Bitcoin Layer 2 is flourishing, an overview of the progress of 6 major protocols
Bitcoin Layer 2 welcomes a financing boom.Author: flowie, ChainCatcher
Editor: Marco, ChainCatcher
After the craze of inscriptions has subsided, Bitcoin Layer 2s are expected to carry the hopes of sustaining the prosperity of the Bitcoin ecosystem.
Currently, Bitcoin Layer 2s are showing a flourishing trend similar to Ethereum Layer 2s, attracting a large number of entrepreneurs to enter the field. In addition to the well-known Layer 2 protocols like Lightning Network, Liquid Network, and Stacks, a large number of new projects claiming to be Bitcoin Layer 2s, such as B² Network, BEVM, Dovi_L2, and Map Protocol, have also emerged.
Du Jun, co-founder of ABCDE Capital and Huobi, stated that he will personally invest $50 million to deeply participate in the construction of the Bitcoin ecosystem, considering Bitcoin Layer 2 as a preferred track.
Bitcoin Layer 2s are also experiencing a financing boom, gaining favor from investors.
Recently, the Bitcoin Layer 2 network Bitfinity completed a $7 million token financing with a valuation of $130 million, with participation from Polychain Capital and others.
Domo, the founder of Bounce Finance and Brc-20, participated in the angel round financing of the Bitcoin data availability layer Nubit, with some crypto users viewing Nubit as the "Celestia" of the Bitcoin ecosystem.
After inscriptions created a new way of asset issuance, how will Bitcoin Layer 2s expand more functions and ecosystems beyond payments for the Bitcoin network, and can they replicate the prosperity of Ethereum Layer 2s?
ChainCatcher has systematically sorted out the current Bitcoin Layer 2 solutions, representative projects, and their progress. The article is divided into two parts; this is the first part, mainly introducing the progress of leading Bitcoin Layer 2 protocols; the second part “Bitcoin Layer 2 Welcomes Financing Boom, Overview of 20 Early Projects” mainly summarizes the outlines of 20 early Bitcoin Layer 2 projects.
Progress of Leading Bitcoin Layer 2 Protocols
Proposals for scaling the underlying network first appeared in the Bitcoin network rather than Ethereum, with various protocols and architectures for Bitcoin scaling emerging as early as 2012.
Around 2018, the Lightning Network and sidechains proposed by Bitcoin ecosystem developers gradually gained attention as they were upgraded. In 2023, the explosive popularity of the BRC-20 protocol led to a surge in Bitcoin network transactions, making the issue of how to solve Bitcoin network performance problems an unavoidable topic.
Currently, the more well-known Bitcoin scaling solutions include off-chain computing expansion models represented by the Lightning Network and RGB protocol, as well as Bitcoin sidechains.
1. Off-Chain Computing
Lightning Network
Among the various scaling solutions for Bitcoin, the Lightning Network primarily emphasizes creating off-chain payment channels to achieve fast, low-cost microtransactions, alleviating congestion and high fees on the Bitcoin network.
As of now, Lightning Labs, the developer of the Lightning Network, has gone through three rounds of financing, with early investors including Twitter CEO Jack Dorsey and Square executive Jacqueline Reses.
In February 2020 and April 2022, Lightning Labs completed $10 million in Series A financing and $70 million in Series B financing, respectively.
In October 2023, its stablecoin protocol Taproot Assets launched on the mainnet.
The Lightning Network was originally derived from Satoshi Nakamoto's concept of "payment channels," attracting more than half of the Bitcoin ecosystem's developers and participants from 2016 until the explosion of the Ordinal ecosystem. Around 2020, the Lightning Network became well-known throughout the crypto community through Nostr.
In October 2023, the alpha version of the Taproot Assets mainnet released by Lightning Labs played a role in expanding the functionality of the Bitcoin network. Taproot Assets supports the issuance of stablecoins and other assets on Bitcoin and the Lightning Network, with these assets being controlled by the programmable features of Bitcoin Script, fully decentralized, and ultimately applied through the Lightning Network. “Lightning Network Releases Taproot Assets Mainnet, Is Bitcoin Entering a True BRC20 Era?”
According to 1ML.com, as of now, the number of nodes in the Lightning Network has exceeded 14,000, and the number of channels has also surpassed 60,000. The products and projects in the Lightning Network ecosystem have already involved node and liquidity services, payment infrastructure and solutions, wallets and banking, and even gaming and social applications.
Lightning Network Ecosystem Source: Arcane
However, most of these solutions still revolve around achieving "instant payments," with notable projects in the Lightning Network ecosystem including the instant payment solution Strike, mobile payment service Cash APP, and ZEBEDEE, which provides instant global payments for games.
