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On the eve of the Bitcoin Layer2 explosion, what can we learn from Ethereum L2?

BlockBeats2024/05/14 09:18
By:BlockBeats


With the birth of the Ordinal protocol in 2023, Bitcoin, as the former "digital gold", has ushered in a new type of asset - "inscription". If Bitcoin is gold, then inscriptions are similar to products processed with gold and have unique value.


This native asset issuance method on the first blockchain quickly gained market popularity, not only deriving more asset issuance protocols such as BRC20, Atomical, Runes, etc., but also giving birth to well-known inscriptions such as ORDI and SATS, as well as many native NFTs of Bitcoin.


For a time, the Bitcoin ecosystem ushered in its own spring again, attracting a lot of funds, users and developers. However, after a period of development, there are indeed more and more assets on Bitcoin, and people have gradually realized the limitations of Bitcoin as a Layer1. On the one hand, Bitcoin itself does not support smart contracts, so it is difficult to expand richer application scenarios on Bitcoin by relying on inscriptions and other technologies.


On the other hand, Bitcoin's performance and mining fees have also become a huge obstacle to the further development of the Bitcoin ecosystem. During the active period of inscription gameplay, the transfer fee of Bitcoin will increase rapidly, and even begin to affect the normal transfer of Bitcoin. Moreover, if there are more application scenarios, it will further cause network congestion and long-term high mining fees.


Naturally, the craze set off by inscriptions quickly spread to the track of Bitcoin expansion, which also opened up another hot track-Bitcoin Layer2.


From pursuit to falsification, where is the road of Bitcoin Layer2?


Some old Bitcoin expansion plans have been paid attention to again, and new Bitcoin Layer2 projects have been proposed more and more. 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 fact that the inscriptions were still popular and took the lead in launching a Bitcoin Layer2, which was the Merlin Chain that became famous later.


Merlin Chain went online in February 2024 and soon launched the staking activity Merlin's Seal. In addition to Bitcoin and some inscriptions, the staking targets also include assets such as BRC420's blue box, which also triggered a surge in the blue box. Taking over the popularity of Bitcoin Inscription, Merlin Chain has gained a large amount of TVL after the staking was launched (data source: https://geniidata.com/ordinals/index/merlin). Within 30 days of the launch of the activity, the TVL exceeded 3 billion US dollars, and once reached 3.5 billion US dollars, becoming a popular star project in the Bitcoin ecosystem.


On April 19, the highly anticipated Merlin was finally listed. 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. This performance directly surprised everyone.


Soon after MERL was listed, Merlin opened the BTC unlocking function on April 25, and then its TVL fell sharply. It has now fallen to about 1.3 billion US dollars, a drop of more than 60%. The blue box that participated in the pledge before also plummeted from a maximum value of about 1 BTC to less than 0.05BTC.



As a star project of Bitcoin Layer2, it suffered a double plunge in currency 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. For the expansion of blockchain, Bitcoin is not the only ecosystem that is being explored. As the second-generation dragon of the veteran class, Ethereum was designed relatively early and also faced the dilemma of having to expand capacity. However, as Ethereum, which began to explore expansion solutions after Bitcoin, its Layer2 can flourish and emerge very actively. There must be something worth learning. Let's look forward to the development of Bitcoin Layer2 through the development of Ethereum's Layer2.


Looking back on the road to Ethereum's expansion


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 continuously 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 fees 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 is only applicable to both 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, so that even if A and B are not in the same channel, they can be connected through multiple channels in series through the network.


The Lightning Network is equivalent to the network version of the state channel. Ethereum has introduced the Lightning Network based on the Lightning Network of Bitcoin. However, the Lightning Network is an off-chain network and does not support smart contracts. Its main use scenario is still the transfer and payment function. In addition, the Lightning 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 sidechain technology fills the shortcomings of the Lightning Network. It is a form of blockchain and 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, if a sidechain node tampers with transaction records or refuses to execute transactions, it may cause incorrect results to be transmitted back to the main chain, which in turn affects the security and reliability of the system. Therefore, sidechains have data availability issues and are not widely recognized.


At 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 step ahead.


2. A ray of hope


In 2017, Joseph Poon (one of the proposers of the Lightning Network) and V God 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 sidechains, 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. 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 fallen into a bottleneck.


It seems that the solution that finally saw hope has fallen into trouble again. However, a year after the birth of Plasma, a new solution was quietly born. It was this solution that opened up the explosion of Layer2 in one fell swoop, and this is the Rollup technology.


Although Rollup is also built using Merkle trees and subchain structures, compared to Plasma, Rollup will package and compress all transaction records in the subchain and pass them to the main chain, instead of hashing like Plasma. Nodes on the main chain can directly access and verify the details of all transactions, not just the hash summary, so it provides strong enough data availability and transparency, thereby increasing the credibility and security of the system.


