Critics argue that bitcoin is outdated, slow, and lacks the advanced smart contract features seen on other blockchains. To some extent, they’re right. The basic layer of bitcoin only handles a few transactions per second, which is certainly not sufficient for potential global adoption. Additionally, Bitcoin Script, the programming language used for creating smart contracts on bitcoin, is very simplistic and does not support all the features we are accustomed to from full-fledged programming languages or other cryptocurrencies.

(Please note: Not all of the projects mentioned are technically layer 2s as various sidechains ("parallel blockchains") and other projects are also described here. It is more of an overview of various solutions that somehow expand the capabilities of bitcoin.)

Should bitcoin undergo significant changes to survive? In my opinion, definitely not. The goal of the base layer, the well-known bitcoin blockchain, is to be maximally secure and decentralized. These characteristics can only be achieved by keeping the system as simple as possible. With every additional feature, even if written and reviewed by the best programmers, the risk of potential errors or failures increases—a risk that the largest and most famous decentralized network for free digital money transactions cannot afford.

However, it's not just about security and the potential errors that could appear in very complex code. The aim is always to maximize decentralization. This means ensuring that the system is not controlled by large institutions or states – as is the case with today's fiat currencies – and that any one of us has the opportunity to operate our own node, verify network rules, and be truly self-sovereign.

For this principle to hold, it is essential that anyone can connect to the network and become a member. Of course, the current block size is not sufficient to scale to everybody on the planet, but it ensures that a hard drive costing just a few dozen dollars is enough to store all the necessary data. Additionally, the fact that Bitcoin Script is relatively simple means that all transactions can be verified on a mini-computer or an old laptop.

In other words—yes, bitcoin's base layer doesn't boast advanced features, nor can it handle several on-chain transactions daily for every person worldwide. However, this simplicity ensures it is secure and truly decentralized. This is evidenced by the tens of thousands of bitcoin nodes running globally and the fact that there have been only two significant outages in its history—in 2010, then in 2013. Since then, the bitcoin blockchain has been operating without a single failure, and its uptime is nearing 99.99%.

Additional Layers

Does this mean that bitcoin will remain a sort of “steam locomotive” in a world of modern trains forever? Absolutely not. Bitcoin approaches things differently and draws its inspiration from nowhere else but the internet itself.

The internet operates in layers. First, there’s the physical layer, which can be envisioned as all the cables connecting computers and other devices. Above that is the link layer, which ensures that data reaches its destination—allowing computers to communicate. The network layer defines the route data takes, and the transport layer ensures that data arrives intact and in order.

The reason we have these layers is that they make the internet more organized and efficient. Each layer has its special role, and when they all work together, the internet can quickly and securely transmit information from one place to another. Bitcoin operates in a very similar way.

As the diagram above illustrates, it's not feasible for the bitcoin blockchain to be secure, decentralized, and scalable. Theoretically, it is possible, but in such a case, it would not perform any of these roles effectively. Bitcoin has chosen the path of security and decentralization, pinning itself to the center of the right side of that triangle. Scalability (and other parameters, as we'll discuss later) is addressed in a similar manner to the internet, through second and subsequent layers.

What does this entail? One layer might handle scalability, another might manage the storage of NFTs, another might enhance privacy, and some might deliver very complex smart contracts, which the basic bitcoin blockchain does not offer. It’s not necessary to limit ourselves to just second layers; in the future, third and possibly more additional layers will undoubtedly emerge.

A crucial aspect here is that these layers are optional. If you want, you can use them, but if, for example, you're not a fan of NFTs, you don't need to connect to these layers at all. Moreover, it's important to note that any error in a second (or subsequent) layer does not affect the security of the basic layer—the bitcoin blockchain itself. This is a significant advantage of this architectural approach.

Thanks to recent projects like Inscriptions, BRC-20 tokens, and the Runes protocol, a significant number of second layers and other projects on bitcoin are emerging. There are two reasons for this. Firstly, many developers have realized that now, primarily due to the Taproot soft-fork, they can develop quite interesting projects on bitcoin, leading to a shift from other blockchains. Secondly, as a result of these protocols, transaction fees have skyrocketed, making many people realize that ordinary users will need to move their everyday transactions from the base layer to higher layers.

