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Bitcoin's position as the most popular cryptocurrency can be both an advantage and a problem for it. The Bitcoin ecosystem is one of the most secure and dependable options available, but having so many people rely on the Bitcoin network can also lead to congestion. During busy times of day, transaction speeds slow and fees begin to rise. One potential solution to this problem lies in Bitcoin Layer 2 technologies. Keep reading to find out how these scaling solutions work, and to discover the best current Bitcoin Layer 2 options.
Key Takeaways:
A Bitcoin Layer 2 solution is a protocol that runs alongside the main Bitcoin chain. It improves Bitcoin's scalability, so the network can handle large amounts of transactions without a reduction in transaction speed or an increase in transaction prices.
Bitcoin Layer 2 solutions help with scaling by selecting the information they pass back and forth. Instead of processing every transaction on Bitcoin one by one, a Bitcoin Layer 2 processes transactions off-chain and only sends the essential information to the main Bitcoin chain.
A Bitcoin Layer 2 solution is a protocol that runs alongside the main Bitcoin chain. It improves Bitcoin's scalability, so the network can handle large amounts of transactions without a reduction in transaction speed or an increase in transaction prices.
Bitcoin Layer 2 solutions are essentially independent blockchains that contain Bitcoin-compatible smart contracts and software. They have the ability to process transactions, just as the Bitcoin network does. A Layer 2 accepts and manages a variety of transactions, such as payments, trades and data storage. With Bitcoin, the Layer 2 system is connected to the main Bitcoin chain, so it passes the record of these transactions to Bitcoin and can pull data from Bitcoin when necessary. It runs alongside Bitcoin, and is constantly updating to stay in step with the main chain.
Bitcoin Layer 2 solutions help with scaling by being selective about the information they pass back and forth. Instead of processing every single transaction on Bitcoin, one at a time, a Bitcoin Layer 2 processes transactions off-chain and only sends essential information to the main Bitcoin chain. For example, a Bitcoin Layer 2 that handles payments might only store payment confirmations on Bitcoin, instead of using the network for every step of requesting, transferring and receiving the payment.
Some Layer 2s make transactions even more efficient by bundling together information and posting it on Bitcoin as a single block, as opposed to several individual statements. Others use special algorithms to encrypt and compress information into smaller transactions. These sorts of features reduce the computing power needed for multiple transactions, making the whole blockchain ecosystem more efficient.
Bitcoin Layer 2 solutions are just one of many scaling options. Here's what you need to know about the pros and cons of Bitcoin Layer 2 designs.
Bitcoin Layer 2 networks come with the following advantages:
Faster transactions: Bitcoin Layer 2 systems are built to handle higher amounts of network traffic, so they can process transactions more quickly.
Lower transaction fees: Most Bitcoin Layer 2 designs are set up to charge users less money for transactions.
Reliable processing: Since Bitcoin Layer 2 networks are built on the underlying Bitcoin system, they use Bitcoin's impressive security features and unchangeable ledgers.
Expanded options: Some Bitcoin Layer 2 services have additional smart contracts that effectively make the Bitcoin blockchain more flexible and programmable.
Increased interoperability: Layer 2 blockchain technology is also useful because it lets the Bitcoin blockchain communicate with other chains, such as Ethereum.
Bitcoin Layer 2 networks do have some potential downsides to be aware of, as follows:
Poor compatibility: If a Bitcoin Layer 2 is improperly designed, it can run into compatibility issues that cause it to lag or struggle to work with other web3DApps.
Privacy issues: With a Bitcoin Layer 2 network, you're involving a third party in your transaction, who can potentially view private details.
Potential hacks: Bugs in a Bitcoin Layer 2's design may lead to vulnerabilities that let scammers and hackers take advantage of users.
As one of the earliest blockchains, Bitcoin is one of the networks that needs Layer 2s the most. The base Bitcoin chain is missing a lot of the functionality found in other systems, such as Ethereum or Solana. Many users believe that Layer 2s are one of the best ways of modernizing Bitcoin and expanding its utility. They add additional programming options and features that users need for modern web3 systems. This ensures that Bitcoin can maintain its position as the premier blockchain, instead of being ousted by other chains capable of running modern trends, such as play-to-earn games.
