Why Scale Up?

Bitcoin has several major performance limitations:

1. Slow Transaction Processing: Bitcoin's blockchain can generate a new block only every 10 minutes at most. This means a transaction takes at least 10 minutes to be confirmed by the network, which is too slow for many applications.

2. Low Throughput: Bitcoin's block size is limited to 1MB, theoretically handling about 7 transactions per second. This is several orders of magnitude lower than the Visa network's capacity.

3. Limited Smart Contract Capability: Bitcoin's scripting system is insufficient for implementing complex smart contract logic. It only supports basic conditional statements and verification, not Turing completeness.

4. High Transaction Costs: Bitcoin's transaction fees depend on the size of the transaction and network congestion. During busy periods, fees can be quite high, limiting Bitcoin's use in scenarios like micropayments.

These performance limitations have spurred research and innovation into new blockchain technologies to create faster, cheaper, and more scalable digital currencies. However, improving performance also faces challenges in security and decentralization.

Why Not Scale On-Chain?

Scaling Bitcoin on-chain has been controversial, primarily due to difficulties in achieving community consensus. This is mainly reflected in the following aspects:

1. Community Governance: The Bitcoin community is deeply divided on the issue of scaling. With Satoshi Nakamoto's disappearance for many years, core developers and miners do not have absolute decision-making power. Scaling requires community consensus, which is very hard to achieve. The Bitcoin community consists of various stakeholders, such as miners, developers, and holders, and coordinating these different interests is challenging.

2. Decentralization and Security Priority: Bitcoin's decentralization relies heavily on the decentralization of its nodes. If the block size is too large, the cost and barrier to running a node increase, threatening decentralization. Some developers and community members believe that maintaining Bitcoin's decentralized nature is far more important than increasing transaction speed.

Overall, scaling Bitcoin involves complex issues related to its technical attributes, community governance, and economic model. The complexity of interests and divergent positions make achieving consensus and advancing scaling difficult.

Pre-Bitcoin L2 Scaling

Due to the difficulty of on-chain scaling, various blockchain projects have emerged to find solutions to the on-chain scaling problem, meeting the growing user demand while maintaining security and decentralization.

1. Ethereum: Vitalik Buterin proposed Ethereum in 2013 to create a more general and flexible blockchain platform supporting smart contracts. While Ethereum wasn't directly intended as a Bitcoin scaling solution, it filled the gap for complex smart contracts and decentralized applications that Bitcoin couldn't accommodate. Ethereum is also working on scaling solutions like sharding and Rollups.

2. Bitcoin Cash (BCH): By increasing the block size limit, BCH significantly increased the transaction processing capability on-chain. When BCH forked in 2017, its block size limit was raised from 1MB to 8MB and later to 32MB. This reduced transaction congestion and delays but also sparked debates about security and decentralization.

What is Bitcoin L2 Scaling?

Bitcoin L2 encompasses a range of scaling protocols and technologies built on top of the Bitcoin blockchain. It aims to scale and extend functionality by moving some transactions and state transitions off the Bitcoin main chain to a second layer.

Early discussions on Bitcoin scaling didn't frequently use the "L2" concept but focused more on specific on-chain and off-chain scaling solutions like sidechains and payment channels. With the surge of interest in inscriptions and the rapid development of Ethereum Layer 2 technologies, many projects and funds have started using the term "Bitcoin L2" to refer to various Bitcoin scaling solutions.

Early Bitcoin L2 Scaling Solutions (Before 2023)

- State Channels: Solutions like the Lightning Network, one of the earliest off-chain scaling attempts, allow users to conduct quick, off-chain micropayments within a payment channel.

- Sidechains: Sidechains run parallel to the Bitcoin main chain, enabling faster and cheaper transactions by locking Bitcoin on the main chain.

1. Liquid Network: Launched by Blockstream, Liquid aims to provide faster transaction confirmations and greater capacity, supporting fast transactions of Bitcoin and other assets using a federated model and multi-signature technology.

2. Stacks (STX): Built on the Bitcoin blockchain, Stacks introduces smart contracts, allowing developers to create decentralized applications. Stacks contracts can read Bitcoin Layer 1 transactions and respond to them.

