Bitcoin Layer2 Development Eve: Drawing Lessons from Ethereum L2

With the launch of the Ordinal protocol in 2023, Bitcoin has welcomed a new asset type - "inscriptions". This native asset issuance method quickly gained market popularity, not only giving rise to more protocols such as BRC20, Atomical, Runes, etc., but also spawning well-known inscriptions like ORDI, SATS, and numerous Bitcoin native NFTs.

In a short period, the Bitcoin ecosystem has once again welcomed a spring, attracting a large amount of capital, users, and developers. However, after a period of development, people gradually realized the limitations of Bitcoin as Layer 1. On one hand, Bitcoin does not support smart contracts, making it difficult to expand into richer application scenarios. On the other hand, Bitcoin's performance and miner fees have also become significant obstacles to the further development of the ecosystem.

Naturally, the inscription craze quickly spread to the Bitcoin scaling track, opening up another hot area—Bitcoin Layer 2.

From Fandom to Doubt, Where is Bitcoin Layer 2 Heading?

Some established Bitcoin scaling solutions have regained attention, and many new Layer 2 projects have emerged. Among them, the Bitmap Tech team, known for its work in the inscription field and the BRC420 protocol, has seized the opportunity and is the first to launch a Bitcoin Layer 2 called Merlin Chain.

Merlin Chain will go live in February 2024 and will soon launch the staking activity Merlin's Seal. The staking targets include Bitcoin, some inscriptions, and assets like the BRC420 blue boxes, causing the price of blue boxes to skyrocket. Riding the wave of Bitcoin inscription popularity, Merlin Chain quickly garnered a large TVL after staking commenced, surpassing $3 billion in less than 30 days and reaching a peak of $3.5 billion, making it a popular star project in the Bitcoin ecosystem at that time.

However, after the listing of the MERL token on April 19, the price quickly fell from a high of 2 USDT, continuing to decline over the next few weeks and now has dropped by more than 80%, approaching the cost price. After the BTC unlock feature was opened, the TVL also plummeted, now down to around 1.3 billion USD, a drop of over 60%. Previously, the blue box that participated in staking fell sharply from about 1 BTC to less than 0.05 BTC.

As a star project of Bitcoin Layer 2, it faced a double plunge in both coin price and TVL after its listing, causing significant losses for many participants. This inevitably raises questions about Bitcoin Layer 2: is it a truly promising narrative, or just a fleeting hype topic?

In fact, the development of the entire blockchain industry has been a process of exploration amidst constant doubt and recognition. For blockchain scalability, Ethereum, as a public chain that explored scalability solutions earlier, has seen a flourishing of Layer2, resulting in very active development, from which there are certainly lessons to be learned. We might as well look forward to the future of Bitcoin Layer2 by reviewing the development history of Ethereum's Layer2.

A Review of Ethereum's Scalability Journey

1. Learning and Exploration Phase

Ethereum initially drew on the experience of Bitcoin, exploring solutions such as state channels, the Lightning Network, and sidechains.

State channels are similar to opening a trading channel outside of Layer 1, where transactions within the channel are not affected by the performance and fees of the main chain. However, it is only applicable to both parties within the channel and requires continuous online status updates; otherwise, there is a risk of asset loss.

The Lightning Network is an iteration based on state channels, connecting multiple channels into a network. Ethereum has launched the Raiden Network, which is inspired by the Bitcoin Lightning Network. However, the Raiden Network is an off-chain network that does not support smart contracts and is mainly used for transfer payments. Additionally, its nodes are susceptible to control by centralized groups, posing risks.

The subsequent sidechain technology fills the gaps of the Lightning Network, capable of running smart contracts, with higher security and scalability. However, sidechains are only responsible for their own ledgers, and may incur losses due to malicious actions, leading to data availability issues, and are not widely recognized.

At this stage, Ethereum mainly practices scaling solutions based on Bitcoin's ideas, but has not stopped exploring after multiple attempts.

2. Breakthrough Progress

In 2017, Joseph Poon and Vitalik Buterin proposed a new Ethereum Layer 2 framework called Plasma. Plasma referenced state channel design and improved the shortcomings of sidechains by adopting a tree structure architecture. Plasma will hash the transaction records of the child chain to generate a Merkle root that is sent back to the main chain, allowing the main chain to supervise Plasma transactions.

Although Plasma solves some problems, there are still data availability issues, and it does not support smart contracts, leading to a bottleneck in development.

However, one year after the birth of Plasma, Rollup technology emerged, marking the beginning of the Layer2 explosion. Although Rollup also uses Merkle trees and sidechain structures, it compresses all transaction records of the sidechain and transmits them to the main chain, rather than just sending a hash digest. Main chain nodes can directly access and verify all transaction details, providing stronger data availability and transparency.

With the introduction of Optimistic Rollup, projects based on this technology such as Optimism and Arbitrum have been launched one after another. OP Rollup addresses key issues such as data availability for sub-chains, and supports smart contracts, with its security and functionality widely recognized. Optimism and Arbitrum have attracted a large number of developers and projects, quickly building an ecosystem, and Ethereum Layer 2 has finally gotten on track.

