With the birth of the Ordinal protocol in 2023, Bitcoin, once the "digital gold", has ushered in a new type of asset - "inscription". If Bitcoin is gold, then the inscription is similar to a product processed with gold and has unique value.
This native asset issuance method on the first blockchain quickly gained market favor, and not only spawned more asset issuance protocols such as BRC20, Atomical, Runes, etc., but also gave birth to well-known inscriptions such as ORDI and SATS, as well as many Bitcoin native NFTs.
For a time, the Bitcoin ecosystem ushered in its own spring again, attracting a large amount of funds, users and developers. However, after a period of development, the assets on Bitcoin have indeed increased, and people have gradually realized the limitations of Bitcoin as a Layer 1. On the one hand, Bitcoin itself does not support smart contracts, so it is difficult to expand more application scenarios on Bitcoin by relying on technologies such as inscriptions.
On the other hand, Bitcoin's performance and mining fees have also become huge obstacles to the further development of the Bitcoin ecosystem. During the period when inscription gameplay is active, the transfer fee of Bitcoin will increase rapidly and even begin to affect the normal transfer of Bitcoin. What's more, if there are more application scenarios, it will further cause network congestion and long-term high mining fees.
Naturally, the enthusiasm created by the inscription quickly spread to the track of Bitcoin expansion, which also opened up another hot track - Bitcoin Layer2.
From being hyped to being falsified, where is the future of Bitcoin Layer2?
Some old Bitcoin expansion plans have attracted attention again, and more and more new Bitcoin Layer2 projects have been proposed. Among them, the Bitmap Tech team, which has been deeply engaged in the inscription direction and is famous for the nested protocol BRC420 of inscriptions on the Bitcoin chain, took advantage of the popularity of inscriptions and took the lead in launching a Bitcoin Layer2, which is the Merlin Chain that became famous later.
Merlin Chain was launched in February 2024, and soon launched the staking activity Merlin's Seal. In addition to Bitcoin and some inscriptions, the pledged assets also include BRC420 blue boxes and other assets, which also triggered a surge in blue boxes. Taking on the popularity of Bitcoin inscriptions, Merlin Chain has gained a large amount of TVL after the staking was launched (data source: https://geniidata.com/ordinals/index/merlin). Less than 30 days after the launch of the activity, the TVL exceeded US$3 billion, and once reached a peak of US$3.5 billion, becoming a popular star project in the Bitcoin ecosystem.
On April 19, the much-anticipated Merlin was finally listed, and its token MERL reached a high of 2USDT, but then quickly fell back and continued to fall in the following weeks. It has now fallen by more than 80% and is close to the cost price. Such performance has directly surprised everyone.
Shortly after MERL was listed, Merlin opened the BTC unlocking function on April 25, and then its TVL plummeted to around $1.3 billion, a drop of more than 60%. The blue box that participated in the pledge also plummeted from a maximum value of around 1 BTC to less than 0.05 BTC.
As a star project of Bitcoin Layer2, it suffered a double plunge in price and TVL after listing, which also hurt many people who actively participated in Merlin. This can't help but make people doubt Bitcoin Layer2. Is Bitcoin Layer2 a real potential narrative, or just a short-lived hype topic?
In fact, the development of the entire blockchain industry is constantly groping forward between various doubts and recognitions. As for the expansion of blockchain, Bitcoin is not the only ecosystem that is being explored. As a veteran of the second dragon, Ethereum was designed relatively early and also faced the dilemma of having to expand. However, as Ethereum began to explore expansion solutions after Bitcoin, its Layer2 has been able to flourish and emerge with very active development. There must be something worth learning from it. Let's look forward to the development of Bitcoin's Layer2 through the development of Ethereum's Layer2.
Looking back at Ethereum’s expansion journey
1. Learning and exploration
Ethereum's expansion plan initially drew on the experience of Bitcoin and explored methods such as state channels, lightning networks, and side chains.
The state channel is like two parties A and B who want to trade, opening a channel outside Layer1 that constantly updates the state. No matter how many times the two parties in the channel conduct transactions, they will not be affected by the performance and cost of Layer1. The reason for constantly updating the state is to upload the latest off-chain state to the Ethereum main chain as the final settlement basis to prevent malicious behavior. This can indeed greatly improve efficiency and reduce fees. For example, Connext Network is exploring based on the state channel.
However, its limitation is that it only applies to the two parties in the channel, and both parties need to be online continuously and update the status continuously, otherwise there will be a risk of asset loss.
The Lightning Network is iterated on the basis of the state channel. If the state channel represents the line between two objects, then the Lightning Network connects a lot of lines to form a network. In this way, even if A and B are not in the same channel, they can be connected through the network by connecting multiple channels.
