Perspective on the Bitcoin L2 Ecosystem: Sidechains and Rollups Become Mainstream, Leading Projects Easily Attract Tens of Millions of Dollars

Author: Weilin, PANews

Bitcoin Layer 2 is a second-layer blockchain network built outside the main chain to enhance the scalability, functionality, and transaction efficiency of the Bitcoin blockchain. Although it is often compared to Ethereum Layer 2, it wasn't until the explosive popularity of the BRC 20 experimental token standard based on the Ordinals protocol in May 2023 that more people began to believe that Bitcoin could not only issue tokens but also enable more complex and sustainable application scenarios.

Currently, according to statistics from l2.watch, there are over 80 Layer 2 projects focused on Bitcoin scalability. In this article, PANews will outline the main Layer 2 projects following different technical routes and introduce the latest project dynamics and financing situations of Bitcoin Layer 2.

Current Main Technical Routes of Bitcoin Layer 2

State Channels

State channels allow users to establish end-to-end encrypted channels, facilitating multiple off-chain transactions between two or more parties, ensuring that only the first and last transactions are recorded on the Bitcoin blockchain without broadcasting every transaction to the main blockchain. Therefore, state channels can achieve a larger transaction throughput with the lowest possible gas fees.

Representative Project: Lightning Network

Sidechains

Sidechains are independent blockchains that run parallel to the main chain, allowing users to transfer assets (Bitcoin) from the main blockchain to the sidechain. Once Bitcoin is transferred to the sidechain, users can use these assets for smart contracts, token issuance, or to implement new consensus mechanisms. Sidechains validate information on the Bitcoin main blockchain and execute subsequent operations. A two-way peg mechanism connects the sidechain and the Bitcoin blockchain.

Representative Projects: Established projects include Rootstock and Stacks; new projects include BEVM, Merlin Chain, Fractal Bitcoin, Liquid Network, Mint layer, Babylon, Bison, Botanix, Core, BounceBit, AILayer, etc.

Rollup

Rollup moves multiple off-chain transactions from the main Bitcoin blockchain to an independent network, processes them, and then submits a compressed transaction back to the chain. Unlike sidechains, Rollup periodically submits blocks to the main chain, inheriting the security and decentralization features of the main chain, but the average transaction processing volume is generally lower than that of sidechains. Common types of Rollup include optimistic rollups, ZK-Rollups, and sovereign rollups.

Representative Projects: B² Network, Bitlayer, BOB, Citrea, QED Protocol, Zulu Network, GOAT Network, Mezo, Bitfinity Network, Arch Network, etc.

UTXO+ Client Validation

UTXO+ client validation is a scaling solution based on the Bitcoin UTXO (Unspent Transaction Output) account model that attempts to perform off-chain ledger calculations based on Bitcoin UTXO and ensures the authenticity of the ledger through client validation.

In 2016, Peter Todd proposed the concepts of single-use seal and client-side validation, leading to the birth of the RGB protocol.

The RGB++ approach is similar to RGB, performing calculations, executions, and validations off-chain, then settling on the Bitcoin chain. Nervos leverages the same POW+UTXO structural advantages as Bitcoin and combines innovative "isomorphic mapping" technology to successfully replace the client validation of the RGB protocol onto CKB. In this way, Nervos achieves an expansion of the functionality and flexibility of the RGB protocol while maintaining the same level of security as Bitcoin.

Representative Projects: RGB, RGB++ (UTXO Stack)

Note: In addition to the above technical routes, there is also a classification method that mentions the Layer 2 technical path BitVM, with representative projects including Bitlayer and Citrea. This article categorizes these two projects as Rollup. In simple terms, BitVM is a computational model that allows developers to run complex contracts on Bitcoin without changing its fundamental rules. Since the concept of BitVM was proposed, it has attracted widespread attention from the Bitcoin community, culminating in the release of a white paper in October 2023. Under BitVM, computations will be executed off-chain and verified on-chain, similar to the optimistic rollup mechanism on Ethereum.

Recent Developments of Major Bitcoin Layer 2 Projects

Lightning Network

The Lightning Network was first proposed in 2015 and began full implementation in 2018. Through smart contract applications, it can execute more transactions. The Lightning Network uses Revocable Sequence Maturity Contracts (RSMC) and Hash Time-Locked Contracts (HTLC) to address the confirmation and payment channel issues of off-chain transactions.

