Since Satoshi Nakamoto first laid out the idea of Bitcoin (BTC) in the historic Bitcoin Whitepaper in 2008, Bitcoin has captivated the interest of individuals, governments, and traditional financial institutions alike. 

As the pioneer decentralised cryptocurrency and the dominant blockchain by market share, Bitcoin represents the flagbearer of the digital currency realm. Today, Bitcoin is the most valuable digital asset, often hailed as "digital gold" due to its status as a reliable store of value.

Bitcoin's journey has, however, been fraught with obstacles. The network's surging popularity has resulted in significant congestion, leading to exorbitant fees and prolonged transaction times, rendering BTC impractical for everyday small transactions. 

In this article, we'll delve into the realm of Bitcoin Layer 2 solutions, understanding their need and workings, challenges and highlighting some of the Bitcoin Layer 2 networks we currently support. 

Why Does Bitcoin Need Layer-2s?

Since its creation, Bitcoin blockchain's potential for widespread adoption has been hindered by inherent limitations. The structural design of the Bitcoin network, while ensuring unparalleled security and decentralisation, comes at the cost of scalability.

Bitcoin transactions are slow, the network can't handle many at once, and fees keep going up. Compared to its blockchain counterparts, Bitcoin struggles to handle substantial volumes of transactional data within reasonable timeframes.

With an average block creation time of 10 minutes and throughput of seven to eight transactions per second (tps) with a maximum of 11 tps per second, Bitcoin's capacity pales in comparison to high-performance blockchains such as Solana and Sei.

Bitcoin’s old tech lags behind the current most popular Ethereum L2, Solana (Source: Chainspect)

Moreover, the Bitcoin network’s original framework does not inherently support the execution of complex smart contracts and decentralised applications (DApps) like other blockchain projects, limiting its utility beyond a digital currency. That is where Bitcoin Layer-2s come into play. 

Understanding Bitcoin Layer 2 Solutions

Bitcoin Layer-2 solutions refer to protocols built on top of Bitcoin’s base layer. These protocols are developed to provide scalability to the Bitcoin network by processing transactions off the main blockchain (mainchain). Additionally, they can solve other technical problems and provide Bitcoin with additional functionality.

These Layer-2s can help improve Bitcoin’s overall performance, all while benefiting from its security and network effects.

Advantages of these Layer-2 solutions to Bitcoin include: 

  • Improved scalability by helping overcome Bitcoin’s limitations around transaction throughput, block confirmation time, and transaction costs.
  • Enhanced programmability through implementation of complex smart contract functionality.
  • Inherited high-level security provided by the Bitcoin network, as the base layer remains untouched.
  • Expanded capabilities to Bitcoin, unlocking new utilities on other verticals like payments, DeFi, NFTs, and other market venues.

How They Work

  1. Sidechains

Sidechains are alternate blockchains where users usually send existing BTC (as wrapped coins) to engage. In a sidechain, people can trade however they want. When they want to move back to the main Bitcoin network, they confirm transactions gradually over time to keep the prices in balance between the sidechain and Bitcoin.

  1. Rollups

Rollups are a breakthrough in blockchain tech, improving scalability and efficiency by handling transactions off-chain and recording results on-chain. This method eases the network load, processing more transactions faster and cheaper. Mainly linked with Ethereum, rollups also hold promise for enhancing scalability and functionality in the Bitcoin ecosystem.

  1. State Channels

State channels enable multiple off-chain transactions between parties, reducing the burden on the Bitcoin blockchain. Only the initial and final transactions are recorded on the blockchain, preventing congestion and lowering fees.

Users create secure channels to conduct numerous transactions privately without broadcasting each one to the main blockchain. This boosts scalability and reduces costs.

The Lightning Network is a prime example, executing more transactions via smart contracts.

Challenges of Bitcoin Layer-2s

Bitcoin Layer-2s provide solutions to some of Bitcoin network’s limitations. However, they also have their unique set of challenges. 

Most Bitcoin Layer 2 solutions are still in the early stages of development, especially true when compared to other network L2s like Polygon, Optimism etc. The majority of side channels are not sufficiently decentralised and are controlled by a central entity.

A rollup or state channel is only complete after the final settlement on the main network. The speed and the cost of settlement are significant for the L2 network. Bitcoin scaling networks have proven to be effective, however, future improvements in this area are still expected

None of the present Bitcoin Layer 2 solutions today have actually solved a similar trilemma. It always comes to trade-offs.

Bitcoin Layer-2s That SubQuery Supports

1. BEVM: BEVM is a Bitcoin Layer-2 Network developed based on Substrate, fully compatible with the Ethereum Virtual Machine (EVM).

2. BVM: BVM is the L2 blockchain meta-protocol, enabling builders to launch their own Bitcoin L2 that utilizes DA (data availability) layer to solve scalability constraints on Bitcoin

Final Words

Layer 2 solutions use Bitcoin technology to improve the network's transaction processing capabilities, taking all its advantages and building upon it.

Although they aren't perfect solutions, they do address the problem while maintaining the decentralised security that has made Bitcoin so successful.

Learn more about Bitcoin Layer 2s by listening to our pre-recorded X Spaces where we discussed the topic extensively with some key players in the space. 

About SubQuery

SubQuery Network is innovating web3 infrastructure with tools that empower builders to decentralise the future. Our fast, flexible, and open data indexer supercharges dApps on over 170 networks, enabling a user-focused web3 world. Soon, our Data Node will provide breakthroughs in the RPC industry, and deliver decentralisation without compromise. We pioneer the web3 revolution for visionaries and forward-thinkers. We’re not just a company — we’re a movement driving an inclusive and decentralised web3 era. Let’s shape the future of web3, together.

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