The Lightning Network is equivalent to the network version of the state channel. Ethereum has borrowed from Bitcoin's Lightning Network to launch the Raiden Network. However, the Raiden Network is an off-chain network and does not support smart contracts. Its main use case is still transfer and payment. In addition, the Raiden Network does not belong to the blockchain network, and its nodes are easily controlled by centralized groups, which has certain risks, so it still has many shortcomings.
The subsequent launch of sidechain technology fills the shortcomings of the Lightning Network. It is a form of blockchain that can also run smart contracts, so it has higher security and stronger scalability than the Lightning Network.
However, sidechains also bring new problems. Due to their independence, sidechains are only responsible for their own ledgers and only transmit transaction results back to the main chain, which may lead to losses caused by sidechain misconduct. For example, sidechain nodes tampering with transaction records or refusing to execute transactions may cause erroneous results to be transmitted back to the main chain, thus affecting the security and reliability of the system. Therefore, sidechains have data availability issues and are not widely recognized.
During this stage, Ethereum’s expansion plan was basically implemented based on the idea of Bitcoin’s expansion plan, but after many attempts, Ethereum did not stop exploring and began to take a more advanced step.
2. A ray of hope
In 2017, Joseph Poon (one of the originators of the Lightning Network) and Vitalik proposed a new Ethereum Layer2 off-chain expansion framework - Plasma. Plasma refers to some designs of state channels and improves on the shortcomings of side chains. It adopts a tree-structured architecture consisting of many subchains forming a Merkle tree. Compared with side chains, Plasma will hash all transaction records that occur in these Plasma subchains, generate a Merkle root, and transmit it back to the main chain, so that the main chain can supervise transactions on Plasma. This Merkle root contains summary information of all transaction records that occur on the Plasma chain, and the main chain can be used to verify the integrity and validity of these transactions, thereby ensuring the legitimacy and security of the transactions.
Although Plasma seems to have solved some problems with state channels and side chains, Plasma still has certain data availability issues, and Plasma cannot support smart contracts, and its development has also reached a bottleneck.
It seemed that the solution that finally showed promise fell into trouble again. However, one year after the birth of Plasma, a new solution was quietly born. It was this solution that started the explosion of Layer2, and that is - Rollup technology.
Although Rollup is also built using Merkle trees and sub-chain structures, compared to Plasma, Rollup will package and compress all transaction records in the sub-chain and pass them to the main chain, instead of hashing them like Plasma. Nodes on the main chain can directly access and verify the details of all transactions, not just the hash summary, thus providing sufficiently strong data availability and transparency, thereby increasing the credibility and security of the system.
As Optimistic Rollup was proposed, projects based on this technology, such as Optimism and Arbitrum, were launched one after another. Since OP Rollup solves key issues such as sub-chain data availability and can support smart contracts, its security and functionality have finally been widely recognized. Optimism and Arbitrum have attracted a large number of developers and projects, and users and funds have dared to participate in them. The two have quickly built their own ecosystems. Since then, Ethereum Layer2 has finally been on the right track and ushered in an explosion.
3. Let a hundred flowers bloom
The success of Layer2 such as Optimism and Arbitrum has also attracted more teams to explore different Layer2 solutions. For teams with strong technical strength, they may develop their own Layer2 solutions, but there are also some teams that may want to operate their own independent Layer2, but their own technology is not enough, and such needs were first discovered by the Optimism team. Based on Optimism, they launched OP Stack, a tool that can release Layer2 with one click. Any team can use this tool more easily to release a Layer2 of their own. Other teams that have developed their own Layer2 are not to be outdone and have released Layer2 tools based on their own projects, such as Arbitrum Orbit of Arbitrum, ZK Stack of zkSync, Polygon CDK of Polygon, etc.
As a result, more Layer2 demands have been discovered, forming a Layer2 feast. Currently, there are more than 50 Layer2 projects counted on L2beat alone, and the development of Layer2 has entered a stage of vigorous development.
On the other hand, the current mainstream Rollup solutions often have the problem of malicious sorters. The sorter in Layer2 is mainly responsible for sorting the transactions occurring on Layer2 according to certain rules, packaging them into blocks, and then submitting them to the main chain for confirmation. The sorter usually determines the order of transactions and ensures the validity of the blocks based on some rules, such as transaction fees, timestamps, etc.
However, since the sorter has the power to control the order of transactions, there is a possibility that the sorter will do evil and intentionally adjust the order of transactions to obtain more MEV benefits. Therefore, some teams have begun to explore decentralized sorter solutions to make Rollup more secure and mature.
Looking at the development of Ethereum's Layer 2, it is not difficult to find that Ethereum's expansion is not smooth sailing, but it is exploring in the direction of greater decentralization, greater data availability and greater security. Only when the safer and more decentralized solutions reach a certain level will they gain more funds and user recognition and develop more rapidly.