What second layers and other projects are emerging on bitcoin? Let's take a closer look at some of the most interesting ones below.

Lightning Network

Certainly, the most well-known second layer on top of bitcoin is the Lightning Network, which has been around for approximately 7 years. This solution uses what are called payment channels. You can think of them as a shared balance between two people, where only those two individuals know how much funds each party holds. Transactions then occur simply by changing the state of this payment channel. The channels and nodes themselves form a network, so it’s not necessary to have a channel open with everyone—similar to the internet, where you don’t need to be connected to every single server, but rather to have an internet connection to your ISP suffices, and they take care of forwarding data further.

The fundamental idea behind the Lightning Network is that it's not necessary for particularly small transactions (such as buying a beer at a bitcoin conference) to be stored on the blockchain and verified by every node in the world. As a result, Lightning transactions are faster (typically settled within a few seconds), cheaper (fees are almost negligible), and more anonymous.

To use this network, you need a special Lightning wallet, usually a mobile app. Payments are typically made by scanning QR codes, but recently, NFC technology is increasingly being used for transactions, significantly enhancing user-friendliness.

Is the Lightning Network the final solution for scaling bitcoin? Only the future will tell. Recently, it has become apparent that Lightning works well in a custodial mode, meaning you entrust a third party with the control of your funds. However, if you want to remain truly sovereign and keep your own keys, Lightning is still quite complicated for many non-technical people. You need to open payment channels, maintain them, understand concepts like inbound liquidity (and know how to manage it), and if you want to receive payments, you must be continuously online. Additionally, there is the issue that, due to limited space in the blocks, it's unrealistic for everyone in the world to have their own payment channels (with current state of Lightning Network).

However, it’s not necessary to completely dismiss Lightning Network. Recently, it has proven to have a definite place, especially in the B2B segment. Moreover, the emerging scaling competition, which we will discuss in the following chapters, is pushing Lightning Network developers to work on user-friendliness in self-custody mode. A relatively good piece of news is that some of the newly emerging second layers are not trying to completely replace Lightning (although some are) but rather leverage its strengths and together create a truly high-quality and usable solution for scaling bitcoin to the masses.

Taproot Assets

For most people living in the developed Western world, bitcoin primarily serves as an investment or a savings. And if they have been interested in bitcoin for a while, they are also accustomed to its price volatility. They simply know that if they "hodl" long enough, gradually buy more, and don’t get spooked by various price dips, they will be in profit. However, this is not the case in developing and poorer countries, where people often lack access to a bank account and would like to operate solely using bitcoin.

Indeed, its volatility is currently a huge problem. If you live paycheck to paycheck, as is common in these countries, a significant drop in bitcoin's price could mean that by the end of the month, you might not have enough to pay for necessities like rent, electricity, or even food. For this reason, stablecoins—cryptocurrencies pegged 1:1, most commonly to the dollar—are gaining popularity in these regions. They offer a more stable alternative for daily transactions and financial management.

Currently, stablecoins are most commonly used on Ethereum or Tron. However, this may change with the Taproot Assets protocol, formerly known as Taro, which allows the sending of stablecoins via the Lightning Network. Through this network, it would be possible to send, for example, US dollars across the world—extremely quickly, easily, cheaply, and using a truly decentralized and secure network. This could significantly enhance the utility of bitcoin in everyday transactions and financial stability in regions where traditional banking infrastructure is lacking.

Thus, bitcoin, and by extension the Lightning Network, could become a sort of "secure rails" for the transfer of any value. This protocol is in the final stages of development and is expected to be launched in the coming months.

Ark

The Lightning Network isn't the only option for scaling bitcoin. Recently, there's been increasing discussion about a protocol called Ark. Recall the complexity I described earlier, like the issue of incoming liquidity in the non-custodial mode of the Lightning Network? Ark aims to address these problems by shifting the technical burden from users to service operators, known as Ark Service Providers (ASPs). This model simplifies the user experience by having ASPs manage the complexities, potentially making it easier for everyday users.

