fast and cost-effective way to process transactions. Fortunately, many developers have decided to tackle Bitcoin's scalability challenges, so when people want to lower transaction fees and expand Bitcoin's functionality, there are many different Bitcoin Layer 2 options available.

Cregis is a solution platform for the Web3 era, focusing on providing cryptocurrency asset management tools and solutions for enterprises since 2017. We have served over 3,200 exchanges, project parties, CryptoFunds, and cross-border e-commerce Web3 enterprises and teams, with an average daily on-chain transaction volume exceeding $30 million. Cregis currently offers MPC wallet services, trading interface APIs, and will fully implement VCC services and Web3 underlying asset solutions Web3 Bridge in 2024, helping more Web3 teams achieve diversified cryptocurrency trading and management.