Theoretically, Bitcoin's Layer2 can also refer to the development of Ethereum's Layer2 to find its own "chain". It will also usher in a flourishing situation like Ethereum after its security and decentralization reach a level that is widely accepted by the market.
So what are the current Layer 2 solutions for Bitcoin, and what new changes are worth paying attention to? Let us turn our attention back to the Bitcoin ecosystem with the development experience of Ethereum Layer 2.
Dilemma and breakthrough of Bitcoin ecology
1. The current Bitcoin expansion dilemma
In the current Bitcoin ecosystem, we do not see many professional organizations or institutions entering the market in large numbers. This is also because the level of security and decentralization has not reached the satisfaction of these professional players.
When we talk about the development of BTC Layer2, the draft of the Lightning Network white paper was released as early as February 2015. This is also the earliest Layer2 "payment protocol" based on BTC, and it also led to the conception of Layer2 itself. But as we all know, the Lightning Network does not support smart contracts. Therefore, it is impossible to develop ecological applications related to Bitcoin on the Lightning Network, and it can only be used as a payment expansion path.
Then in 2016, a company that was particularly optimistic about L2 on BTC received a $55 million investment led by Tencent. This company was later known as "Blockstream" in the industry, and their L2 product was called Liquid Network, which interacts with the Bitcoin main chain through two-way anchoring technology and is also a well-known BTC sidechain. However, Liquid's Bitcoin cross-chain solution is relatively centralized, using 11 certified multi-signature nodes to host Bitcoin. The overall solution is similar to a consortium chain with a permission mechanism, rather than a true public chain.
At the same time as Liquid Network, there was another sidechain called RSK. It was born earlier and released its white paper in October 2015, but it did not become a solution that was later talked about, and it is not even mentioned now.
Also in 2016, a developer named Giacomo Zucco proposed the initial concept of the RGB protocol based on Peter Todd's ideas. However, it was not until 2019 that Maxim Orlovsky and Giacomo Zucco established the LNP/BP Standards Association to promote the development of RGB towards practical applications. Then in April last year, the RGB v0.10 version was released, which brought full support for smart contracts to Bitcoin and the Lightning Network. Since then, RGB has completed the important function of "landing", and the popular "RGB++" some time ago has also been available. However, whether it is RGB or RGB++, there is still some distance to go in terms of real landing.
Of course, we cannot forget another important role - Stacks. As a well-known Layer2 that claims to truly support smart contracts and realize decentralized application development on Bitcoin, it has been a leading player in the BTC Layer2 track since its launch in 2018. With the advent of the "Satoshi Upgrade", it has attracted the attention of the industry. However, the recent postponement of the upgrade has put out the fire.
The BTC Layer2 solution that is closer to us is BitVM, which was proposed only last year. Its implementation method is exactly the same as Ethereum's Optimistic, so it has also received a lot of attention. However, BitVM's smart contracts run off-chain, and each smart contract does not share status, while BTC cross-chain uses traditional Hash locks to anchor assets, and does not achieve truly decentralized BTC cross-chain.
Through the above review, it is not difficult to find that BTC Layer2 actually developed much earlier than Ethereum, and these attempts have been continuously verified. Later generations stepped on the shoulders of their predecessors and continued to move forward, which led to today in 2024. The development of BTC L2 is no longer a spark. We can see the current status and representative projects of several mainstream BTC Layer2 solutions on the market through the figure below, and we can intuitively see the current dilemma (thanks to netizens for the picture)
According to public data, there are no less than 10 BTC Layer2 projects that have received financing this year, and the number is still growing. It can be called a star track. However, so far, there are very few BTC L2s that are truly impressive and recognized by the public. Some are trapped by technical bottlenecks and development has been delayed, or like Merlin, they opened high and fell low and were complained by the community. In addition, because of the lack of decentralization, big funds have never dared to get on board and are just providing "cover" on the periphery.
As we analyzed above, the reason why ETH Layer2 has achieved today's success is that it has a good balance between "decentralization" and "nativeness", which makes funds willing to enter the Layer2 ecosystem, thus achieving the effect of "a hundred flowers blooming". BTC Layer2 is currently in the same dilemma and urgently needs to break through.
2. Possible breakthrough directions of Bitcoin ecology
The Bitcoin Hong Kong Conference just ended recently. The author had the honor to attend the event and listen to the sharing of these well-known BTC L2 in the industry. On the one hand, it was to attend the conference, and on the other hand, it was to answer his own doubts. He hoped to find the direction of BTC Layer2 with greater decentralization, greater data availability and greater security. Among them, two emerging BTC Layer2s that have attracted widespread attention have come into view.