Recommended Reading: “Seven Years in the Making: The Authentic Origins and Challenges of the Lightning Network”
RGB Protocol
RGB is a smart contract system that supports Bitcoin and the Lightning Network, featuring scalability and privacy characteristics.
The concept of RGB was first proposed by community figure Giacomo Zucco around 2016, inspired by Peter Todd's early ideas on client validation and one-time seals, and was implemented in the original MVP by BHB Network in 2017.
In 2019, Maxim Orlovsk and Giacomo Zucco co-founded the LNP/BP Standards Association (https://www.lnp-bp.org) to promote the transition of RGB from concept to practical application.
RGB aims to enable Bitcoin to deploy smart contracts like networks such as Ethereum, allowing developers to deploy token, NFT asset issuance contracts, decentralized finance applications (DEX, lending), DAOs, and more on Bitcoin.
However, unlike smart contracts on Ethereum, RGB employs an off-chain solution, executing smart contract code maintenance and data storage off-chain, with the mainnet (Bitcoin) serving as the final state commitment layer, reducing the use of block space and increasing throughput.
In April 2023, the LNP/BP Association announced the release of RGB v0.10, a significant breakthrough in the development of the RGB protocol, which facilitates developers in deploying homogeneous token RGB20 and complex smart contract development for non-homogeneous token NFT contracts, making compatibility with the Lightning Network possible. Through the Lightning Network, users can quickly and cheaply transfer RGB assets without waiting for confirmations on the Bitcoin mainnet. Additionally, RGB may bring fully supported smart contract functionality to the Lightning Network.
In June 2023, the RGB protocol launched on the mainnet.
Currently, there are multiple applications on the RGB protocol. Pandora Prime Inc, founded by the founding members of LNP/BP, has several RGB products, such as the Bitcoin NFT marketplace DIBA, which uses the RGB smart contract protocol and the Lightning Network to trade Bitcoin Unique Digital Assets (UDAs, similar to NFTs). The first NFT wallet in the RGB ecosystem, BitMask, has over 760,000 user wallet addresses; MyCitadel, a graphical user interface wallet supporting RGB, and RGB Explorer, which provides RGB asset registration and smart contract browsing, are also notable.
In addition, noteworthy RGB ecosystem applications include the Bitcoin infrastructure BiHelix, the Bitcoin asset management platform BitRGB.network, and the Bitcoin DEX solution Bitswap.
Recommended Reading: “In-Depth Analysis of RGB Protocol: Creating a New Layer for Bitcoin Asset Issuance”
“What is the True Potential of the Bitcoin Asset Issuance Protocol RGB?”
2. Bitcoin Sidechains
A sidechain refers to the design of an independent public chain that can transfer assets between itself and the Bitcoin network. The sidechain itself also has its unique accounting methods, consensus mechanisms, smart contract and script support, and is linked to the Bitcoin mainnet through specific cross-chain technologies.
Since the Bitcoin main chain was not designed to support smart contracts from the beginning, sidechains provide a pathway to smart contract compatibility, allowing ecosystem developers to build applications independently without leaving the Bitcoin public chain, achieving greater scalability and composability. For the critical congestion issue of the Bitcoin network, sidechains solve transaction confirmation speed problems through customized consensus mechanisms and block generation times.
However, not everyone can run nodes on sidechains, as the consensus of the ledger relies on the management of certain central institutions, resulting in low decentralization.
Stacks (STX)
Stacks is an established project founded in 2013, aimed at bringing smart contracts and decentralized applications to Bitcoin.
Stacks builds a sidechain outside of Bitcoin and has its own compiler and programming language. Stacks uses the PoX (Proof of Transfer) consensus algorithm, where transaction validators need to stake Stacks' token STX to mine BTC, while miners need to stake BTC on the Bitcoin main chain to mine STX.
The total supply cap of the STX token is 1.818 billion, with the genesis block of Stacks containing 1.32 billion STX tokens. These STX tokens were distributed in multiple issuances in 2017 and 2019. As of January 15, the fully diluted market cap of STX tokens is approximately $2.972 billion.
Stacks has also built a large ecosystem, listing over 100 ecosystem projects on its official website, covering various fields such as DeFi and payments. According to statistics from crypto data platforms, single-chain projects on Stacks include Bitcoin DeFi platforms like Alex and Velar. As of January 15, Stacks' TVL reached $55.4 million (this value changes over time and should indicate the date). “Stacks Ecosystem Map”
In the fourth quarter of 2023, Stacks initiated a major upgrade called Stacks Nakamoto, aiming to bring the project closer to Bitcoin Layer 2 and introduce Bitcoin-pegged assets sBTC, allowing smart contracts to run faster and cheaper, easily facilitating the transfer of BTC into or out of Stacks L2.
