Which layer is your bitcoin? Current paths to scaling the original cryptocurrency

In 2023 the Ordinals project delivered rich fee income to miners and revived the debate about scaling the first cryptocurrency. A culture of building on digital gold spurred a trend to create L2 networks atop bitcoin—Bitcoin Layers (BL). By August 2024 nearly a hundred such efforts existed.

ForkLog examined the main methods for scaling bitcoin, potentially bringing about $1.2 trillion of liquidity into DeFi.

Why scale bitcoin

Satoshi Nakamoto envisaged bitcoin as a secure, decentralised means of payment. But low transaction throughput and limited smart-contract programmability left it trailing blockchains such as Ethereum. The concept of Bitcoin Layers was proposed to address these issues.

There are two main approaches to improving the original cryptocurrency:

• base-layer changes. This implies restoring previously removed or adding new opcodes such as the debated OP_CAT and the already implemented OP_RETURN. Many BL protocols use the latter; Ordinals and the BRC-20 token standard were built with it. Such changes can expand the ecosystem without sacrificing security. They also enable smart-contract programmability, increase transaction speed and simplify the creation of Bitcoin Layers;

• BL solutions. Resorting to cross-chain bridges entails some security trade-offs owing to reliance on third parties, but brings notable benefits. Many sidechains adopt a modular architecture in which the data-availability (DA) layer sits, for example, on the Celestia blockchain, while other computation is performed on bitcoin’s L1. Conversely, rollups tend to choose a more resource-intensive, costly but safer approach: DA on the base bitcoin chain, with other environments processed in parallel off-chain to boost speed and scalability.

To understand BL it helps to recall the functional layers of a blockchain: consensus, DA and execution. Each is handled in its own environment (layer). Once all stages complete, the blockchain updates the data processed in the latest block by miners and the transaction is final.

On bitcoin, all processes occur on the base L1; overlays such as rollups and sidechains can assume part of the workload.

BL bring the following to the first blockchain:

• smart-contract programmability. Enables complex transactions directly on bitcoin;
• transaction speed. Significantly reduces waiting times; some BL complete in under 30 seconds;
• minimised trust when moving BTC to L2. Provides safe and efficient transfers of digital gold to external networks and tackles centralisation issues tied to federated models;
• cost efficiency. Cuts transaction expenses;
• asset issuance and rollups. New capabilities for minting coins and batching transactions;
• interoperability and privacy. Improves connectivity with other blockchains and safeguards user confidentiality;
• virtual machine and specialised features. Supports a variety of dapps including GameFi, DeFi, DeSoc and DeSci.

Scaling technologies

The past two years have brought a flurry of new bitcoin-scaling technologies. With so many “-chain” names, terminology gets confusing, so start with the core approaches to Bitcoin Layers:

• state channels. Create end-to-end encrypted channels for sending and receiving payments. Transactions occur off-chain; only the initial and final balances are posted to the main network, reducing load and boosting efficiency. Solutions such as Lightning Network enable near-instant, near-free transfers between participants;
• optimistic and ZK rollups. Bundle multiple off-chain transactions into a single data fragment later attested on bitcoin. This improves scalability and raises throughput significantly;
• sidechains. Independent blockchains with their own consensus mechanisms. They connect to the base layer via a two-way bridge. Users can move assets between networks thanks to L2 add-ons and expanded bitcoin functionality.

Sidechains as a BL implementation have drawn criticism because true L2s are initially defined by the ability to exit unilaterally—withdraw BTC from the second layer without trusting a third party.

Janusz, a co-founder of the Bitcoin Layers platform, expressed scepticism about L2 prospects on bitcoin in an article for Bitcoin Magazine. In his words, only some new projects bring innovation—such as the ZK rollups Citrea and Alpen. The rest, he argued, are mostly sidechains building solutions that vaguely resemble Ethereum L2s, compromising on security and failing to scale bitcoin.

Sidechains come in many new guises with varying security and convenience:

• drivechains. A technology proposed by LayerTwo Labs co-founder Paul Sztorc in bitcoin-improvement proposals BIP-300 and BIP-301. Miners act as custodians with the ability to unfreeze BTC for moving back to the main chain—“blind” merged mining;
• softchains. Sidechains that rely on bitcoin’s consensus while allowing certain modifications, remaining compatible with the main network;
• spiderchains. A method for decentralised, minimally trusted sidechain governance with the option of merged mining. It follows a “channels” or “web” concept in which each node can decide independently. This self-governing design demands substantial compute;
• spacechains. Modular, fully independent sidechains operating in their own space. Independent space blocks can be used for data storage or smart-contract execution. Flexibility, scalability and the creation of independent chains may introduce compatibility issues;
• federated sidechains. One of the earliest implementations, in which a federation of trusted participants controls asset movements between mainnet and the “side network”. High performance comes with centralisation and reliance on the federation.

