From Craze to Debunking, Where is Bitcoin Layer2 Headed?
With the birth of the Ordinal protocol in 2023, Bitcoin, as the former “digital gold,” has ushered in a new type of asset called “Inscription.” If Bitcoin is considered gold, then Inscription is like a product processed with gold, possessing unique value.
This native asset issuance method on the first blockchain quickly gained popularity in the market, giving rise to more asset issuance protocols such as BRC20, Atomical, Runes, etc. It also gave birth to well-known inscriptions like ORDI and SATS, as well as numerous native Bitcoin NFTs.
At one time, the Bitcoin ecosystem once again welcomed its own spring, attracting a large amount of capital, users, and developers. However, after a period of development, there are indeed more and more assets on Bitcoin, and people gradually realized the limitations of Bitcoin as a Layer1. On one hand, Bitcoin itself does not support smart contracts, so it is difficult to expand richer application scenarios on Bitcoin relying on technologies like inscriptions. On the other hand, Bitcoin’s performance and miner fees have become significant obstacles to the further development of the Bitcoin ecosystem. During the active period of inscriptions, Bitcoin’s transaction fees rapidly increased, even starting to affect normal Bitcoin transfers. Moreover, if there are more application scenarios, it will further congest the network and result in long-term high miner fees.
Naturally, the craze caused by inscriptions quickly spread to the Bitcoin scaling track, which also opened up another popular track – Bitcoin Layer2.
From the pursuit to debunking, where is Bitcoin Layer2 headed?
Some old Bitcoin scaling solutions have been re-examined, and new Bitcoin Layer2 projects are being proposed more and more. Among them, the Bitmap Tech team, which focuses on inscriptions and is known for the nested protocol BRC420 on the Bitcoin chain, took advantage of the popularity of inscriptions and was the first to launch a Bitcoin Layer2, which later became the famous Merlin Chain.
Merlin Chain went live in February 2024 and quickly started its staking activity, Merlin’s Seal. In addition to Bitcoin and some inscriptions, staking targets also include assets like the blue box of BRC420, which led to a surge in the value of the blue box. After the staking started, Merlin Chain gained a significant amount of TVL (data source: https://geniidata.com/ordinals/index/merlin). Within less than 30 days of the activity being launched, TVL surpassed $3 billion, reaching a peak of $3.5 billion, becoming a popular Bitcoin ecosystem project.
On April 19th, the highly anticipated Merlin finally went public, with its token MERL reaching a high of 2 USDT. However, it quickly fell back and has been continuously declining for the past few weeks, currently down more than 80% and approaching the cost price, which surprised many people.
Shortly after MERL’s listing, on April 25th, Merlin unlocked BTC, and its TVL plummeted. It has now dropped to around $1.3 billion, a decrease of over 60%. The blue box, which participated in staking earlier, also plummeted from a peak value of about 1 BTC to less than 0.05 BTC.
As a star project of Bitcoin Layer2, Merlin experienced a double plunge in token price and TVL after going public, causing significant losses to many enthusiastic participants. This inevitably raises doubts about Bitcoin Layer2. Is Bitcoin Layer2 a truly promising narrative, or just a short-lived speculative topic?
In reality, the development of the entire blockchain industry has been constantly exploring between various doubts and recognitions. For blockchain scalability, Bitcoin is not the only ecosystem being explored.
Ethereum, as an elder-level player, designed relatively early and also faced the dilemma of having to scale. However, as Ethereum began exploring scalability solutions only after Bitcoin, its Layer2 has flourished and witnessed active development. There are lessons to be learned from this. Let’s take a look at the development of Bitcoin Layer2 through the development of Ethereum Layer2.
Looking back at Ethereum’s scaling journey:
1. Learning and Exploration
At the beginning, Ethereum’s scaling solutions borrowed from Bitcoin’s experience and explored methods such as state channels, Lightning Network, and sidechains.