The Lightning Network has received widespread attention and adoption, but it primarily focuses on Bitcoin's payment scenarios. On July 23 of this year, Lightning Labs, the developer of the Lightning Network, announced a significant update to Taproot Assets on the Lightning Network, enabling it to support multi-asset transfers beyond BTC. Lightning Labs believes this update is significant as it could help bring the multi-trillion-dollar stablecoin market into Bitcoin, effectively Bitcoinizing the dollar and global financial assets.

Stacks

Stacks (formerly Blockstack) was first proposed in 2013 and conducted its initial coin offering (ICO) in 2017. The Stacks Network employs a Proof of Transfer (PoX) consensus mechanism, which is an adaptation of the Proof of Burn concept, involving miners transferring Bitcoin to secure the Stacks blockchain and earn rewards.

On August 28, after several months of delays, Stacks launched the long-awaited Nakamoto upgrade. This upgrade will increase the block production speed of the Stacks network by 120 times, reducing the average Bitcoin confirmation time from 10 minutes to just a few seconds. This upgrade also prepares for the launch of sBTC, a "programmable Bitcoin asset" that allows users to bridge their BTC to the Stacks network in a relatively decentralized manner. The code for sBTC is expected to be completed in September.

Rootstock

Rootstock (RSK) was first proposed in 2015 and officially launched in 2018. In addition to Rootstock, the team has developed various products based on RSK, including DEX, wallets, domain services, and other dApps. These dApps are built on a universal protocol covering payments, storage, computation, communication, and gateways/bridges. The goal is to establish a comprehensive RIF ecosystem (RSK Infrastructure Framework) and unify it under RIF OS technology.

The Rootstock team closely monitors developments in the Bitcoin ecosystem, particularly the BitVM technology, which is the foundation of their upcoming BitVMX plan. Additionally, from 2024 to 2025, the team is focused on developing RBTC super applications to consolidate their latest advancements in DeFi tools on the Rootstock network.

Merlin Chain

Launched by Bitmap Tech in February of this year, Merlin Chain is a Bitcoin Layer 2 solution that integrates a ZK-Rollup network, decentralized oracles, and on-chain BTC anti-fraud modules. Bitmap Tech's metaverse platform and the Bitmap.Game and BRC-420 asset protocol have received positive feedback in the market this year.

At the end of August, the ZK interoperability infrastructure Polyhedra Network announced that it had integrated its Decentralized Verification Network (DVN) with Merlin Chain through LayerZero. After the integration, Merlin's ecosystem of over 100 applications can benefit from ZK secure interoperability.

On September 9, Merlin Chain released its semi-annual report, reviewing its growth trajectory in the first half of 2024, including: $1.2 billion TVL, $16 billion in bridging volume, 1.9 million on-chain addresses, and 12.7 million transactions; after 50 days of mainnet launch, TVL surpassed $3.9 billion (88% from native assets like BTC and Ordinals), with M-BTC's market cap reaching $1.2 billion in the first half of the year; asset trading volume exceeded $3 billion, and DEX liquidity surpassed $78 million. It is reported that Merlin Chain plans to continue focusing on technology, ecology, and community in the second half of the year to promote the sustainable development of the Bitcoin ecosystem.

Fractal Bitcoin

Fractal Bitcoin enhances transaction processing capacity and speed by recursively creating infinitely expandable layers on the BTC main chain using BTC core code while maintaining full compatibility with the existing Bitcoin ecosystem. According to reports, the block confirmation time on the Fractal network is about 30 seconds, and its transaction processing capacity is claimed to be 20 times that of the BTC main chain.

The development team behind it, Unisat, has continuously attracted market attention, consisting of developers proficient in Bitcoin technologies such as SegWit, Lightning Network, and TapRoot. Previous projects by the team have also performed well in the BRC 20 trading market, with the issued token $PIZZA performing excellently, attracting investors including Binance and OKX.

On September 9, the mainnet of Fractal Bitcoin officially launched, bringing renewed interest to the Bitcoin ecosystem. As of September 12 at 5 PM, the total number of FB holding addresses reached 200,165, with an increase of 79,484 in the past 24 hours, and the number of active addresses reached 118,454.

