Author: Weilin, PANews
Bitcoin Layer 2 is a second-layer blockchain network built to enhance the scalability, functionality, and transaction efficiency of the Bitcoin blockchain. Although often compared to Ethereum Layer 2, it wasn’t until the rise of the experimental BRC-20 token standard based on the Ordinals protocol in May 2023 that more people began to believe in the potential for complex and sustainable application scenarios on the Bitcoin network.
Currently, according to statistics from l2.watch, there are over 80 Layer 2 projects focused on Bitcoin scalability. This article will outline major Layer 2 projects following different technological pathways and introduce the latest developments and funding situations of Bitcoin Layer 2 projects.
Main Technological Pathways of Current 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 participants, ensuring that only the first and last transactions are recorded on the Bitcoin blockchain, without the need to broadcast each transaction to the main blockchain. Thus, state channels can achieve larger transaction throughput at the lowest possible gas fees.
Representative Project: Lightning Network
**Sidechains**
Sidechains are independent blockchains that run parallel to but separate from 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 utilize these assets for smart contracts, token issuance, or to implement new consensus mechanisms. Sidechains validate information from 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 single compressed transaction back to the chain. Unlike sidechains, Rollups periodically submit blocks to the main chain, inheriting the security and decentralization features of the main chain, but the average transaction processing volume is generally less than that of sidechains. Common types of Rollups 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 scalability solution based on the Bitcoin UTXO (Unspent Transaction Output) account model, which 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, facilitating the birth of the RGB protocol. The RGB++ concept is similar to RGB, performing calculations, executions, and transaction validations off-chain before settling on the Bitcoin chain. Nervos leveraged the same POW+UTXO structural advantages as Bitcoin and combined them with innovative “isomorphic mapping” technology, successfully replacing the RGB protocol’s client validation onto CKB. This method allowed Nervos to expand 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 aforementioned technological pathways, another classification method mentions the Layer 2 technological path BitVM, represented by projects such as 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 BitVM concept was introduced until the white paper was published in October 2023, it has attracted widespread attention from the Bitcoin community. Under BitVM, computations will be executed off-chain and verified on-chain, similar to the optimistic rollup mechanism on Ethereum.
**Recent Developments in 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 utilizes Revocable Sequence Maturity Contracts (RSMC) and Hash Time-Locked Contracts (HTLC) to address off-chain transaction confirmation and payment channel issues.
The Lightning Network has garnered widespread attention and adoption, primarily focusing on Bitcoin payment scenarios. On July 23 of this year, Lightning Labs, the developer of the Lightning Network, announced a significant update for Taproot Assets, enabling the Lightning Network to support multi-asset transfers beyond BTC. Lightning Labs believes this update is monumental, potentially bringing trillions of dollars into the Bitcoin market in stablecoins, thereby Bitcoinizing USD and global financial assets.
**Stacks**
Stacks (formerly Blockstack) was first proposed in 2013 and conducted its first token issuance (ICO) in 2017. The Stacks Network employs a Proof of Transfer (PoX) consensus mechanism, a modification of the Proof of Burn concept, which involves 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 Bitcoin’s confirmation time from an average of 10 minutes to mere seconds. This upgrade also prepares Stacks 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, and domain services. These dApps are built on a universal protocol covering payments, storage, computing, communication, and gateways/bridging. The goal is to establish a comprehensive RIF ecosystem (RSK Infrastructure Framework) and unify it under RIF OS technology.
The Rootstock team closely follows advancements in the Bitcoin ecosystem, particularly the BitVM technology, which is the basis for their upcoming BitVMX plan. Additionally, from 2024 to 2025, the team will focus on developing RBTC super applications to solidify their latest advancements in DeFi tools on the Rootstock network.
**Merlin Chain**
Launched by Bitmap Tech in February 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 its asset protocol BRC-420 have both received positive market responses this year.
At the end of August, ZK interoperability infrastructure Polyhedra Network announced the integration of its Decentralized Verification Network (DVN) with Merlin Chain via LayerZero. After 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; just 50 days after the mainnet launch, TVL surpassed $3.9 billion (88% in BTC and native assets like Ordinals), and M-BTC’s market cap reached $1.2 billion in the first half of the year; the asset trading volume exceeded $3 billion, with DEX liquidity over $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 sustained 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 the BTC core code, while maintaining full compatibility with the existing Bitcoin ecosystem. Data shows that Fractal Network’s block confirmation time 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 Fractal, Unisat, has continuously attracted market attention, consisting of developers well-versed in Bitcoin technologies (such as SegWit, Lightning Network, and TapRoot). The team’s previous projects 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, Fractal Bitcoin’s mainnet officially launched, bringing renewed excitement to the Bitcoin ecosystem. As of 5 PM on September 12, the number of addresses holding FB 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 issuing a stablecoin pegged to the USD, RUSD. By leveraging RGB++’s advanced Leap feature, Stable++ enables seamless asset transfers 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 rapid, 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 local use case for Bitcoin assets beyond value storage and simple payments: staking to secure PoS networks and earn rewards. The launch of Babylon’s staking mainnet phase one caused a spike in Bitcoin network gas fees that night, but also triggered more market contemplation on the returns of Bitcoin staking projects.
**B2Network**
Founded in 2022, B2Network is a Bitcoin Layer 2 network developed based on ZK-Rollup, compatible with EVM, enabling seamless deployment of DApps for EVM ecosystem developers. 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 ecosystem incentive program to promote the development of its mainnet ecosystem.
On September 2, Bitlayer announced the official launch of its ecosystem 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 hottest applications within the ecosystem.
**Funding Situation of Bitcoin Layer 2 in the Past 5 Months**
In the past five months, the BTC Layer 2 sector has seen frequent investment activities, with public financing occurring 14 times, totaling over $71.1 million. The highest funding 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 a $7.5 million financing round, led by Ledger Cathay Fund. Additionally, Bitlayer, BOB, and QED Protocol have also demonstrated strong fundraising capabilities, attracting significant capital.
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, have also made considerable investments.
Overall, there are currently numerous Bitcoin Layer 2 projects, with signs of “inflation” emerging. Each project adopts different technological pathways. Well-known Bitcoin Layer 2 projects like Stacks and Rootstock were established earlier and have explored relevant technologies for a long time, yet they currently lack more highlights. With the maturation of Bitcoin’s foundational protocol, projects like Merlin, RGB++, and Babylon are making the Bitcoin ecosystem more versatile, bringing more possibilities for the development of Layer 2.
Nevertheless, the development of Bitcoin Layer 2 also faces some bottlenecks. According to Haotian, an independent researcher at CryptoInsight, the chaotic competition in the BTC Layer 2 market has not significantly contributed to the BTC ecosystem, and amidst market stagnation, debates often arise regarding whether BTC Layer 2 is a false proposition. While the absence of standards offers more possibilities for “pick-and-shovel” approaches in BTC Layer 2, directly stitching mature scaling solutions onto the already limited BTC mainnet may not translate the second-layer scaling benefits back to the mainnet, but could instead harm the BTC mainnet user community due to security and stability issues. In his view, the prosperous scene of BTC Layer 2 in this “no-standard” phase is nearing its end, and BTC Layer 2 is likely to evolve towards a direction with higher technical thresholds.
As Haotian stated, the narrowing of technical standards in Layer 2 might be a future trend. 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