State channels are like two parties, A and B, who want to transact outside of Layer1. They open a channel to continuously update the state. The two parties can conduct multiple transactions in the channel without being affected by Layer1’s performance and fees. The constant state updates are necessary to upload the latest off-chain state to the Ethereum main chain as the final settlement basis, preventing malicious activities. This significantly improves efficiency and reduces fees. For example, Connext Network explores based on state channels.
However, its limitations lie in its applicability only to the parties within the channel, and both parties need to be continuously online and updating the state. Otherwise, there is a risk of asset loss.
Lightning Network iterated on the basis of state channels. If state channels represent lines between two entities, then Lightning Network connects a large number of lines to form a network. Even if A and B are not in the same channel, they can be connected through the network by chaining multiple channels.
Lightning Network is a network version of state channels, and Ethereum borrowed from Bitcoin’s Lightning Network to introduce the Raiden Network. However, the Raiden Network is an off-chain network and does not support smart contracts. Its main use case is for payments and transfers. Moreover, the Raiden Network is not part of the blockchain network, and its nodes are susceptible to control by centralized entities, posing some risks. Therefore, it still has many shortcomings.
The subsequent introduction of sidechain technology filled in the gaps of the Lightning Network. It is a form of blockchain that can also run smart contracts, thus having higher security and scalability than the Lightning Network.
However, sidechains also brought new problems. Due to their independence, sidechains are only responsible for their own ledgers and only send back transaction results to the main chain. This may lead to losses caused by misconduct in sidechains. For example, sidechain nodes tampering with transaction records or refusing to execute transactions may result in incorrect results being transmitted back to the main chain, thereby affecting system security and reliability. Therefore, sidechains have data availability issues and have not been widely recognized.
During this stage, Ethereum’s scalability solutions were basically practiced based on the ideas of Bitcoin’s scalability solutions. However, after many attempts, Ethereum did not stop exploring and took a more advanced step.
2. New Hope
In 2017, Joseph Poon (one of the proposers of Lightning Network) and Vitalik Buterin proposed a new Ethereum Layer2 off-chain scaling framework called Plasma. Plasma referenced some designs of state channels and made improvements based on the shortcomings of sidechains. It adopted a tree-like architecture consisting of many child chains forming a Merkle tree structure. Compared to sidechains, Plasma hashes all transaction records occurring in these Plasma child chains, generates a Merkle root, and sends it back to the main chain, enabling the main chain to supervise transactions on Plasma. This Merkle root contains the summary information of all transaction records occurring on the Plasma chain, which the main chain can use to verify the completeness and validity of these transactions, ensuring their legitimacy and security.
Although Plasma seems to solve some of the problems of state channels and sidechains, it still has certain data availability issues, and it does not support smart contracts. Its development also encountered bottlenecks.
Just when it seemed difficult to see hope, one year after Plasma’s birth, a new solution quietly emerged, which opened the floodgates of Layer2. This solution is called Rollup technology.
Although Rollup also uses Merkle trees and subchain structures to build, compared to Plasma, Rollup compresses and sends all transaction records in the subchain to the main chain without hashing them like Plasma. Nodes on the main chain can directly access and verify detailed information of all transactions, not just the hash digest, providing sufficient data availability and transparency, thus increasing the system’s trustworthiness and security.
With the introduction of Optimistic Rollup, projects such as Optimism and Arbitrum based on this technology were launched. Since OP Rollup solves key issues such as subchain data availability, and it supports smart contracts, its security and functionality have gained widespread recognition. Optimism and Arbitrum have attracted a large number of developers and projects, and users and funds are willing to participate more actively. Both have quickly built their own ecosystems. Thus, Ethereum Layer2 has finally embarked on the right track and exploded.