Muneeb.btc, the founder of Stacks, announced noteworthy items in the upgrade plan for the first half of 2024:
The Stacks Nakamoto upgrade plan will start before the Bitcoin halving, bringing a rapid (5-second) block speed to Stacks, a significant improvement over the current 10-30 minute block speed tied to Bitcoin L1;
sBTC may be released as a second hard fork after the Bitcoin halving. There are proposals to use it directly as gas on Stacks. Additionally, the open network of sBTC signers may be the largest and most decentralized collection of signers at the launch of Bitcoin L2/anchoring (currently estimated based on signer library performance and signer interest);
Stacks' support for WASM to accelerate the execution of Clarity (secure language) contracts, preparing for support of other languages like Rust.
Recommended Reading: “Stacks Founder: The 2024 Roadmap for Stacks, Why Bitcoin Layer 2 is Important?”
“BTC Ecosystem Accelerator: Discussing the Investment Value of $STX from Stacks' Nakamoto Upgrade”
Liquid Network is a Bitcoin sidechain developed by blockchain technology company Blockstream on October 10, 2018, aimed at enhancing the speed and security of Bitcoin transactions.
To enhance speed, Liquid Network employs a special Federated Byzantine Agreement (FBA), compressing block generation time to within 2 minutes. In terms of security, Liquid Network supports Confidential Transactions, protecting transaction amounts and address information through encryption technology and zero-knowledge proofs. For scalability, FBA allows the verification node set to be adjusted at any time, providing a certain degree of decentralization, but in reality, the operational rights of verification nodes are still easily controlled by a few authoritative mechanisms.
Like most Bitcoin sidechains, Liquid Network allows users to use LBTC (Liquid Bitcoin) as a tradable digital asset for fast and private transactions on the Liquid Network. Currently, there are over 3,700 LBTC in circulation on Liquid Network.
Additionally, Liquid Network is governed by a distributed alliance of over 65 Bitcoin-centric companies, including exchanges like Bitbank and BTCBOX, platforms like Aquannow and Bitcoin Reserve, as well as wallets and payment platforms like Cobo and OpenNode.
Recently, Bitfinex Securities Ltd, which provides listing and trading services for security tokens, announced the successful issuance of $5.2 million in tokenized bonds on the Liquid Network.
DriveChains is a sidechain framework concept proposed by Dr. Paul Sztorc, an economics professor at Yale University and a Bitcoin researcher and developer.
Paul Sztorc also serves as the co-founder and CEO of the Drive Chain development team LayerTwo Labs. Sztorc outlined the concept of DriveChains in Bitcoin Improvement Proposals (BIPs) 300 and 301. The DriveChains framework allows users to lock Bitcoin on the main chain and then implement a series of functions permitted by the sidechain and build applications independently. Thus, DriveChains grants autonomy to sidechains while providing users with the ability for bidirectional asset transfer.
On December 20 last year, LayerTwo Labs completed a $3 million seed round financing, serving as the startup fund for the team to introduce DriveChains and other innovative technologies into the Bitcoin network.
Rootstock, born in 2015, is an EVM-compatible smart contract platform based on Bitcoin, using merged mining to allow the simultaneous establishment of sidechains and Bitcoin blocks to enhance network scalability. However, since Rootstock operates independently of the Bitcoin network, its data availability, censorship resistance, and gravity resistance do not inherit the security of the Bitcoin network.
Rootstock launched its mainnet in 2018, and the RSK platform does not have its own native token, using smartBTC (RBTC) as payment for transaction fees, with RBTC issued 1:1 from BTC on the mainnet through a cross-chain bridge.
According to official information, there are already hundreds of applications on Rootstock, including multiple wallet applications like Metamask and Ledger, as well as applications in other fields such as lending, oracles, and payments. Recently, the dex platform Oku on Uniswap has also been deployed on Rootstock. In 2023, Rootstock announced a $2.5 million hackathon plan to incentivize ecosystem development, and projects can still apply for funding.
The developer platform Rootstock Infrastructure (RIF), launched by the Rootstock development team IOV Labs, is a set of infrastructure architecture open standards built on Rootstock, providing developers with blockchain infrastructure and services.
The RIF ecosystem includes a series of products, including DeFi, storage, domain services, payment solutions, etc. The RIF token is often mistakenly regarded by users as the native token of Rootstock.
Recommended Reading: “Bitcoin Sidechains: Understanding the EVM-Compatible Rootstock”