The most obvious impact Bitcoin Layer 2 systems have on the main chain is their ability to handle congestion. Every time a Bitcoin Layer 2 goes online, it helps tackle some of the unnecessary transactions that Bitcoin would otherwise have to handle. This results in lower transaction fees and higher transaction speeds for everyone who still uses the main chain. Research estimates that Bitcoin Layer 2 solutions can reduce congestion by up to 84%.
To better understand what a Layer 2 has to offer the Bitcoin ecosystem, it's useful to take a look at some examples. Here are a few of the most popular current Bitcoin Layer 2 options in the blockchain ecosystem.
Lightning Network is one of the most popular Bitcoin scaling solutions. It uses a method called channels to more efficiently process transactions off-chain. This strategy lets users communicate with each other through an individual connection. Each channel lets a person send as many transactions as they'd like, back and forth, with only the final results recorded on the main chain.
Lightning Network's ability to increase transaction throughput is a benefit that’s mostly utilized for payments. Therefore, security is essential. It uses hashed timelock contracts (HTLCs) and multi-signature transactions to help users transfer funds and process payments without running into security issues.
The design of Lightning Network has proven to be efficient, with a processing speed of around 1 million transactions per second (TPS), while Bitcoin only has a TPS of around 10. Furthermore, the transaction cost for users working on the Lightning Network is usually just $0.001. Especially during the Bitcoin price surge of late Feb 2024, Lightning Network's services have been extremely valuable. Since Bitcoin has recently reported over 100,000 extra transactions per day, Lightning Network's scaling solutions have saved users a lot of time and money.
Rootstock Infrastructure Framework, which runs on the Rootstock chain, is another popular option. Rootstock is inspired by Ethereum virtual machine (EVM) scaling solutions. It's a sidechain that uses a proof of work (PoW) consensus mechanism to simultaneously mine both Bitcoin and Rootstock (RSK). As transactions are validated, Rootstock bundles them and sends them to Bitcoin to merge the two chains' histories.
Rootstock is only slightly faster than the main Bitcoin chain. Its bundling methods allow some scaling, but the PoW mining method still slows it down. It tends to have a TPS rate of around 20 to 300, which at times is just twice the speed of Bitcoin. The main benefit of Rootstock outside of slightly increased transaction speed is its in-depth set of smart contracts. Developers can use Rootstock and the Rootstock Infrastructure Framework for a variety of storage, payment and naming solutions. It also offers a variety of helpful integrated features, including a rollup service and a wallet for users.
The current interest in Bitcoin has led to a lot of opportunities for Rootstock. Though most people don't rely on it for fast transaction processing, Rootstock's system has attracted the attention of traders who like using DApps to handle their Bitcoin.
Bitcoin's price spike has also been promising for Rootstock's native token, which is called Rootstock Smart Bitcoin (RBTC). When BTC prices began to climb on Feb 25, 2024, RBTC prices also took off. The coin is designed to match Bitcoin’s price one-to-one, so its price always mirrors that of BTC. For those who help to maintain Rootstock’s network security by mining RBTC, this price spike has been quite favorable.
Liquid Network is a Bitcoin sidechain. It operates in parallel with Bitcoin and aims to increase scalability by sharing the computing power load with Bitcoin. Liquid’s native token, Liquid Bitcoin (L-BTC), corresponds to Bitcoin in price and helps to back the network’s transactions with reliable collateral. Users swap their Bitcoin for Liquid Bitcoin, conduct as many transactions as they desire on the sidechain and then turn it back into regular Bitcoin.
Liquid Network specializes in secure, private transactions. Unlike some other Layer 2 systems, Liquid has special protocols in place to ensure users' transactions are confidential and entirely safe. It also has smart contract capabilities with features such as trustless atomic swaps between users. Many people choose Liquid when they're working with large amounts of crypto or a high volume of transactions.
Liquid Network's scalability has been useful for investors during Bitcoin's price spike. Its network has a TPS roughly double that of Bitcoin, but its real value is in the size of the transactions it can handle. Since it posts far more blocks per hour than Bitcoin, Liquid can handle vast sums of data. Up to 2,500 vbytes of transaction data can be processed at a time, while Bitcoin can only handle around 450 vbytes per transaction. This makes Liquid ideal for busy times, when traders are buying and selling every few minutes to take advantage of minute price shifts, but don't want to pay pricey transaction costs.