3. Drivechain: Proposed by Paul Sztorc, Drivechain allows Bitcoin to be locked on the main chain and transferred to sidechains for more flexible operations, enabling custom sidechains based on specific needs.

4. RGB: Using client-side validation and the concept of single-use seals, RGB aims to enable Bitcoin's double-spending protection and censorship resistance through off-chain verification and transfers.

Recent Bitcoin L2 Developments (Since 2023)

Since May 2023, the explosion of inscriptions and related protocols has revitalized Bitcoin as a focal point in the blockchain industry, leading to a surge in Bitcoin L2 projects. The trend has been towards mainnet-Ordinal(BRC-20)-L2-dApp development, with over thirty new Bitcoin L2 projects emerging in 2023 alone.

Key recent developments include:

1. Sidechain Approaches with EVM Compatibility:

- BEVM: Utilizes Taproot technology, combining Schnorr signatures, Mast contracts, and a 1000 BTC light node POS network for decentralized cross-chain asset management.

- BitmapTech Merlin Chain: Develops solutions for cross-chain interactions and asset transfers.

2. Rollup Solutions:

- Bison Network: A ZK-STARK sovereign Rollup built on Bitcoin, using ordinals for data storage and DLC for asset custody.

- B² Network: A ZK Rollup mixing "commitment challenge" with zkEVM for smart contract logic.The network is divided into two layers, the Rollup layer and the DA layer. The Rollup layer uses zkEVM to run smart contract logic. Promises are generated through ZK technology and placed on top of the Bitcoin network, allowing for challenges, similar to fraud proofs.

3. Data Availability (DA) Solutions:

- Nubit: To put it simply, Nubit organizes a Celestia-like DA chain by running POS consensus, and regularly uploads Nubit's own DA data such as block headers, transaction Merkle tree roots, etc. to BTC L1. Data is stored off-chain, and the node is open, so as long as there is an honest node, the network can be guaranteed.

Bounce Finance's involvement with domo is in the spotlight.

Information:

https://drive.google.com/file/d/1TCsN7MvvuC6dqrAxbro-9dg9lS-icxFu/view

4. Restaking Approaches:

- Babylon Chain: Allows BTC staking for economic security in POS chains, enabling BTC holders to secure other chains through cryptographic means without relying on third-party bridges or custodians.So the money is still in the user's wallet, but it is locked. When BTC pledger runs a node of a POS chain, after verifying the only valid block, it is signed with the EOTS private key. If the pledger (who is also the verifier of this POS chain) keeps honesty and only signs one valid block at a time, then it will be rewarded by the verifier of the POS chain; If it tries to do evil and signs two blocks at the same height, then its EOTS private key will be reversed, and anyone can use this private key to transfer the pledged BTC to the BTC chain to realize the confiscation.

Market Focus and Trends

Current focus areas for BTC L2 include:

1. Security from L1: Ensuring L2 inherits security from Bitcoin L1 is critical but challenging without L1 executing computations to verify L2 actions.

2. Trust-Minimized Bridging: Safe and trust-minimized bridging between L1 and L2 remains a key challenge, as Bitcoin lacks the capability for L1-protected bridges akin to Ethereum's smart contracts.

Emerging trends include:

1. Modular Approach: With the explosive growth of the BTC ecosystem, modular solutions, such as BTC-specific DA layers, are becoming prominent to maintain consistency and scalability.

2. Bitcoin MEV Development: As BTC L2 grows, opportunities for MEV in Bitcoin chains are increasing, particularly with BRC-20 and runes gaining popularity.

3. Aggregate Yield DeFi Applications: More BTC L2 projects are requiring BTC staking, creating underlying yield opportunities. Platforms like BounceBit collaborate with CeFi to generate yield from staked BTC assets.

4. Bitcoin Restaking: Innovations like Babylon Chain allow BTC staking to secure other chains, providing new opportunities for BTC holders to earn rewards.

By leveraging these emerging trends and technologies, Bitcoin L2 projects aim to address the scaling challenges while maintaining the core principles of security and decentralization.

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