Are Bitcoin L2s Real?

Introduction

The arrival of Ordinals (“NFTs on Bitcoin”) marked a pivotal moment, signaling a major shift toward a “Build on Bitcoin” philosophy. In May 2023, Ordinals caused a sharp increase in transaction fees, which jumped from 4–7sat/vB to 415 sats/vB, pushing transaction costs to about $30. As Bitcoin continues to be adopted worldwide, the demand for more block space becomes evident.

Layer 2 solutions for Bitcoin are addressing these challenges by offering programmability, quicker transaction speeds, better data availability, and improved functionality for applications. This approach leverages Bitcoin’s robust security and stability while also tapping into its substantial market capitalization, which stands at $1.3 trillion, unlocking new possibilities and maximizing the potential of the Bitcoin network.

In 2023, the landscape started to change with the rising popularity of Ordinals, Inscriptions, and BRC20 tokens. Inscriptions alone generated almost $3 billion in sales. Amid the excitement around BitVM and Ordinals, the number of projects focused on scaling Bitcoin is nearing 70.

The Evolving upgrades on Bitcoin L1

Bitcoin has come a long way since its inception in January 2009, with its purpose and potential growing over time. To deal with scalability, key updates have been made to its base layer.

The first big step was the Segregated Witness (SegWit) update in July 2017, which occurred during the “Blocksize War” — a debate on whether to increase the block size to improve Bitcoin’s scalability. SegWit helped by separating the signature data from transaction data, allowing more transactions to fit in a block without increasing the block size. This update also paved the way for the lightning network.

Following the SegWit update, the Taproot upgrade in November 2021 further enhanced Bitcoin by introducing Schnorr signatures. This innovation allows for the aggregation of multiple signatures into a single one, making complex transactions appear identical to simple ones on the blockchain. It improves transaction privacy, reduces the data size of transactions, enhancing the ability to execute complex conditions.

The introduction of SegWit and Taproot upgrades tackled certain issues on Bitcoin’s Layer 1 (L1), but the release of ordinals has once again put Bitcoin in the spotlight. This has put strain on Bitcoin’s L1 performance and scalability, also leading to a significant increase in fees.

So, the growing interest in ordinals spurs further interest in smart contracts and also creates a higher demand for Bitcoin block space. This emphasizes the need for enhanced Layer 2 (L2) solutions. Developers initially focused on Ethereum, are now expanding their efforts to include Bitcoin’s L2 options, signaling a shift toward improving Bitcoin’s scalability and functionality.

However, these L1 upgrades have definitely laid the foundation for further advances in Bitcoin’s layers.

Bitcoin Layers

Bitcoin Layers are separate consensus protocols that extend the utility of Bitcoin through scalability and programmability. These protocols include sovereign rollups, sidechains, Validiums or Optimiums, Layer2, Layer3, state channels, and more.

Sidechains

Sidechains are independent blockchains that run parallel to the main Bitcoin blockchain, introducing features like larger blocks or enhanced privacy without changing Bitcoin’s core protocol. Users can transfer Bitcoin to a sidechain via a multisig contract, receiving a pegged derivative there. This process depends on a federation to manage conversions and maintain the peg, which introduces trust issues and potential risks of mismanagement or fraud.

State channels

State Channels offer private, instant off-chain transaction paths, with blockchain settlement occurring only at the start and end of the interaction. The Lightning Network example of state channels, enables payment channels for quicker, cheaper transactions between any two parties. However, these channels become economically unviable in high-fee scenarios, making it costly to open and close them.

Sovereign rollups

Sovereign rollups on Bitcoin are scalability solutions that enable independent execution environments, using Bitcoin’s blockchain for data availability and security. Projects like Ordinals and platforms utilizing the Omni Layer, such as USDT, showcase early examples of embedding additional data and creating tokenized assets on Bitcoin. However, sovereign rollups and similar technologies face significant limitations due to Bitcoin’s constrained block space, impacting scalability and throughput.

Layer 2

Layer 2 (L2) solutions are built on top of the Bitcoin blockchain to improve scalability and functionality. A true L2 must post Data Availability (DA) to Bitcoin and offer a trustless BTC bridge.