3. A Hundred Flowers Bloom

The success of Layer 2 solutions like Optimism and Arbitrum has attracted more teams to explore different solutions. Some teams hope to operate independent Layer 2s but lack the technical strength. The Optimism team has keenly sensed this demand and launched the OP Stack tool for one-click Layer 2 deployment. Other teams developing their own Layer 2s have also launched similar tools, such as Arbitrum Orbit, zkSync's ZK Stack, and Polygon CDK.

This has uncovered more demand for Layer 2, creating a feast. Currently, there are over 50 Layer 2 projects documented on L2beat, and development has entered a vigorous stage.

On the other hand, mainstream Rollup solutions often face the issue of malicious behavior by sequencers. Some teams are beginning to explore decentralized sequencer solutions to enhance the security and maturity of Rollups.

Looking back at the development history of Ethereum Layer 2, we find that it has not been a smooth journey, but it has always explored towards more decentralization, greater data availability, and enhanced security. Only when the solutions reach a certain level in these aspects can they gain more funding and user recognition, achieving rapid growth.

In theory, Bitcoin Layer 2 can also learn from Ethereum's experience to find a path suitable for itself. Once the security and degree of decentralization reach market recognition, it will usher in a flourishing landscape. So, what Layer 2 solutions does Bitcoin currently have? What new changes are worth paying attention to? Let's revisit the Bitcoin ecosystem with the lessons learned from Ethereum Layer 2.

The Dilemma and Breakthrough of the Bitcoin Ecosystem

1. Current Bitcoin Scaling Dilemma

Currently, the Bitcoin ecosystem has not attracted a large number of professional institutions, mainly because existing solutions do not meet the security and decentralization requirements of professional players.

A Review of the Development History of Bitcoin Layer 2:

• The Lightning Network white paper was released in 2015, making it one of the earliest Layer 2 payment protocols based on BTC, but it does not support smart contracts.

• In 2016, Blockstream launched the Liquid Network, which uses 11 multi-signature nodes to host Bitcoin, posing centralization risks.

• The RSK sidechain proposed in 2015 failed to gain widespread attention.

• The RGB protocol will only complete its important functionality for implementation in 2023, but there is still a distance to true implementation.

• Stacks has been a leading player since its launch in 2018, but the recent delays in upgrades have been disappointing.

• The BitVM proposed in 2023 has gained attention, but smart contracts run off-chain and do not share state. BTC cross-chain uses traditional Hash locks and has not achieved true decentralized BTC cross-chain.

Current mainstream Bitcoin Layer2 solutions face issues such as technical bottlenecks, community skepticism, or centralization risks. Just as Ethereum Layer2 attracts funds into its ecosystem by balancing decentralization and native features, Bitcoin Layer2 also urgently needs to overcome these dilemmas.

2. Possible breakthrough directions in the Bitcoin ecosystem

At the recent Bitcoin Hong Kong conference, two emerging BTC Layer 2 projects drew widespread attention:

The BEVM is a trustless BTC network solution based on Taproot Consensus. Taproot Consensus consists of three core functions:

1. Schnorr Signature allows Bitcoin multi-signature addresses to be scalable up to 1000, enhancing security.
2. MAST implements multi-signature management in a coded manner.
3. Bitcoin Light Node Network drives multi-signature through the Bitcoin light node network consensus, achieving fully decentralized Bitcoin cross-chain and management.

BEVM developers also mentioned the BEVM-Stack concept similar to OP Stack, which may bring a new pattern to BTC Layer2 development.

Mezo uses tBTC as its foundation, which serves as a bridge linking Ethereum and Bitcoin DeFi. Unlike traditional solutions, the locked Bitcoin does not have a centralized custodian, ensuring network security through randomly selected signers and over-collateralization. Mezo leverages tBTC to implement BTC Layer2 functionality, which, while innovative, feels more like a "technology patchwork."

Although these emerging projects each have their own characteristics, the trust issue of Bitcoin Layer2 remains a major obstacle to development. If effects similar to Ethereum Rollup can be achieved, I believe the Bitcoin Layer2 ecosystem will usher in a new spring.

Outlook

Despite the recent macro-financial changes affecting the cryptocurrency ecosystem, this will not hinder the industry's progress. Although projects like Merlin have set a "bad precedent" for the BTC Layer2 track, it will not stop people from continuing to build.

The development of Ethereum Layer2 has also gone through difficult times, and it may even require one or two bull markets to solidify the trend. However, once the technological direction and path are confirmed, its growth will rise geometrically. Currently, BTC Layer2 is in a challenging climbing phase.

In the future, we need more projects like BEVM that possess characteristics of "decentralization", "native" and "greater security", as well as contributions of fresh blood from veteran players like Stacks who continue to build, and innovative projects like Mezo to enrich the ecosystem. Only with a hundred flowers blooming can BTC Layer 2 welcome a true spring.

As long as we move in the right direction, we are very likely to see a genuine explosion in the Bitcoin ecosystem, rather than a fleeting hype. The magic box of this hundred billion dollar track has been opened, and what we can do, besides holding expectations, is to maintain patience and perseverance.