3. Flourishing Development
The success of Optimism, Arbitrum, and other Layer2 solutions has also attracted more teams to explore different Layer2 solutions. For teams with strong technical capabilities, they may develop their own Layer2 solutions. However, there are also teams that may want to operate an independent Layer2 but lack the necessary technical skills. Optimism was the first to discover this demand. They launched the OP Stack tool based on Optimism, which allows any team to easily release their own Layer2 using this tool. Other teams that self-developed Layer2 also released their own tools based on their projects, such as Arbitrum’s Arbitrum Orbit, zkSync’s ZK Stack, Polygon’s Polygon CDK, etc.
As a result, more Layer2 demands were discovered, leading to a thriving feast of Layer2. Currently, L2 Beat alone has counted over 50 Layer2 projects. The development of Layer2 has entered a vigorous stage.
On the other hand, mainstream Rollup solutions often face the problem of malicious sequencer behavior. The sequencer in Layer2 is mainly responsible for sorting transactions occurring on Layer2 according to certain rules, packaging them into blocks, and then submitting them to the main chain for confirmation. The sequencer usually determines the transaction order based on rules such as transaction fees and timestamps to ensure the validity of blocks.
However, since the sequencer has the power to control the transaction order, there is a possibility of sequencer manipulation by deliberately adjusting the transaction order to gain more MEV (Miner Extractable Value) profits. Therefore, some teams have begun to explore decentralized sequencer solutions to make Rollup more secure and mature.
Looking at Ethereum’s Layer2 development, it is clear that Ethereum’s scalability has not been smooth sailing. However, it continues to explore towards a more decentralized, data-available, and secure direction. Only when more secure and decentralized solutions reach a certain level will they gain recognition from more funds and users, enabling faster development.
In theory, Bitcoin Layer2 can also refer to the development of Ethereum Layer2 to find its own path.As a professional translator, here is the translation of the news article into English:
On its own “chain”, Bitcoin will also experience a flourishing period similar to Ethereum once its security and decentralization reach a level widely accepted by the market.
So what are the current Layer2 solutions for Bitcoin, and what new changes are worth paying attention to? Let’s turn our focus back to the Bitcoin ecosystem with the development experience of Ethereum Layer2.
1. The dilemma and breakthrough of the Bitcoin ecosystem
Currently, we haven’t seen many professional organizations or institutions entering the Bitcoin ecosystem in large numbers. This is because the security and decentralization have not yet reached the satisfaction level of these professional players.
When we talk about the development of BTC Layer2, as early as February 2015, the draft of the Lightning Network whitepaper was released, which was the earliest Layer2 “payment protocol” based on BTC and also led to the later conceptualization of Layer2 by others. However, as we all know, the Lightning Network does not support smart contracts, so it cannot be used for the development of Bitcoin-related ecosystem applications on the Lightning Network, and can only serve as a payment scaling path.
Then, in 2016, a company that was optimistic about L2 on BTC received a $55 million financing led by Tencent. This company is the well-known “Blockstream” later, and their L2 product is called Liquid Network, which interacts with the Bitcoin main chain through bidirectional anchoring technology and is also a well-known BTC sidechain. However, Liquid’s Bitcoin cross-chain solution is relatively centralized, using 11 certified multi-signature nodes to custody Bitcoin. The overall solution is similar to a licensed alliance chain, rather than a truly public chain.
At the same time as the Liquid Network, there was another sidechain called RSK, which was born earlier in October 2015 and published its whitepaper. However, it did not become the later talked-about solution and is no longer mentioned now.
Also in 2016, a developer named Giacomo Zucco proposed the initial concept of the RGB protocol based on Peter Todd’s ideas. However, it was not until 2019 that Maxim Orlovsky and Giacomo Zucco established the LNP/BP Standards Association to promote the practical development of RGB. Subsequently, in April last year, the RGB v0.10 version was released, bringing full support for smart contracts to Bitcoin and the Lightning Network. Since then, RGB has achieved important functions that can be implemented, and this is when “RGB++” became popular recently. However, both RGB and RGB++ still have a long way to go in terms of actual implementation.
