Why does Bitcoin need Layer 2? What is the current status of L2 development?

Author: Arjun Chand, Bankless; Translator: Tao Zhu, Golden Finance

Bitcoin development is exploding.

New primitives like Ordinals, Runes, and BRC-20 are taking center stage. This marks a major shift in the atmosphere of the Bitcoin ecosystem. It is evolving from focusing on BTC as an asset to a more vibrant ecosystem that offers people different things to use, build, and speculate on.

L2 is now the new hot thing in the Bitcoin ecosystem. Everyone wants a piece of the Bitcoin L2 pie.

In today's story, we'll zoom out and take a comprehensive look at the Bitcoin L2 scene. We'll answer key questions for those who are new to the concept of Bitcoin L2: The necessity of L2, their current status, future developments, and their final state. Let's take a deep dive!

Why does Bitcoin need L2?

The Bitcoin network was designed to prioritize security and decentralization, with tradeoffs around its scalability and expressiveness as a blockchain. While this makes BTC a more valuable asset, it also means the network is not an ideal infrastructure for building financial applications, as seen in Ethereum.

For nearly a decade, the Bitcoin community has struggled with scalability issues, with transaction costs reaching tens of dollars during peak network traffic. Today, demand for Bitcoin block space is exploring new heights, driven by experiments such as Ordinals, Runes, BRC-20, and more:

• Ordinals have caused Bitcoin fees to rise by as much as 280% since December 2023.

• Runes have accounted for 68% of Bitcoin's total transaction volume since Bitcoin's inception.

• Over the past year, BRC-20 has caused Bitcoin transaction fees to spike at times, with these fees accounting for 74% of the block reward at one point.

The vision of Bitcoin is to make it accessible and adopted by everyone. To achieve this, it must be able to scale to handle more traffic without incurring significant costs on each transaction. The growing demand for Bitcoin block space highlights the need for Bitcoin to scale, reflecting the need for Bitcoin L2.

The Current State of Bitcoin L2

The Bitcoin community has been actively working on improving transaction scalability for many years. A key development step in this area is the Lightning Network - a payment channel protocol that aims to enable faster and more affordable transactions by processing outside of Bitcoin L1.

While the Lightning Network has long been the flagship solution for Bitcoin's scalability vision, the community is increasingly recognizing its limitations. There is consensus that the Lightning Network may not be the ultimate scaling solution for Bitcoin, and that a better Bitcoin L2 is needed.

Eric Wall recently discussed the need for improved L2, suggesting that the future of Bitcoin scalability may extend beyond what the Lightning Network currently offers.

But where does this leave us? How can we build a more efficient Bitcoin L2?

BitVM’s Trust-Minimized Promise

Currently, the focus is on BitVM, a new model for executing Turing-complete contracts on Bitcoin that could pave the way for optimistic rollups on Bitcoin.

The main reason why the community supports BitVM over any other approach is its compatibility with the Taproot upgrade. This means that BitVM can be deployed without further modifications to the Bitcoin network, preserving the network's existing rules. It's a win-win for all types of people in the Bitcoin community.

BitVM's approach involves off-chain execution of transactions and features the ability to verify transactions within a challenge window via fraud proofs, a mechanism similar to Ethereum's optimistic rollups.

The system can operate even with a single prover, but there is a trust assumption that there must always be at least one honest validator in the system who can detect and broadcast malicious transactions. However, this also means that if all validators are compromised, the integrity of Bitcoin will be at risk as an attacker can publish fraudulent transactions on the network.

BitVM only allows the creation of trust-minimized Bitcoin L2s (such as optimistic rollups), but not trustless Bitcoin L2s (such as ZK-rollups). In addition, similar to optimistic rollups on Ethereum, BitVM faces challenges such as long dispute resolution times and the need for operators to lock up large amounts of funds to ensure liquidity for potential withdrawals.

Therefore, there is a certain degree of skepticism in the Bitcoin community about the practicality of BitVM. However, it is worth noting that BitVM is still in the early stages of development and has the potential to scale Bitcoin through optimistic rollups.

The Zero-Knowledge Proof Dream

This brings us to a major question — What will be the final state of Bitcoin L2?

But building ZK-rollups on Bitcoin is not easy, and even technically impossible right now…it would require changing the Bitcoin network via a soft fork, which we all know is easier said than done.

The soft fork would add a new opcode to Bitcoin that would enable it to natively recognize and verify zero-knowledge proofs, allowing for trustless interaction between Bitcoin and Rollups. However, as mentioned above, this is a major technical hurdle, and its feasibility remains uncertain.

But wait. Given that BitVM is still in its early stages, and ZK-rollups are neither optimistic nor possible on Bitcoin right now, how come we have so many Bitcoin L2s in our ecosystem?

Well, the reality is that, technically speaking, true Bitcoin Rollups don’t exist yet. What we’re seeing is a group of dedicated teams laying the foundation for the future Bitcoin L2.

For example, some Rollup teams, such as BOB, are taking a phased approach. They first bootstrap the ecosystem as an EVM Rollup, attracting users, liquidity, and applications. Then, once the technology matures, they plan to transition to optimistic rollups using BitVM, and eventually, they aim to evolve into zk-rollups, depending on whether Bitcoin undergoes a soft fork to add the necessary opcodes.

Summary

With the hype comes the potential for scams. Amid the hype, there are many projects falsely claiming to be Bitcoin L2, so it’s important for investors and users to be cautious. The jury is still out on whether many of the projects calling themselves L2 are actually L2, or if they are simply using buzzwords to attract venture and retail investment.

Nevertheless, it’s still an exciting time for the Bitcoin community. From the launch of a Bitcoin spot ETF, which marked a milestone for institutional adoption, to primitives like Ordinals, BRC-20, and Runes, the Bitcoin ecosystem is experiencing unprecedented growth and innovation.

The prospect of Bitcoin L2 adds to the excitement about the future of Bitcoin.