Layer3 and Validiums or Optimiums

Layer3 blockchains settle their transactions on Bitcoin’s Layer 2 solutions or sidechains to enhance efficiency and support specialized applications. Validiums or Optimiums are blockchains designed to post data availability off the main chain, featuring a secure, trustless bridge to Bitcoin for scalable and secure transaction processing.

Currently, there are no implementations of true Layer 2, Layer 3, Validiums, or Optimiums live yet.

Are Bitcoin L2s even possible?

To be considered a true Layer 2 (L2) on Bitcoin, it must not require soft forks, ensure full trustlessness, and allow the validation of zero-knowledge (ZK) or validity rollups, enabling users to trustlessly withdraw their assets anytime through a trustless two-way peg. Currently, there’s no live example of such a Bitcoin L2 solution due to Bitcoin’s base layer not natively supporting the verification of validity proofs.

The exploration of integrating technologies like zero-knowledge proofs (zkps) into Bitcoin has been ongoing, with contributions from notable figures such as Greg Maxwell and Ellie Ben-Sasson from StarkWare.

A significant development in this area is the white paper by Robin Linus about BitVM, released in 2023. It proposes a method for enabling complex computations, including the verification of zero-knowledge proofs, on Bitcoin without the need for a soft fork. This opens up new possibilities for Bitcoin’s scalability and smart contracts’ programmability.

BitVM: Build Turing-complete contracts on Bitcoin

BitVM is a project that introduces the ability to express Turing-complete Bitcoin contracts without changing the network’s consensus rules. Rather than executing computations on Bitcoin, they are just verified, similar to optimistic rollups. It aims to scale Bitcoin and enhance its connectivity with other blockchain networks through a trusted two-way peg. BitVM seeks to replicate the functionality of the Ethereum Virtual Machine (EVM), thereby enabling the execution of complex smart contracts on the Bitcoin blockchain that is limited by Bitcoin script.

Why Bitcoin script is not Turing-complete?

Bitcoin script is a smart contracting language designed for operations like signatures, multi-signatures, time locks, and hash locks. It’s deliberately not Turing-complete to minimize potential attack surfaces. Satoshi Nakamoto significantly restricted Bitcoin script following the discovery of a bug and removed many opcodes.

Bitcoin’s security relies on decentralization, with users running nodes to verify transactions. Full nodes compute every transaction in every block on the network. Unlike Ethereum, Bitcoin’s transaction fees are loosely related to computation complexity. Satoshi’s restrictions on Bitcoin’s language ensured that the computation required for verifying a block wouldn’t overwhelm nodes.

How does BitVM solve this problem?

BitVM enables advanced computations on Bitcoin by first simulating the fundamental operations of computers (Boolean logic gates) within Bitcoin’s Script language. This means it can perform complex logical operations without needing to change how Bitcoin fundamentally works. Then, using features like hash locks and taproot addresses, it verifies the outcomes of these operations. If there’s a dispute about the result of a computation, BitVM has a protocol in place to determine the correct outcome, ensuring that only the necessary computation is conducted to verify transactions, rather than executing them in full. This process allows Bitcoin to support more complex functions and smart contracts without requiring every node to process heavy computations.

The potential for BitVM to enable trust-minimized bridges and verify zero-knowledge proofs excites many. These are key components of rollups, which could transform Bitcoin applications by enabling functionalities like DeFi and DAOs. If BitVM can enable zk-rollups on Bitcoin, a new era of on-chain Bitcoin applications is poised to emerge.

Conclusion

Bitcoin’s cautious approach to updates prioritizes security and stability, which, while prudent, could impede the development of its Layer 2 ecosystem. In recognition of the significant potential of Layer 2 innovations, the Bitcoin community has pinpointed essential enhancements, such as OP_Cat, that are vital for boosting BitVM’s functionality and increasing its ability to minimize trust. OP_Cat, for instance, could facilitate larger data commitments within single transactions, thus improving BitVM’s overall protocol efficiency. Additionally, the introduction of Bitcoin Covenants might greatly strengthen Bitcoin’s Layer 2 solutions, enabling them to compete more effectively with established Layer 2 platforms and application chains. However, the realization of these enhancements amid current market conditions is still uncertain, possibly restricting the short-term efficiency and trust minimization of Bitcoin’s Layer 2 solutions.