Bitcoin Layer 2s: Explained & Examples

A Bitcoin layer 2 is any offchain community, system, or know-how constructed on prime of the Bitcoin blockchain to assist prolong its capabilities.

Since its inception in 2008, Bitcoin has turn out to be the point of interest of the verifiable web as the primary decentralized cryptocurrency, remaining the most important one by market capitalization. Nevertheless, Bitcoin’s progress has confronted challenges because of the community’s restricted scalability, usually leading to excessive transaction charges and community congestion. 

The latest introduction of ordinals, BRC-20 tokens, and different Bitcoin-native onchain functions has additional exacerbated these points, the place—particularly throughout peak instances—Bitcoin can turn out to be impractical for on a regular basis use. These ongoing scalability challenges spotlight the fast want for Bitcoin scaling options equivalent to layer-2 networks.

On this put up, we talk about what Bitcoin layer 2s are, how they work, and the way they’ll profit from industry-standard oracle companies.

How Do Bitcoin Layer 2s Work?

The Bitcoin community takes about 10 minutes to finalize a single block of transactions—solely seven transactions per second (TPS) on common. Scaling the Bitcoin blockchain immediately isn’t an possibility, as it might require compromising both safety or decentralization per the blockchain scalability trilemma.

It’s price noting that the restricted core performance (i.e., a worldwide, censorship-resistant decentralized forex) helps make the Bitcoin community so tamper-proof and sturdy, and a big technological breakthrough of the twenty first century. Nevertheless, this slender focus limits the community’s usability in on a regular basis situations and limits builders’ skill to launch new functions on Bitcoin. Enter layer 2s.

A Bitcoin layer 2 is any offchain community, system, or know-how constructed on prime of the Bitcoin blockchain that helps prolong its capabilities. Layer-2 networks can introduce enhancements equivalent to higher transaction throughput, lowered charges, and programmability by sensible contracts. A key requirement for a community to be thought of a layer 2 is that it should inherit the safety of the blockchain it’s constructed on—on this case, Bitcoin. Within the case of Bitcoin layer 2s, because of this transaction information is verified and confirmed by the Bitcoin blockchain reasonably than a separate set of nodes.

Layer-2 networks can differ significantly in how they obtain this elevated scalability, however a typical denominator between layer-2 environments is that when seeking to decide on the bottom chain, they need to present some form of cryptographic proof to the blockchain on the integrity of the proposed state change, both preemptively or retroactively.

If you happen to’d like a deep dive into how layer 2s work, learn What Is Layer 2?.

Kinds of Bitcoin Layer 2s

There are a number of varieties of Bitcoin scalability options that may be categorized as layer 2s, although some exist in a grey space concerning their classification as true layer-2 options. Be aware that Bitcoin scalability is an ongoing space of analysis, and new options and applied sciences might emerge sooner or later to handle a few of the limitations of present Bitcoin layer-2 applied sciences.

State Channels

State channels allow customers to bypass excessive transaction charges by shifting transactions offchain, the place two events lock a certain quantity of bitcoin right into a multisig to ship and obtain funds. These channels then keep data of all transactions that happen inside them till they’re closed. When the events are finished transacting, they signal and broadcast the ultimate state of the channel to the Bitcoin blockchain.

State channels hold all transactions inside them offchain, solely reporting the opening and shutting steadiness of individuals to the Bitcoin community. This permits individuals to make transactions with out having to pay Bitcoin mainnet charges for every transaction. 

State channels are just like cost channels within the Bitcoin Lightning Community, however additionally they help extra complicated transactions apart from micropayments.

Sidechains

A sidechain is an unbiased blockchain with its personal consensus mechanism that connects to Bitcoin by way of a two-way peg, permitting the switch of property or balances between the 2 chains. Whereas sidechains usually use bitcoin as their native forex, they’ll additionally concern their very own native tokens.