Each approach has distinct trade-offs. The choice depends on use-case goals, the desired level of decentralisation, security requirements and functionality. Drivechains and softchains, for instance, promise greater decentralisation, whereas federated sidechains are simpler to deploy but more centralised.

Pioneers

According to a report by The Spartan Group, four solutions laid the groundwork for BL’s development: Stacks, Lightning, RSK and Liquid. Later the BitVM protocol made a significant contribution, spawning its own ecosystem.

BitVM

On October 9, 2023 Robin Linus of ZeroSync unveiled BitVM, a concept that enables arbitrary computation on bitcoin without changing consensus.

BitVM moves all computation off-chain; on mainnet one can only dispute an unfair result. The solution renders bitcoin Turing-complete, akin to the EVM, and allows sovereign rollups without relying on base-layer smart contracts or computation for verification. In essence it is a framework that introduces peer-to-peer interaction with the native network and a slashing system for false proofs.

On August 15, 2024 BitVM2 and a BTC cross-chain bridge tool were presented. According to the developers, a refined design made the bridge simpler and more capital efficient. The new version requires less liquidity, locked for a shorter time.

Rootstock

An EVM-compatible sidechain launched by RSK Labs in 2015. To pay gas, RSK uses a synthetic two-way-pegged version of BTC—Smart Bitcoin (RBTC). It is mined via merged mining.

The consensus protocol lets miners produce RBTC alongside BTC and earn extra fees. The two-way peg automatically transfers BTC between mainnet and the sidechain by locking BTC on the base chain.

In May 2024 the sidechain’s founder Sergio Demian announced plans to deliver a new version, BitVMX, within 12 months. It will presumably enable programmable smart contracts, aggregated oracles and SNARK/STARK solutions.

Key Rootstock projects:

• Rootstock Infrastructure Framework (RIF). A suite of protocols for building dapps, RNS Name Service, RIF Wallet, RIF Lumino Network for third-layer state channels, RIF Marketplace for decentralised services and the RIF governance token;
• Sovryn. A DeFi platform for trading, lending and borrowing, with SOV as the governance token and DLLR as the stablecoin;
• Money on Chain. Implements smart contracts to create stablecoins, using MOC for governance and RBTC as collateral for DOC (Dollar on Chain), an ERC-20 stablecoin pegged to the US dollar.

Stacks

Stacks is currently neither a sidechain, nor a state channel, nor a rollup. It is closer to an abstraction layer or software stack atop bitcoin.

It links to BTC via the Proof-of-Transfer (PoX) consensus, which operates alongside Proof-of-Work, processing transactions on the network and anchoring Stacks block metadata to base-layer blocks.

Both BTC miners and STX holders participate in this dual-security mechanism; the latter contribute to consensus and earn bitcoin through staking. The overlay adds functionality to digital gold but does not provide confirmations on the base network.

On August 28, 2024, preparations began for the Nakamoto upgrade, which could add about $70 billion to bitcoin DeFi. The plan entails several fundamental changes: a 100x increase in transaction speed and a reduction in confirmation time from 10–30 minutes to roughly five seconds.

Key Stacks protocols:

• ALEX Lab. The main DeFi hub on Stacks, featuring a DEX for trading BRC-20 tokens, a launchpad and a BSC bridge;
• Hiro. Developer tooling for bitcoin-based apps, including deployment and scaling solutions, plus the Stacks Leather wallet;
• Arkadiko. Offers USDA, a stablecoin overcollateralised by STX, with plans to integrate ALEX and sBTC.

Lightning Network

A peer-to-peer protocol launched in 2018 by Lightning Labs to create payment channels between two parties. To open a channel, the parties lock some BTC that is then used for transactions between them.

Operations occur off-chain without miner confirmations, allowing unlimited transfers while the channel remains open. Channels may be closed by mutual consent or unilaterally, with a final bitcoin transaction settling the closing balances.

Lightning is widely used for transfers between centralised exchanges, in P2P and retail, and remains bitcoin’s most successful L2. According to Bitcoin Layers, it is the only protocol that does not raise security concerns. Bitcoin developer Antoine Riard takes a different view, having discovered a vulnerability in LN payment channels. The attack vector can steal funds from a channel participant due to inconsistencies between separate mempools.

An analogous project in development is Hedgehog. It uses an alternative state-channel model with support for asynchronous payments.

Liquid Network

Launched in 2018 by Blockstream, the federated sidechain Liquid Network enables fast, secure and confidential bitcoin-based transactions. The protocol has its own ledger and relies on consensus by a federation of about 60 members who produce new blocks. The native coin, Liquid Bitcoin (L-BTC), is a wrapped version of BTC.

In the industry’s push to scale bitcoin, a second-layer trilemma has emerged:

1. use an open network or a federation;
2. introduce a new token or not;
3. use a full/global virtual machine or constrained off-chain contracts.

