There is a lot of talk about Ethereum’s layer 2 solution such as Polygon, xDai, etc., but Bitcoin is growing in this regard as well. The oldest and most valuable blockchain network on Earth is also home to a healthy L2 ecosystem. Many of these products aim to bring decentralized finance (DeFi) to Bitcoin and compete one to one with other networks.
The race for L2 solutions is on for the entire blockchain. Ethereum has them, Polkadot, Cosmos, Avalanche, and many others are racing to create a viable multi-chain model. The stakes are high, as literally billions of dollars are betting on the different networks. In this competition, few see Bitcoin as a contender.
What is a Layer 2?
First, we need to establish some terminology. Layer 2 is a concept that not many people in Blockchain or DeFi are familiar with. As the technology remains largely a niche subject many are still only acquainted with the big topics in the space, Bitcoin, Ethereum, Dogecoin, etc.
But Blockchain technology advances at a rapid speed, in fact, it is the most dynamic sector of the technology economy. There are more advances in blockchain than there are in web development, neural networks, cloud computing, and any other part of the tech economy. One of these many advances are Layer 2s.
A Layer two (L2) is a supplemental network or protocol built on top of an existing Blockchain. The L2 in itself is not capable of running transactions, and settling balances by itself, but relies on the existing previous network, known in this architecture as Layer 1, to provide security.
In most L2 designs, transactions happen on the L2 ledger and once these have been completed, the final results are then transferred to the L1 for final settlement. These make L2 far more customizable and modular than L1 protocols, and hold a lot of promise.
How is this possible? A L2 can rely on the security of the L1, so it can basically be constructed to fit certain use cases that the original network is not able to accomplish. Furthermore, because the L2 already has the backing of the Layer 1, original network, it can be faster and cheaper to use.
Now in Bitcoin this is precisely the case. By design, the Bitcoin Network is slow and somewhat expensive to use. On top of that, it was specifically built to prevent other programs from running on top of it, such as smart contracts. As a result, many L2 projects have come out that permit faster and cheaper Bitcoin transactions, and others that allow smart contracts on top of Bitcoin.
Collectively, the Bitcoin L2 networks are expanding the use cases for the Bitcoin Network while respecting its original design. As the construction of an L2 has no impact on the functioning of the Layer 1 network.
Now , let us look at the best L2 networks for bitcoin. What are their use cases? How do they improve Bitcoin? And most important of all, how can you use them?
Lightning Network
Perhaps the original Bitcoin Layer 2 project, the Lightning Network is almost a decade old. It was conceived when Bitcoin was first starting to become popular and widely used. In those days for the first time BTC transactions became a problem, with fees climbing to hundreds of dollars, and reported confirmation times 72 hours.
All of those problems with using the Bitcoin Network resulted in the creation of the Lightning Network. It is a series of nodes that are able to transact BTC with one another on a private channel. This means that transactions can happen in seconds, instead of the 10 minutes average, and cas cost cents.
The Lightning nodes only charge a small fee and can be created relatively easily. There are now over 100 thousand nodes on the world, making the Lightning Network the largest L2 in Bitcoin, and one of the most successful in blockchain.
As a user, anyone can access this network and transfer BTC with a peer anywhere on the planet. The transactions happen on the private channel, but once they are finished and the channel is closed, the end result is settled on the main Bitcoin Network.
Additionally, it is an excellent way to transfer BTC privately. As the main Bitcoin blockchain is now heavily monitored, the Lightning Network is a good alternative to keep transactions away from the curious eyes of 3rd parties.
Omni Layer
Omni Layer is the most successful attempt at creating a smart contract layer built on top of Bitcoin. As we have discussed, Bitcoin was never designed to be capable of running custom code, such as smart contracts. It only deals with tracking the balance of BTC transactions.
The rise of Ethereum and other similar Blockchains able to run smart contracts led many to think Bitcoin could do the same. One of the most successful in this project is Omni Layer. The Omni Network allows developers the ability to create custom tokens that work with Bitcoin as a basis.
Now, it is possible to create different tokens in Bitcoin as it is possible in Ethereum. One of the most famous Omni tokens is actually Tether USDT. The most popular stablecoin on the market actually began its journey on the Omni Layer and became a success first due to Bitcoin’s security.
The recent price spikes on Ethereum have made Tether think of migrating to other Networks and go back to its original home. As such Omni Layer remains a popular choice for developing on the Bitcoin Network.
Now, Omni Layer is highly technical, and creating tokens there is harder than in a project like Ethereum. That has reduced more or less its popularity, something our next project aims to address.
Rootstock (RSK)
Rootstock like Omni Layer is another project that aims to allow smart contracts on top of Bitcoin. People are not only able to issue tokens on RSK but also lend Bitcoin, earn interest on it, and many other services from the DeFi world.
RSK sets itself apart by trying to make development on top of Bitcoin as easy as possible. It has many libraries and code examples available to anyone and also has RSK Academy. The aim of it is to spread Blockchain education in general to all levels, casual users and developers.
All of these factors have made the RSK protocol very popular. It is very active in the Blockchain space and particularly in the Bitcoin world. It is closing the gap between Bitcoin and the other networks.
Liquid Network
Now Liquid Network aims to solve a very particular problem. Its main aim is to ensure cheap and fast transactions of BTC for professional traders and exchanges. The network can move large quantities of Bitcoin safely and cheaply without using the main Bitcoin blockchain.
A big problem exchanges have when incorporating Bitcoin is that it can be expensive to use, and build up liquidity to meet demand. In this sense, Liquid is actually providing a very important service for the general public, even though most of us cannot access it directly.
It has a product called L-BTC that allows Bitcoin transactions on a side-chain that are faster and less costly and more effective. The confirmation time for L-BTC is one minute, compared to the 10 minutes on the main BTC network.
In recent years, it has branched out to also being able to host Dapps on its network. There are two at the moment, Lend at Hodl Hodl and lending platform using USDT, and TDEX, a decentralized exchange focused on privacy.
Conclusion
Bitcoin is transitioning from a single Blockchain to a multilayer ecosystem. Some of the L2s described in this article are competing with each other, but all are meaningfully contributing to the advancement of the main Bitcoin Network.
As a result, Bitcoin is becoming an active DeFi alternative that is taking the best characteristics of the original network, security, and combining them with the versatility Layer 2s bring to the tabe. With them, Bitcoin will evolve into something more.
Another debate at the core of Bitcoin is the block limit. In this article, A History of Proposals to Increase the Block Size we review the past of the discussion and what it means for the future of Bitcoin.