Working as separate blockchains, sidechains provide sooner transactions and extra options like sensible contracts. As a result of sidechains have their very own validator set, they aren’t all the time thought of true layer-2 options, as transactions aren’t essentially in the end verified by the Bitcoin community. Nevertheless, some sidechains might faucet into Bitcoin’s safety or periodically decide on the primary chain.

Rollups

Bitcoin layer-2 rollups transfer transaction execution and information off the primary Bitcoin blockchain to a separate rollup chain or layer whereas nonetheless anchoring to Bitcoin for information availability and consensus.

Rollup know-how entails executing transactions on the rollup chain, compressing information, and anchoring to the Bitcoin mainnet. Customers submit transactions to be executed on the rollup chain reasonably than immediately on the Bitcoin blockchain. The rollup chain then processes these transactions and updates account balances accordingly. 

After processing a batch of transactions offchain, the rollup compresses the transaction information right into a compact cryptographic proof or dedication, representing the web impact of all these transactions. This compressed proof is periodically submitted to the Bitcoin blockchain as a single transaction, and a few form of verification mechanism on Bitcoin then validates and applies the adjustments represented by the rollup proof.

Advantages of Bitcoin Layer 2s

Bitcoin layer 2s provide a number of advantages:

• Higher scalability—Bitcoin layer 2s successfully improve the transaction throughput and pace of Bitcoin by processing transactions offchain after which settling them on the primary chain, relying on the answer.
• Lowered charges—Bitcoin layer 2s allow decrease transaction prices, unlocking use instances secured by Bitcoin that wouldn’t be possible on the primary Bitcoin community, equivalent to micropayments.
• Programmable sensible contracts—Though Bitcoin was not initially designed to help sensible contracts, layer-2 options can introduce this performance, enabling the creation of complicated decentralized functions and novel programmable monetary devices constructed on Bitcoin.
• Deeper liquidity—Bitcoin layer 2s can enhance liquidity and entry to Bitcoin, unlocking DeFi on Bitcoin with enhanced liquidity, capital effectivity, and elevated entry.

Bitcoin Layer 2 vs. Ethereum Layer 2

The utility of layer-2 options lies in how they faucet into the safety of the primary chain whereas growing its scalability. On this means, Bitcoin and Ethereum layer 2s are fairly related—each search to introduce enhanced scalability with out making adjustments to the bottom layer. Nevertheless, Bitcoin and Ethereum layer 2s differ considerably of their technical implementation, as Bitcoin and Ethereum themselves are designed for distinct functions.

Accelerating Bitcoin Layer 2 Adoption

State channels, sidechains, rollups, and different layer-2 options are all strategies of approaching the blockchain scalability drawback in numerous methods—supporting each the rising adoption of onchain functions and enhanced use instances and consumer experiences.

The Chainlink platform has underpinned the DeFi ecosystem since its inception, fulfilling the necessity for high-quality information, compute, and interoperability companies that assist builders create fully-fledged decentralized functions. In lots of instances, integrating Chainlink has helped layer-1 and layer-2 ecosystems bootstrap their progress with battle-tested Chainlink infrastructure, attracting each new builders and customers. With the rising ecosystem of Bitcoin layer-2 scalability options, the necessity for high-quality information and different oracle companies can even develop within the Bitcoin ecosystem.

A major benefit of adopting the Chainlink platform is that when an app makes use of a single Chainlink service, there are little-to-no extra belief assumptions for utilizing different Chainlink companies since they’re all constructed upon the identical time-tested oracle infrastructure. And each new service constructed on prime of Chainlink provides extra worth for all current customers. Because of this blockchains are more and more becoming a member of the Chainlink Scale program as a strategy to speed up the expansion of their software ecosystem. An integration with Chainlink can convey a number of companies to a single blockchain and subsequently drive a surge in developer exercise.

To study extra about Chainlink, go to chain.link, subscribe to the Chainlink newsletter, and comply with Chainlink on Twitter, YouTube, and Reddit.