First of all, I had a chat with a friend from BEVM at the event. Although I had seen the news that they had received financing from Bitmain before, and I also learned about Taproot Consensus because of my research on RGB, I was not particularly clear about their team background and specific situation.
In fact, they created ChainX in 2017, which brought BTC to Polkadot in a decentralized way and attracted more than 100,000 BTC to interact with the protocol. However, because it used a multi-signature scheme with 11 people to custody users' Bitcoin assets, there was a certain centralization risk. Later, because of Bitcoin's famous Taproot upgrade, BTC was given a more efficient, flexible and private transmission method, which made the ChainX team see a new BTC L2 construction method, and now the first BEVM network based on Taproot Consensus was created.
According to official information, BEVM has implemented a trustless BTC network solution through Taproot Consensus, and Taproot Consensus consists of three core functions: first, Schnorr Signature allows Bitcoin multi-signature addresses to be expanded to 1,000 (greatly improving security compared to ChainX's 11-person solution), thereby achieving decentralization of multi-signature addresses; secondly, MAST is used to implement the coding of multi-signature management, which does not rely on people to sign, but relies on code to drive; finally, the Bitcoin Light Node Network is used to drive multi-signatures based on the Bitcoin light node network consensus, achieving fully decentralized Bitcoin cross-chain and management.
Logically speaking, the implementation of Taproot Consensus is neither like the traditional sidechain nor the popular RGB. It seems to have opened up a new technical implementation logic. Of course, the author is not a professional technician and cannot judge from the technical pros and cons and code level, but at least he has seen a brand new solution. In addition, the BEVM core developer also mentioned BEVM-Stack at the event. This concept, which is somewhat similar to OP Stack, has caused a lot of discussion. After all, if one-click Layer2 is implemented on BTC, it may bring a new pattern to the development of BTC Layer2.
Another project that is often mentioned in Hong Kong is Mezo, which also completed a US$21 million Series A financing in April. The investors are also very impressive, led by Pantera Capital, with participation from Multicoin, Hack VC, Draper Associates, etc. It can be said to be a true representative of Western BTC Layer2.
Mezo uses tBTC as its foundation, which is a bridge between Ethereum and Bitcoin DeFi that has been around for several years. TBTC allows any user with BTC or ETH to create tBTC by using a network of signers. Unlike previous solutions, there is no centralized custodian for locked Bitcoins, signers are randomly selected, and a different group of signers is selected for each minted tBTC. Signers provide collateral to ensure that they cannot easily run away with funds, while ensuring the normal operation of the network through over-collateralization.
Therefore, as an ETH with the same value as BTC, tBTC acts as a bridge between Bitcoin and Ethereum. BTC holders can deposit BTC into smart contracts and receive tBTC. Mezo also uses tBTC to implement the functions of BTC Layer2. Although it is innovative, it is more like a "technical patchwork". The team that raised funds this time is also the development team behind tBTC, Thesis.
In addition, judging from the currently known information, Mezo’s security method still seems to be a multi-signature method, which is not very decentralized in a sense and is worth discussing.
Of course, the trust issue of BTC Layer2 is the stumbling block to its development. Although the old saying goes "use their own spear to attack their shield", we cannot use the advantages of others to belittle their disadvantages. From the perspective of industry development, how to expand the track and set an example are the goals of any project. To put it another way, if BTC Layer2 can achieve the effect of ETH Rollup, why worry about the failure of ecological development and the failure of realizing a BTC Layer2 with a scale of hundreds of billions?
Outlook
Although recent macro-financial changes have had a significant impact on the cryptocurrency ecosystem, causing the market value of Bitcoin to fall back to around US$1.2 trillion, this cannot stop the industry from moving forward, nor will it make people lose confidence in the development of the Bitcoin ecosystem. Although projects like Merlin seem to have set a "bad example" for the BTC Layer2 track, this will not prevent people from continuing to build BTC Layer2.
It should be noted that the development of ETH Layer2 is also full of difficulties, and it may even take one or two bull markets to consolidate this trend. However, once the technical direction and technical path are confirmed, its rising index will grow exponentially. Currently, BTC Layer2 is probably in this difficult climbing period.
From the perspective of utility, we need more ecological projects like BEVM that are "trustless", "native" and "safer". We also need old players like Stacks that continue to build to contribute fresh blood, and innovative projects like Mezo to add bricks and tiles to the track. Only when an ecological situation with a hundred flowers blooming appears can BTC Layer2 usher in a new spring.
“Pessimists are always right, optimists always move forward.” As long as we continue in the right direction, we will most likely see a real explosion in the Bitcoin ecosystem, rather than a short-lived hype. After all, the Pandora’s box of this trillion-dollar track has been opened. In addition to having expectations, all we can do is be more patient and persevere.
