Bitcoin has long been criticized for its scalability issues. As it keeps growing in popularity, it became clear that the number one cryptocurrency has an inherent inability to handle large amounts of transaction data.

The Bitcoin blockchain can only process around 7 transactions per second, which pales in comparison to traditional payment systems like Visa. This limitation not only constrained Bitcoin's utility but also ignited internal conflicts known as the "Hash Wars" which culminated in a divisive hard fork that created Bitcoin Cash - a copy of Bitcoin with increased block size.

This pivotal event in Bitcoin’s history underscored the urgency of exploring Layer 2 solutions—technologies built atop the Bitcoin blockchain to enhance its scalability and functionality.

The Need for Layer 2 Solutions

It’s nothing new to discuss whether or not Bitcoin can scale using L2s or other scaling solutions. This ongoing debate has been happening since 2009, when Bitcoin blocks were limited to 1MB by Satoshi Nakamoto himself. A further example of the scalability issue was the SegWit fork in 2017, and for many years now, several different projects have been developing possible solutions for this limitation.

This problem arises as part of the Blockchain Trilemma, which refers to the trade-off between the following three pillars of Blockchain Technology: Scalability, Security, and Decentralization. Bitcoin prioritizes decentralization and security, at the expense of scalability.

The Blockchain Trilemma (Source)

Layer 2 solutions address scalability issues by processing transactions off the main blockchain, significantly improving performance without compromising security. They add an additional layer to the existing blockchain to allow faster, and cheaper transactions that are periodically settled on the main chain. This minimizes congestion, lowers fees, and speeds up transaction times, thereby improving Bitcoin’s scalability and overall user experience.

As an example, Ethereum which is known to have the same scaling constraints, currently is valued at around ~$430 Billion with ~44B in Total Value Locked (TVL) across its various Layer-2 (L2) solutions. These solutions represent about 10% of Ethereum's total value.

Bitcoin, on the other hand, valued at about ~1.3 Trillion has only around ~2.5 Billion in L2 TVL.

This demonstrates the potential for the Bitcoin Layer 2 market, which currently represents a relatively symbolic percentage of 0.19% of Bitcoins total value.

Market Cap/Layer 2 Market Size Ratio in Billions of USD (Source: CoinmarketCap, L2Beat)

Beyond just improving scalability, L2s also open a host of new features and benefits for Bitcoin, such as:

- Smart Contracts and Decentralized Applications (dApps)

Layer 2 solutions allow Bitcoin to support smart contracts and dApps, just like Ethereum. This enables developers to create a wide range of applications, including financial services, decentralized finance (DeFi) protocols, gaming platforms, NFT marketplaces, etc.

- $BTC Staking

Layer 2 solutions make Bitcoin staking easier, allowing users to lock up their Bitcoin in a trustless environment to earn rewards. This integration of staking methods increases Bitcoin's utility in proof-of-stake ecosystems by allowing users to participate in securing other blockchain networks while collecting rewards without having to move their assets off the Bitcoin network.

- Lower Transaction Costs

The recent developments of Runes, BRC-20 tokens, Ordinals, and Inscriptions into the Bitcoin ecosystem have sparked once again renewed focus on scalability issues. The average transaction cost for Bitcoin has increased from ~1.5 USD in late 2023 to about ~5 USD in 2024 so far.

By removing transactions from the main chain, Layer 2 solutions dramatically cut transaction fees. This makes Bitcoin more useful for small, everyday transactions and micropayments, hence increasing its usability.

- Faster Transaction Times

Transactions on Layer 2 solutions can occur almost instantly, dramatically improving the user experience by offering faster confirmations and lowering wait times.

- Increased Privacy

Certain Layer 2 technologies use advanced cryptographic techniques like zero-knowledge proofs (ZKPs), which not only offload transaction workload on the base chain but also improve transaction privacy and secrecy while maintaining security.

BitVM has been the fundamental technology of zero-knowledge rollups on Bitcoin. This allows more secure validation operations for roll-up data than other scaling solutions that purely post a hash of their block data into Bitcoin blocks. These rollups perhaps inherit the highest level of BItcoin security at this current stage.

Industry Insights and Expert Discussions

To provide a comprehensive understanding of Layer 2 solutions, we have been closely monitoring the industry and engaging with leading experts in the field.

Through a series of in-depth AMA sessions, we've invited pioneers from various Layer 2 projects to share their insights and discuss the potential impacts of their technologies on the Bitcoin network. These discussions have illuminated the capabilities and challenges of each solution while also highlighting the diverse approaches to enhancing Bitcoin's functionality and efficiency.

Below, we explore some of the most innovative Layer 2 projects that are shaping the

Babylon

At the forefront of these innovations is Babylon, a middleware protocol for Bitcoin Staking. Babylon introduces a robust mechanism for staking, which involves locking Bitcoin in a trustless setup, enabling Bitcoin holders to stake on PoS chains without the need to bridge assets between chains. This method not only secures the staked assets with Bitcoin’s robust security model but also allows stakeholders to earn yields directly from their participation in these PoS ecosystems​.

Babylons Staking testnet is currently live, with plans to launch its mainnet later this year.

(Source)

Stroom Network

Stroom Network enhances the interaction between Bitcoin and Ethereum's blockchain ecosystems. It integrates the Bitcoin Lightning Network with EVM (Ethereum Virtual Machine) Based Blockchains, allowing users to generate revenue from the Lightning Network without the need to lock up Bitcoin or manage node infrastructure. This setup provides a streamlined gateway for liquidity and staking across blockchain networks​.