Stacks is a type of blockchain technology that relies on participation from community members known as Stackers, STX token holders who validate and approve blocks. The system’s proof of stake (PoS) system requires less computing power while still ensuring each block on the Stacks chain is valid. Stacks further scales Bitcoin by adding extra protocols to its blockchain. These smart contracts help to manage complex transactions off-chain, so less data needs to be transmitted to Bitcoin’s network.
Stacks is one of the Bitcoin Layer 2 systems that aims to mimic the design of the Ethereum blockchain, which includes the ability to design projects that wouldn't be operable on Bitcoin. People can design web3 products with ease on Stacks, and the Layer 2 then translates the more complex language into simple transactions that Bitcoin's base chain can handle.
STX's recent price movements provide a unique look at how Bitcoin's prices affect related chains. The token doesn’t match Bitcoin's price one-to-one, but it still follows the same general price patterns as Bitcoin. After sitting at around $2.50 for a year, STX soared to $3.34 when Bitcoin's prices started trending upward in February 2024.
This community-driven project aims to tackle several Bitcoin issues at once. By running an additional layer of smart contracts alongside the Bitcoin blockchain, Conflux can process transactions off-chain, which speeds up the main Bitcoin chain by moving several essential types of transactions off-chain. Conflux uses a hybrid consensus mechanism that provides PoW and PoS systems to obtain a transaction processing speed of 3,000 TPS.
Conflux is one of the most versatile Bitcoin Layer 2 networks. Its system is fully EVM-integrated, so it can handle a broad range of assets. In addition to using Conflux to scale Bitcoin, you can also use it for transferring assets between chains and minting a variety of BRC-20 and ARC-20 tokens. This makes Conflux ideal for users who want to run decentralized finance (DeFi) projects or work with complicated smart contracts.
Since the February 2024 price surge, Conflux has been able to support a lot of DApps running on Bitcoin. People who rely on the blockchain for assistance with daily tasks, such as running a DeFi app, often struggle with crypto trends randomly bogging down transaction throughput. Companies that choose to rely on Conflux's decentralized finance services have found they can keep running smoothly, no matter how high Bitcoin's price goes.
Drivechain is a type of Layer 2 called a Bitcoin fork, which means it's a blockchain that started out identical to Bitcoin and then gradually differentiated as its creators added more features. To help with scalability, Drivechain has multiple large-block sidechains. These chains process larger blocks of data, so they can handle larger transactions than the main chain can. The system also uses a type of security mechanism called a hash rate escrow, which allows users to maintain token value as they move between the mainchain and the Layer 2 network.
Drivechain was created by LayerTwo Labs with the mission of improving user experience (UX) and reducing public reliance on non-Bitcoin tokens. The focus is on adding extra functionality that makes the main network more straightforward to use. Drivechain's mission also involves more experimentation: the LayerTwo Labs team believes that Bitcoin has stagnated, and wants its forks to become a testing ground for new innovations.
The Drivechain design offers several benefits for users during Bitcoins' price spike. It features payment channels that boast instant transactions without high fees. These fast transaction speeds are ideal for users who are rushing to purchase Bitcoin at the optimal moment. Furthermore, Drivechain offers some additional privacy features that are helpful for users who want to take advantage of BTC prices without compromising their identities.
Omni Layer is an open-source asset platform created by stablecoin issuer Tether. It functions as a meta-layer of software that runs on top of Bitcoin. Its smart contract capabilities allow users to access a variety of DApps on Bitcoin. Omni Layer can leverage Bitcoin's security and processing power while also expanding Bitcoin's utility. One of the most unique methods it employs is altering Bitcoin transaction metadata. After processing transactions on the Omni Layer, the system takes bundles of transaction data and adds them to Bitcoin transaction metadata. This allows information to be stored on the main chain without needing to actually validate every transaction on Bitcoin’s network.
Omni Layer has many potential uses in the Bitcoin community. Originally, it was used primarily for trading and creating cryptocurrencies. Users can create altcoins and then trade them with other members. Since Omni Layer is connected to Tether, its most popular coin is the USDT stablecoin. Because this Bitcoin Layer 2 has both scaling and programming capabilities, it's popular with users who want to extend Bitcoin's functionality as a tradeable coin.