With the introduction of Optimistic Rollup, projects such as Optimism and Arbitrum based on this technology have been launched one after another. Since OP Rollup solves key problems 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 dare to participate in them in depth. 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 who may also 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 the OP Stack, a tool that can release Layer2 with one click. Any team can use this tool to release their own Layer2 more easily. Other teams that develop their own Layer2 have also released Layer2 tools based on their own projects, such as Arbitrum's Arbitrum Orbit, zkSync's ZK Stack, Polygon's Polygon CDK, etc.


As a result, more Layer2 needs were 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 may be a situation where the sorter acts maliciously and intentionally adjusts 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 Layer2, 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.


In theory, Bitcoin's Layer2 can also refer to the development of Ethereum's Layer2 to find its own "chain", and will also usher in a flourishing like Ethereum after the security and decentralization reach a level that is widely accepted by the market.


So what are the current Layer2 solutions for Bitcoin, and what new changes are worth paying attention to? Let us turn our perspective back to the Bitcoin ecosystem with the development experience of Ethereum's Layer2.


Dilemmas and breakthroughs in Bitcoin ecology


1. Current Bitcoin expansion dilemma


In the current Bitcoin ecology, we have not seen many professional organizations or institutions enter the market in large numbers, which is also because the security and decentralization have 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 by later generations. But as everyone knows, 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, which was born earlier and released a white paper in October 2015, but it did not become a solution that was later talked about, and it is no longer mentioned even 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 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 can’t forget another important role - Stacks. As a well-known Layer2 that claims to truly support smart contracts and can realize decentralized application development on Bitcoin, it has been the top player in the BTC Layer2 track since its launch in 2018. With the advent of the "Satoshi Upgrade", it has attracted enough attention in the industry, but the recent upgrade delay 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 of several mainstream BTC Layer2 solutions and representative projects in 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, which can be called a star track. However, so far, there are very few BTC L2s that are truly impressive and recognized by the public. They are either trapped in technical bottlenecks and development has been delayed, or they are like Merlin, which has opened high and fallen low and has been complained by the community. In addition, because it is not decentralized enough, big funds have never dared to get on board and are just "covering" on the periphery.


As we analyzed above, the reason why ETH Layer2 has achieved today's achievements is that it has a good balance between "decentralization" and "nativeness", which makes funds willing to enter the Layer2 ecosystem, thereby achieving the effect of "letting a hundred flowers bloom", and the current BTC Layer2 is also in such a dilemma and urgently needs to be broken.


2. Possible breakthrough directions for Bitcoin ecology


The Bitcoin Hong Kong Conference has just ended recently. The author had the honor to go to the scene to 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 my own doubts. I hope to find a BTC Layer2 direction with more decentralization, more data availability and more security. Among them, two emerging BTC Layer2s that have attracted widespread attention have entered my field of vision.


First, at the event site, the author had a chat with a friend from BEVM. Although I had seen the news that they had obtained 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 of 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 way to build BTC L2, and now the first BEVM network based on Taproot Consensus was created.


According to official information, BEVM implements a trustless BTC network solution through Taproot Consensus, which 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; second, MAST is used to implement the coding of multi-signature management, which does not rely on people to sign, but relies on code-driven; finally, Bitcoin Light Node Network is used to drive multi-signatures through 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 side chain method 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 advantages and disadvantages and code level, but at least he has seen a brand new solution. In addition, the core developers of BEVM 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 $21 million Series A financing in April. The investors are also very impressive, led by Pantera Capital, and participated by 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 different groups of signers are selected for each minted tBTC. Signers provide collateral to ensure that they cannot easily run away with the funds, while over-collateralizing the network to ensure normal operation.


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 stitching monster", and the team that raised funds this time is also the development team Thesis behind tBTC.


In addition, from the currently known information, Mezo's security method 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 that hinders development. Although the old saying goes "attack the enemy with his own spear", we cannot use the advantages of others to belittle the other party's 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 development of the ecosystem and why worry about not being able to achieve a BTC Layer2 of hundreds of billions?


Prospects


Although the recent macro-financial changes have had a lot of impact on the cryptocurrency ecosystem, and the Bitcoin market value has fallen back to around 1.2 trillion US dollars, 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 even requires 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", and we also need old players like Stacks that continue to build to contribute fresh blood, as well as innovative projects like Mezo to add bricks and tiles to the track. Only when a hundred flowers bloom in the ecological situation can BTC Layer2 usher in a new spring.


"Pessimists are always right, and optimists always move forward." As long as we keep going 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 100 billion track has been opened. In addition to embracing expectations, we can also be more patient and perseverant.



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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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