Ark works by initially allowing users to exchange their bitcoin UTXOs (unspent transaction outputs) for virtual vTXOs with a chosen Ark Service Provider (ASP). These vTXOs can be used to make fast, efficient, inexpensive, and anonymous payments without recording them on the bitcoin blockchain. The only requirement is that users must make a self-payment once a month (which will likely be automated in the future) to avoid forfeiture of their funds. Each transaction technically involves a large coin-join, ensuring a high level of anonymity. Users can exchange their vTXOs back into traditional UTXOs at any time, even if the ASP is unavailable.

By shifting much of the complexity from users to Ark Service Providers (ASPs), these operators need to lock up significant amounts of liquidity (bitcoins) to ensure the protocol functions correctly, which could lead to some centralization of these ASPs. Additionally, for users to receive payments non-interactively, i.e., offline, a bitcoin soft-fork is required. The protocol is still in the early stages of development, so its usability and effectiveness will be revealed over time.

The good news is that although Ark may seem like direct competition to the Lightning Network at first glance (and to some extent it is), Lightning is actually used within this protocol to facilitate payments between different ASPs. This integration suggests that Ark could complement rather than replace the Lightning Network, potentially enhancing the overall ecosystem by adding another layer of functionality and user-friendliness.

NFTs, memecoins, and gambling

While technically not a second layer, the technologies described below have recently captured significant attention, so I believe they deserve a few lines here. What am I specifically referring to? Over a year ago, developer Casey Rodarmor proposed the Ordinals protocol, which allows individual satoshis to be numbered. This led to the creation of Inscriptions, a form of NFTs on bitcoin, where all data are stored directly on the bitcoin blockchain.

However, it didn’t stop with NFTs. Shortly thereafter, the BRC-20 protocol was created, which is a play on words with the well-known ERC-20 tokens. Most recently, a concept known as Runes was also introduced. In both cases, these are protocols for issuing fungible tokens on top of bitcoin.

As you might correctly assume, most of these tokens are essentially worthless, involving pure speculation or memecoins. This has somewhat divided the bitcoin community over whether such features should even exist on bitcoin. Regardless of your opinion, the desire for gambling and quick wealth is likely deeply ingrained in our DNA. This trend underscores the community's appetite for innovation, even if it means experimenting with applications that might not align with bitcoin's original ethos of providing a decentralized, digital cash system.

Liquid

Liquid is a sidechain of bitcoin, essentially a separate blockchain that runs parallel to the main bitcoin blockchain. It operates in a similar manner but with some key differences. For example, blocks on the Liquid network are produced at fixed intervals of one minute, making transactions somewhat faster. Additionally, the amounts transferred are hidden, which makes the protocol more private.

If you want to use this sidechain, you need to exchange your bitcoins for what are known as Liquid Bitcoins (L-BTC). Similarly, you can convert your L-BTC back to regular bitcoin after some time by performing the reverse exchange. While Liquid also supports the transfer of other assets, such as dollar-denominated stablecoins, this feature has not gained much traction in practice.

Liquid has been around since 2018, and if you look at the transaction volume, it appears that very few people are using it. Why is this the case? Unlike the main bitcoin blockchain, where security is ensured purely through cryptography, Liquid requires users to also trust the members of a federation, which currently consists of 67 entities (mostly bitcoin companies). This reliance on a federated model introduces a level of centralization, which can be a deterrent for those seeking the decentralized security guarantees typical of blockchain technologies.

In my opinion, the need to trust selected companies is the stumbling block preventing Liquid from being widely used by the general populace, even after six years in operation. However, it's not necessary to write off this protocol entirely, as it represents a very active ecosystem that could potentially gain more traction in the future.

RGB

RGB is a platform designed for smart contracts that are capable of all the complex functions known from other cryptocurrencies, such as Ethereum. This means that with this second layer, it would be possible to issue stablecoins on bitcoin, tokenize real world assets, implement NFTs, integrate a broad DeFi ecosystem, and operate DAOs (Decentralized Autonomous Organizations), among other things.