Of course, we must not forget another important player – Stacks. As a well-known Layer2 that claims to truly support smart contracts and enable decentralized application development on Bitcoin, it has been a leading player in the BTC Layer2 track since its launch in 2018. With the arrival of the “Concord Upgrade”, it has attracted industry attention. However, the recent delay in the upgrade has dampened the enthusiasm.
A more recent BTC Layer2 solution is BitVM, which was proposed only last year. Its implementation is similar to Ethereum’s Optimistic Rollup, so it has received a lot of attention. However, the smart contracts of BitVM run off-chain, and each smart contract does not share state. The BTC cross-chain uses traditional hash locks for asset anchoring and has not achieved true decentralized BTC cross-chain.
Through the above review, we can see that BTC Layer2 actually started earlier than Ethereum, and these attempts have been continuously verified. It is the accumulation of progress on the shoulders of predecessors that has led to today in 2024. The development of BTC L2 is no longer just a small spark. Looking at the figure below, we can see the current situation and representative projects of several mainstream BTC Layer2 solutions on the market, which intuitively shows the current dilemma (thanks to netizens for the image).
According to publicly available information, there have been no less than 10 BTC Layer2 projects that have received financing this year, and the number is still growing, making it a star track. However, so far, there are few BTC L2 solutions that can truly be presented and widely recognized by the public. Either they are trapped by technical bottlenecks and face development obstacles, or they rise and fall like Merlin, being criticized by the community, or they are not decentralized enough, and large funds are always hesitant to get involved, only providing “cover” on the periphery.
As we analyzed earlier, the reason why ETH Layer2 has achieved its current achievements is that it has balanced “decentralization” and “nativeness”, which has made funds willing to enter the Layer2 ecosystem, thus achieving the effect of “flourishing”. The current BTC Layer2 is also in a similar dilemma and urgently needs a breakthrough.
2. Possible breakthrough directions in the Bitcoin ecosystem
Recently, the Bitcoin Hong Kong Conference has just ended, and I had the opportunity to attend the event and listen to the sharing of these well-known BTC L2 players in the industry. On the one hand, I participated in the conference, and on the other hand, I sought answers to my own questions, hoping to find a more decentralized, data available, and secure direction for BTC Layer2. Two emerging BTC Layer2 projects that have received widespread attention have entered the field of vision.
First, at the event, I had a discussion with a friend from BEVM. Although I had seen news about their financing from Bitmain before and learned about the situation of Taproot Consensus through the study of RGB, I was not very clear about their team background and specific situation.
In fact, they created ChainX in 2017, which is a decentralized way to bring BTC into Polkadot and attracted over 100,000 BTC to interact with the protocol. However, due to the use of an 11-person multi-signature scheme to custody users’ Bitcoin assets, there is a certain degree of centralization risk. Later, with the famous Taproot upgrade of Bitcoin, which brought a more efficient, flexible, and private transmission method to BTC, the ChainX team saw a new BTC L2 construction method, which led to the first BEVM network based on Taproot Consensus.
According to official information, BEVM has achieved a trustless BTC network solution through Taproot Consensus. Taproot Consensus consists of three core functions: firstly, Schnorr Signature allows Bitcoin multi-signature addresses to be expanded to 1,000 (significantly improving security compared to ChainX’s 11-person scheme), thereby achieving decentralization of multi-signature addresses; secondly, using MAST to code the management of multi-signatures, not relying on human signatures but driven by code; finally, use the Bitcoin Light Node Network to drive multi-signatures through the consensus of the Bitcoin light node network, achieving fully decentralized Bitcoin cross-chain and management.
Logically speaking, the implementation of Taproot Consensus is neither like traditional sidechains nor like the popular RGB. It seems to open up a new technical implementation logic. Of course, I am not a professional technical personnel, so I cannot judge the technical advantages and disadvantages and the code level. But at least I see a completely new solution. In addition, the core developers of BEVM also mentioned BEVM-Stack at the event, which has some similarities to OP Stack, which sparked a lot of discussion. After all, if a one-click Layer2 can be implemented on BTC, it may bring a new pattern to the development of BTC Layer2.