As of 2023, Tether has been phasing out support for Omni Layer. However, due to the market demand for USDT, Omni Layer has still played an important role in the Bitcoin price surge of 2024. Users can continue to redeem coins on Omni Layer until August 2024. While the network was stagnating, the impressive BTC price boost has encouraged many users to rush to Omni Layer and make sure they redeem their assets before the deadline.
Rollkit is a Layer 2 that uses a special type of scaling solution called a sovereign rollup. Unlike zero-knowledge proofs, sovereign rollups don't involve processing all transactions off-chain. Instead, Rollkit uses a blend of both the Bitcoin main chain and its own proprietary software to bundle rollups. This provides better security than some types of zero-knowledge proofs, while also ensuring that transactions are processed at a faster rate.
The Rollkit scaling solution is relatively new to Bitcoin. It was initially a Layer 2 designed for the Celestia blockchain. However, its ability to take multiple transactions and bundle them into a single, compressed transaction has also attracted attention from the Bitcoin chain. Therefore, its developers decided to retrofit their technology and create a version that could leverage Bitcoin's security for processing transactions and extend Bitcoin's functionality.
Rollkit's services have attracted some attention in the wake of the Bitcoin price surge. As one of the only services offering sovereign rollups on Bitcoin’s blockchain, Rollkit is uniquely positioned to help developers. People looking for a faster and more efficient way of designing DApps may turn to Rollkit as the solution to their problem.
The Dovi Layer 2 network relies on the EVM for scaling, using the flexible design and smart contract capabilities of Ethereum to process Bitcoin transactions while lowering transaction costs. Dovi incorporates Schnorr signatures to further improve security. These multi-signature authentications are ideal for confirming transactions in an efficient manner. Moreover, by optimizing block space, Dovi can process transactions more efficiently and speed up transaction processing times.
While Dovi does make the Bitcoin transaction process more efficient, its main aim is to improve the network's capabilities. Dovi contains a variety of flexible smart contracts that developers can use to create projects. It supports cross-chain communications and has an interoperable design that lets it run on multiple systems. This allows people to explore all of Bitcoin's classic services while also using more modern blockchain functionalities.
Dovi is still a fairly new Layer 2, so it hasn't had many chances to show what it can do yet. However, the recent pump in BTC prices has greatly motivated the Dovi community. Even though this Layer 2 hasn't assisted with many transactions during the price surge, its value has gone up a lot. Interest in BTC resulted in positive attention that gave the project's native token a chance to grow. DOVI tokens that were retailing for around $0.40 in mid-February are now worth around $0.60 as of early March 2024.
Many crypto enthusiasts believe that the future of Bitcoin Layer 2s is increased programmability and functionality. There is a real need for Layer 2s that address Bitcoin's unique design instead of simply copying the scaling Layer 2s found on Ethereum. By offering more smart contract capabilities and programming options, Layer 2s could potentially allow developers to build more projects on Bitcoin. Potentially, the new Bitcoin Layer 2 explosion could help Bitcoin move beyond investing and payment processing and begin to focus on software and games instead.
Layer 2s on Bitcoin are also likely to lead to more integration with other projects in the future. Interoperability is a major focus for the web3 community right now, and the right Bitcoin Layer 2 project could make the network much more compatible with other systems. Not only can they work with web3 games, social media and exchanges, but Layer 2s can also make it easier to integrate Bitcoin into traditional financial systems. These implications could provide even more positive benefits beyond the scaling that Layer 2 systems currently provide.
Another trend to watch for in Bitcoin Layer 2 networks is a focus on user experience. Many developers are currently working on ways to make blockchain networks more accessible to the average user. Existing blockchains can feel overwhelming or confusing to people who aren't technologically proficient, but Layer 2s can help. By adding a cleanly designed user interface on top of the main Bitcoin chain, these technologies make it more straightforward to transfer funds or make payments. The most successful Layer 2s in the future may be the ones that do a good job of enhancing user experiences.
Ultimately, Bitcoin Layer 2 networks are an essential part of modern web3 development. If Bitcoin wants to maintain its position as one of the leading blockchain networks, it needs a way to process transactions quickly and affordably. Fortunately, many developers have decided to tackle Bitcoin's scaling challenge, so there are a lot of different Bitcoin Layer 2s for people to choose from when they want to reduce transaction fees and extend Bitcoin's functionality.
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