Compared to Ethereum, a key distinction of the RGB platform is its use of the so-called client-side validation model. This means that the validity of transactions, such as asset transfers, is verified only by the participants involved rather than the entire network. This approach significantly reduces the load on the blockchain, enhancing privacy and scalability. On the other hand, designing and implementing such a system is generally more complex than the full-node validation model used by networks like Ethereum.

Similar to Taproot Assets, the RGB platform also aims to enable the transfer of individual assets through the Lightning Network in the future. This underscores the assertion that the Lightning Network is likely here to stay, though exactly how it will be utilized remains to be seen. 

RGB is a highly complex and ambitious project. While it primarily relies on voluntary contributions from the community, it does receive some support from companies like Tether and Bitfinex, which have occasionally contributed code to the project. However, it's important to note that there is no significant corporate or venture capital backing, and the bulk of development still depends on the dedication of independent developers and community-driven efforts. For this reason, the project is still under development, and a real-world deployment will take some time. This grassroots approach to funding and development might slow progress, but it also keeps the project aligned with the decentralized ethos of the broader cryptocurrency community.

BitVM

The Bitcoin Virtual Machine (BitVM) is a system currently under development aimed at introducing advanced smart contract capabilities to bitcoin, thereby enhancing its scalability. As mentioned earlier, the scripting language of bitcoin is deliberately kept simple to ensure maximum security and decentralization. Technically, it is not Turing complete, which limits its ability to perform complex operations.

Given that the concept of BitVM is quite complex, let's consider it in a simplified case. Take, for example, a game of chess. Even in this game, there could be disputes about who won. The solution we're accustomed to from platforms like Ethereum involves all nodes replaying (simulating) all the chess moves and then deciding who won. However, this can be particularly computationally intensive for complex "games" (smart contracts) and places performance demands on the individual nodes.

In BitVM, all such computations take place off-chain, between just the two parties involved, rather than on the bitcoin blockchain. The blockchain acts only as a kind of judge in the event of a dispute. This makes BitVM a new way to verify complex smart contracts on bitcoin without requiring every single node to perform complicated calculations.

The good news is that implementing BitVM does not require any soft forks, meaning it can be integrated into bitcoin without needing any changes to the network's protocol. This concept could also introduce functionalities such as zero-knowledge (ZK) rollups, which are tools for scaling the blockchain that are already known from Ethereum. Other possibilities include trust-less transfers of bitcoin to sidechains, theoretical improvements to the Lightning Network, and more. Although these prospects sound very promising, the off-chain computations in BitVM design are very computationally intensive and currently inefficient, and the protocol itself is still in its early stages. So real-world applications and benefits of BitVM will take some time and it’s important to mention that so far it’s more of a scientific research endeavor rather than practical update.

Final thoughts

Indeed, dozens more paragraphs could be written about other second layers and enhancements to bitcoin. There is a website (l2.watch) that monitors all second layers on top of bitcoin, and at the time of writing this article, it has recorded more than 80 projects. Many of these are various experiments, and some may even be non-functional proposals or scams, but it shows the trends in bitcoin development. 

However, this article is already quite lengthy, so we could perhaps save the more exotic proposals for a future article. Nonetheless, the future and overall idea seem clear. Bitcoin is simple, secure, and decentralized. Yet, most bitcoin enthusiasts recognize the necessity for primarily better scalability or more advanced smart contracts. Thus, the architecture of the entire ecosystem is built in layers.

Developing these enhancements for bitcoin is a complex process, which is why it might seem that other cryptocurrencies are further along in their development. However, if these innovations succeed, they will provide solutions that do not compromise bitcoin's security for advanced use cases. This delicate balance between maintaining robust security while expanding functionality is crucial for bitcoin's long-term relevance.

Thank you Michal

We are thrilled to have Michal contribute once again to Braiins and look forward to seeing his work in the future.

Follow him on X at @PBudoucnosti.

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