RGB++

Recently, the first over-collateralized stablecoin protocol based on RGB++, Stable++, was launched, using BTC and CKB as collateral while minting a stablecoin pegged to the US dollar, RUSD. By leveraging the advanced Leap feature of RGB++, Stable++ achieves seamless asset transfer within the Bitcoin ecosystem.

Additionally, on August 23, the next-generation public Lightning Network, Fiber Network, built on Nervos CKB and off-chain channels, was launched, providing fast, low-cost, and decentralized multi-currency payments and peer-to-peer transactions for RGB++ assets.

Babylon

On August 22, the Bitcoin staking protocol Babylon launched the first phase of its Bitcoin staking mainnet, introducing a third native use case for Bitcoin assets beyond value storage and simple payments: staking to secure PoS networks and earn rewards. The launch of the first phase of Babylon's staking mainnet caused a spike in Bitcoin network gas fees that night, but it also sparked more discussions in the market about the returns of Bitcoin staking projects.

B²Network

B²Network, established in 2022, is a Bitcoin Layer 2 network developed based on ZK-Rollup, compatible with EVM, allowing EVM ecosystem developers to seamlessly deploy DApps. On August 28, B² Network reached a strategic cooperation with Aptos and Echo Protocol to promote BTCFi's expansion into the Move ecosystem, marking BTCFi's first attempt in the Move ecosystem.

Bitlayer

On March 29, Bitlayer announced the launch of a $50 million ecological incentive program to promote the development of its mainnet ecosystem.

On September 2, Bitlayer announced the official launch of its ecological application center—DApp Center. The Bitlayer application center aims to create a one-stop platform for users to explore and experience innovative applications within the Bitlayer ecosystem. The App Center serves as an important portal for the Bitlayer ecosystem, gathering the latest and most popular applications.

Financing Situation of Bitcoin Layer 2 in the Last 5 Months

In the past 5 months, the BTC Layer 2 sector has seen frequent investments and financing, with 14 public financing rounds totaling over $71.1 million. The highest financing amount was $21 million raised by Mezo in its Series A round.

On August 22, the Bitcoin L2 project Ark Labs raised $2.5 million in its Pre-seed round; on August 22, the Bitcoin Lightning Network payment startup TMRW announced the completion of $1.3 million in Pre-Seed round financing; on July 26, the Bitcoin scalability network Mezo completed $7.5 million in financing, led by Ledger Cathay Fund. Additionally, Bitlayer, BOB, and QED Protocol have also shown good "capital attraction" capabilities and have been favored by investors.

Currently, active VCs in the Bitcoin Layer 2 space include Draper Dragon, ABCDE Capital, Ledger Cathay Capital, Waterdrip Capital, and Polychain. Some investment institutions familiar to domestic users, such as Hashkey Capital, OKX Ventures, and Binance Labs, also have significant investments.

Overall, there are currently many Bitcoin Layer 2 projects, even leading to a phenomenon of "inflation." Each project adopts different technical routes. Well-known Bitcoin Layer 2 projects like Stacks and Rootstock were established relatively early and have explored related technologies for a long time, but currently lack more highlights. With the maturation of Bitcoin's foundational protocol, projects like Merlin, RGB++, and Babylon are enriching what can be done within the Bitcoin ecosystem, bringing more possibilities for the development of Layer 2.

Nevertheless, the development of Bitcoin Layer 2 also faces some bottlenecks. According to independent researcher Haotian from CryptoInsight, the chaotic competition in the BTC Layer 2 market has not significantly brought incremental value to the BTC ecosystem. During market lulls, debates occasionally arise about whether BTC Layer 2 is a false proposition. Although the "lack of standards" has provided more possibilities for "pick-and-choose" in BTC Layer 2, directly stitching mature scaling solutions onto the already limited BTC mainnet may not necessarily return the scaling benefits of Layer 2 to the mainnet, and could instead harm the BTC mainnet user base due to security and stability issues. In his view, the prosperous scene of BTC Layer 2 in the absence of standards is about to pass, and BTC Layer 2 will likely evolve towards higher technical thresholds.

As Haotian mentioned, the narrowing of technical standards for Layer 2 may be a trend for future development. Currently, challenges and opportunities coexist. In the future, we still look forward to more Layer 2 projects that can "break through," bringing more innovation and surprises to crypto users and the market.