For three protocols, the results look as follows:

• Lightning Network — A and B, but lacks a full VM;
• Stacks — A and C with the STX token;
• Liquid — B and C, but operates as a federation.

The industry has already tried to square this circle by using existing bitcoin miners to produce blocks on the second layer. Rootstock and drivechains are examples pursuing such initiatives.

In this model, incentives for miners remain uncertain—much like early Ethereum L2s, where gas fees were insufficient, especially at the outset.

New experiments in scaling bitcoin

Innovators and pioneers have built a solid base for active experimentation. Building on bitcoin is spawning a multitude of projects across infrastructure, standards and protocols. Several players stand out.

Merlin Chain is one of the first sidechains with ZK-rollup technology on bitcoin, a decentralised oracle system, plus DA and fraud-proof modules. The protocol unlocks the potential of native BTC assets inside EVM-compatible dapps.

Projects built on external networks can be ported to Merlin with minimal code changes. The MERL token launched on April 19, 2024.

According to risk analysis by Bitcoin Layers, there is a high security threat across all four points, despite Merlin Chain leading BL by value locked—with more than 14,500 WBTC.

Merlin is essentially a Polygon CDK implementation with Polygon zkEVM privacy, delivered via the Rollup-as-a-Service provider Lumoz. The sidechain faces issues with code and smart-contract verification; it also secures its network with its own resources rather than relying on bitcoin’s authoritative consensus.

Core Chain. An EVM-compatible sidechain that, at the time of writing, leads by TVL with more than 5,100 BTC. It uses the Satoshi Plus consensus, combining DPoW and DPoS. Governed by Core DAO, it uses the coreBTC token.

BitLayer. A federated sidechain with 21 members and its own DA. One of the first protocols to inherit BitVM. In Q4 2024 it plans to transition to L1 bitcoin verification with the rollout of its mainnet v2. According to Bitcoin Layers, as of September 2, 2024 the project’s TVL exceeds 4,400 BTC.

Build On Bitcoin (BOB). Billed as the first hybrid L2 operating on both bitcoin and Ethereum. The BOB rollup ecosystem seeks to harness digital gold’s security while offering deposits/withdrawals, stablecoins, NFTs, DeFi and other EVM-compatible features.

BOB has completed the first phase of its roadmap, launching an optimistic EVM rollup using OP Stack. Settlement occurs on Ethereum L1, while BOB tracks bitcoin state via a light client, enabling cross-chain swaps and contracts between the networks.

The roadmap culminates in BOB’s own version of a BitVM rollup. Through BOB Gateway, users can move from BTC to WBTC and liquid-staking tokens.

BitcoinOS. A hybrid superchain scaling technology that enables interoperable rollups, dapps and DAOs, providing privacy via zk-SNARK—BitSNARK.

In July 2024 the protocol successfully verified the first ZKP transaction on bitcoin mainnet. The solution allows developers to build “almost trustless bridges” for moving BTC between mainnet and L2.

Ark. A ZKP protocol introduced in May 2023. It enables off-chain BTC payments with anonymity via a trust-minimised intermediary—the Ark Service Provider (ASP). ASP supplies inbound liquidity for recipients without requiring them to acquire coins. The protocol preserves privacy at lower cost than Lightning Network.

Babylon. Built on Cosmos SDK, the protocol integrates bitcoin’s security and consensus into the Cosmos ecosystem. Presented at Cosmoverse 2023, it offers BTC staking without bridges. On August 16, 2024, the first mainnet phase launched with self-custody of the asset.

Botanix. A PoS spiderchain using a distributed network of decentralised multisig contracts. To raise decentralisation and security, the technology uses bitcoin as the base layer, stabilising the two-way BTC peg.

The Solana team has also shown interest in scaling bitcoin. In May 2024 the release of Molecule introduced an SVM-compatible ZKP solution on bitcoin. The developers aim to deliver a cheap, fast programmable layer for dapps on digital gold.

Conclusions

In early August 2024, Galaxy Research questioned the viability of bitcoin L2 scaling. Analysts cited the high cost of data posting on the base layer and the 4MB block-size constraint shared by all users. In response, BOB co-founder Alexei Zamyatin offered a different view—using the modular Celestia blockchain or a sidechain such as Botanix, as well as merged-mining designs.

Technologically, quality now matters more than quantity, which is already ample. One must consider how a trillion of capital could boomerang on investors if BL security mechanisms are poorly built. In that case, neglecting DYOR could become a lever for a market rout.

Financially, BL could well drive the next bull cycle. According to BTCL2.info, at the time of writing the total value locked across all 77 listed solutions exceeds $2.9 billion.

Under base-case market conditions, TVL in bitcoin scaling solutions could reach $24 billion in 2025, and as much as $48 billion in a bull market.

Text: Sergey Golubenko