Another project that has been widely mentioned in Hong Kong is Mezo, which also completed a $21 million Series A financing in April with notable investors including Pantera Capital leading the investment, and participation from Multicoin, Hack VC, Draper Associates, etc. It can be said to be a true representative of Western BTC Layer2.
Mezo uses tBTC as the foundation, and tBTC is a bridge that has been in existence for several years for linking DeFi between Ethereum and Bitcoin. tBTC allows any user who owns BTC or ETH to create tBTC by using a signer network. Unlike previous solutions, the locked BTC does not have a centralized custodian. Instead, signers are randomly selected, and different signer groups are selected for each minted tBTC. Signers provide collateral to ensure they cannot easily run away with the funds, and the network operates normally through over-collateralization.
Therefore, tBTC, as an ETH equivalent to the value of BTC, serves as a bridge between Bitcoin and Ethereum, and BTC holders can deposit BTC into smart contracts and receive tBTC. Mezo also achieves BTC Layer2 functionality through tBTC. Although it is innovative, it looks more like a “technical patchwork”, and the team behind this financing is the development team Thesis behind tBTC.
In addition, based on the currently known information, Mezo’s security mechanism seems to still be a multi-signature approach, which is not truly decentralized in a sense and needs further discussion.
Of course, the trust issue of BTC Layer2 is the stumbling block to its development. Although the saying goes, “the spear of the son is always correct,” we cannot belittle the shortcomings of others using others’ advantages. From the perspective of industry development, how to expand the track and set an example is the goal of any project. Stepping back, if BTC Layer2 can achieve the effect of ETH Rollup, why worry about the development of the ecosystem and the inability to achieve a multi-billion-dollar BTC Layer2?
Outlook
Although recent macroeconomic changes have had a significant impact on the cryptocurrency ecosystem and caused the market value of Bitcoin to fall to around $1.2 trillion, it has not stopped the industry from moving forward, nor has it made people lose confidence in the development of the Bitcoin ecosystem. Although projects like Merlin seem to have opened a “bad head” for the BTC Layer2 track, it will not hinder people from continuing to build BTC Layer2.
It should be noted that the development of ETH Layer2 also faced many difficulties and even needed one or two bull markets to consolidate this trend. However, once the technical direction and path are confirmed, its growth is exponentially increasing. Currently, BTC Layer2 is probably in this difficult climbing period.
In terms of utility, we need more ecosystem projects like BEVM that have “trustlessness,” “nativeness,” and “greater security” to appear. We also need old players like Stacks to continue to contribute fresh blood. Innovative projects like Mezo can also contribute to the development of the track. Only when the ecosystem is in full bloom can BTC Layer2 usher in a new spring.
“The pessimist is always correct, and the optimist always moves forward.” As long as we continue in the right direction, we will most likely see a real outbreak of the Bitcoin ecosystem, rather than just a speculative flash in the pan. After all, the Pandora’s Box of this multi-billion-dollar track has been opened. Besides holding expectations, we also need patience and perseverance.
Tags:
Arbitrum
L2
Optimism
Ethereum
Multi-signature
Custody
Payment
Smart contracts
Bitcoin
Source link:
https://mp.weixin.qq.com/s/i30rysL0gIAhAm4YK1EgqQ
Note: The translation reflects the author’s views and does not constitute investment advice.
Original article link: https://www.bitpush.news/articles/6726214
Related news:
Hong Kong Cryptocurrency ETF Starts Slowly, What Are the Reasons and What Are the Expectations
Bitcoin’s “Defense Spending”
Vitalik: Near and Medium Term Future of Improving Ethereum Network’s Permissionless and Decentralization
Wu’s Weekly Selection: US CPI Falls, Pension Funds Buying Bitcoin ETF, Lido and Paradigm Launch EigenLayer Competitor, and More Top News