As Stroom nears its mainnet debut, it stands out by potentially expanding Bitcoin’s utility into the Defi Space. Here are some remarks directly from the Stroom team:

“Lightning Network - the very first scaling L2 for Bitcoin scalability proposed back in 2016 - is a sleeping giant, organically grown and most adopted Bitcoin L2 at the moment. At Stroom.Network, we are building Bitcoin Liquid Staking protocol - a tool, that will drive more liquidity to the Lightning Network, increasing its utility and hence speeding up its adoption”

For further insight, check out our AMA Highlights with Stroom: Exploring Bitcoin Staking with Stroom

(Source)

Rootstock (RSK)

Rootstock brings Turing-complete smart contracts to Bitcoin, establishing a two-way peg that locks bitcoins on the Bitcoin blockchain and transfers them into smart bitcoins on the RSK blockchain. This sidechain solution scales transaction capabilities up to 100 transactions per second.

Rootstocks goal is to revolutionize the Bitcoin ecosystem by combining its security with Ethereum’s Smart Contract functionality.

Check out our AMA Highlights with Rootstock: Exploring Bitcoin Staking with Rootstock

RootStocks Ecosystem Data (Source)

Build on Bob (BOB)

BOB leverages the Ethereum Virtual Machine (EVM) to enable developers to create expressive, complex smart contracts and dApps on Bitcoin. This integration facilitates EVM compatibility while extending Bitcoin’s functionalities to support decentralized applications.

Bob intends to improve Bitcons’ programmability and expand usage across a variety of applications. BOB is currently rolling out its pre-mainnet campaign, preparing for the official launch.

The BOB team has this to say about their future roadmap and upcoming endeavors:

“BOB is currently live on mainnet launch as part of its Phase 1 hybrid L2 roadmap: bootstrapping as an Ethereum rollup. Its official points program "BOB Fusion" is currently live with 60+ projects already participating in the ecosystem program.”

For the full scoop, check out our AMA Highlights with BOB: Exploring Bitcoin L2s with BOB

BOBs Roadmap (Source)

Botanix Labs

Botanix Labs is creating the Spiderchain, a decentralized Layer 2 protocols based on Bitcoin. It integrates the Ethereum Virtual Machine (EVM), allowing dApps to benefit from Bitcoin's security. The Spiderchain's Proof-of-Stake consensus with decentralized multi-signatures improves Bitcoin's scalability and programmability without affecting its core protocol.

Check out our AMA Highlights with Botanix: Exploring Bitcoin L2s with Botanix

Botanix Ecosystem Stats (Source)

Elastos

Elastos intends to build a decentralized internet infrastructure that connects with Bitcoin. It combines blockchain with a peer-to-peer network, enabling secure digital assets and dApps. By leveraging Bitcoin's security, Elastos supports data ownership and a decentralized internet.

Check out our AMA Highlights with Elastos : Exploring Bitcoin L2s with Elastos

Elastos Features (Source)

ProjectZKM

ProjectZKM improves Bitcoin's scalability and privacy by utilizing zero-knowledge proofs (ZKPs). This technology enables private and efficient transactions, increasing throughput and privacy. It combines ZKPs into Bitcoin's Layer 2 solutions, promoting larger adoption and innovative use cases.​

Check out our AMA Highlights with ProjectZKM : Exploring Bitcoin L2s with ProjectZKM

ZKMs Features (Source)

The Bitcoin Layer 2 Landscape

Exploring several Layer 2 solutions reveals a thriving and dynamic landscape of innovation inside the Bitcoin ecosystem. Each protocol adds its own set of features that, when combined, open up a greater range of benefits. The Integration of the Ethereum Virtual Machine (EVM) model and architecture on top of Bitcoin, for example, adds a level of programmability and enables EVM-compatible applications to run to Bitcoin.

By developing Layer 2 solutions, Bitcoin can take advantage of these features while maintaining its high-security standards and decentralized nature. This possible transformation of the Bitcoin landscape positions Bitcoin not just as a store of value but also as a robust foundation for a new era of financial innovation.

Benefits and Challenges

Benefits:

• Enhanced Scalability: Layer 2 solutions can handle thousands of transactions per second, far surpassing Bitcoin's original capabilities.

• Reduced Transaction Costs: By moving transactions off the main chain, fees are significantly lowered, making Bitcoin economical for smaller transactions.

• Faster Transaction Times: Transactions on Layer 2 can occur almost instantly, providing a better user experience.

Challenges:

• Technical Complexity: Layer 2 solutions involve complex protocols and new technologies that can be daunting for users and developers.

• Adoption Hurdles: Widespread adoption requires changes in user behavior and extensive integration with existing wallets and services.

• Potential Security Concerns: While Layer 2 solutions are designed to inherit Bitcoin's security, new layers introduce new potential vulnerabilities.

Impact on the Bitcoin Ecosystem

Bitcoin is being reshaped into more than just a store of value, beginning to resemble Ethereum as “programmable money”. With Layer 2 solutions propelling this transformation further, enabling developers to build a more versatile and mature ecosystem, Bitcoin will be able to accommodate a wider array of services and applications.

The significance of Bitcoin L2 solutions will only increase as Bitcoin expressivity continues to plow ahead and Defi primitives like money markets, stablecoins, Staking & Restaking, and perpetual coins arise. An exciting time ahead, which will bring lots of developments expected over the next couple of months.

Fulfilling Satoshi’s Vision

Layer 2 solutions are crucial for the future of Bitcoin, offering the necessary scalability and functionality enhancements that can lead to broader adoption and more innovative applications. Staying informed about these technological advancements is essential for anyone interested in the future of Bitcoin and blockchain technology.

For more insights and detailed discussions on specific Layer 2 protocols, readers are encouraged to explore the AMAs on our X (Twitter) Page. Here, experts delve deeper into the potential and challenges of these transformative technologies.