BTCLayer2: Sidechains and Rollups Become Mainstream Routes

According to statistics from l2.watch, there are currently over 80 Layer2 projects focused on BTC scaling. In this article, PANews will sort out Layer2 projects that follow different technical routes and introduce the latest project updates and financing situations of BTCLayer2.

Author: Weilin, PANews

BTCLayer2 is a second-layer blockchain network built outside the mainchain to improve the scalability, functionality, and transaction efficiency of the BTC blockchain. Although it is often compared to ETH's Layer2, it was not until May 2023 that more people believed in the road to BTC's expansion, with the experimental BRC20 Token standard based on Ordinalsprotocol gaining traction, which not only allows for launching coins based on BTC, but also enables more complex and sustainable application scenarios.

Currently, according to the statistics of l2.watch, there are more than 80 Layer2s focusing on the expansion of BTC. In this article, PANews will sort out the main projects of Layer2 following different technical paths, and introduce the latest project dynamics and financing situation of BTCLayer2.

The main technical route of the current Bitcoin Layer 2

State Channels

State Channels enable users to establish end-to-end encryption channels, facilitating multiple off-chain transactions between two or more participants, ensuring that only the first and last transactions are recorded on the BTC Blockchain, without the need to broadcast each transaction to the main Blockchain. Therefore, State Channels can achieve as low gas fees as possible and support greater transaction throughput.

Representing project: Lighting Network

Sidechain

Sidechain is a separate and independent blockchain that runs in parallel with the mainchain, allowing users to transfer assets (BTC) from the main blockchain to the sidechain. Once BTC is transferred to the sidechain, users can use these assets for smart contracts, token issuance, or implementing new consensus mechanisms. The sidechain will validate the information on the BTC main blockchain and perform subsequent operations. A two-way peg mechanism connects the sidechain and the BTC blockchain.

Representative projects: Established projects include Rootstock, Stacks; new projects include BEVM, Merlin Chain, Fractal Bitcoin, Liquid Network, Mint layer, Babylon, Bison, Botanix, Core, BounceBit, AILayer, etc.

Rollup

Rollups move multiple off-chain transactions from the main Bitcoin blockchain to a separate network, where they are processed and then submitted back to the chain as a compressed transaction. Unlike sidechains, Rollups periodically submit blocks to the mainchain, inheriting its security and decentralization features, but the average transaction processing capacity is generally lower than sidechains. Common types of Rollups include optimistic rollups, ZK-Rollups, and sovereign rollups.

Representative projects: B² Network, Bitlayer, BOB, Citrea, QED Protocol, Zulu Network, GOAT Network, Mezo, Bitfinity Network, Arch Network, etc.

UTXO+ Client Validation

UTXO+Client validation is a scaling solution for the BTC UTXO (Unspent Transaction Output) account model. It attempts to perform off-chain ledger calculations based on BTC UTXO and ensures the authenticity of the ledger through client validation.

In 2016, Peter Todd proposed the concepts of Single-use seal and Client-Side Validation, which led to the birth of the RGBprotocol.

The RGB++ approach is similar to RGB, where transactions are computed, executed, and verified off-chain, and then settled on-chain using BTC. Nervos leverages the same POW+UTXO structure as BTC and combines it with innovative 'homomorphic mapping' technology to successfully migrate RGB protocol's client-side verification to CKB. This allows Nervos to maintain the same level of security as BTC while expanding the functionality and flexibility of the RGB protocol.

Representative projects: RGB, RGB++ (UTXO Stack)

Note: In addition to the above technical routes, there is also a classification method that mentions the Layer2 technology path BitVM, represented by projects such as Bitlayer and Citrea. This article classifies these two projects as Rollup. Simply put, BitVM is a computational model that allows developers to run complex contracts on BTC without changing its basic rules. Since the concept of BitVM was proposed, up to the release of the White Paper in October 2023, it has attracted widespread attention from the BTC community. Under BitVM, computations will be executed off-chain with on-chain verification, similar to the optimistic rollup mechanism on the ETH network.

BTCLayer2 main project new progress

Lighting Network

The Lighting Network was first proposed in 2015 and began full implementation in 2018. Smart Contract applications can execute more transactions. The Lighting Network uses revocable sequence maturity contracts (RSMC) and hash time-locked contracts (HTLC) to address confirmation and payment channel issues for off-chain transactions.

Lighting Network has received widespread attention and adoption, but Lighting Network mainly focuses on BTC payment scenarios. On July 23 this year, Lightning Labs, the developer of Lighting Network, announced a significant update of Taproot Assets on Lighting Network, which enables Lighting Network to support multi-asset transfers other than BTC. Lightning Labs believes that this update is of great significance, as it can help bring the trillion-dollar stablecoin market into BTC, making the US dollar and world financial assets BTC-ized.

Stacks

Stacks (formerly known as Blockstack) was first proposed in 2013 and conducted its first Tokenissuance (ICO) in 2017. Stacks Network adopts the Proof of Transfer (PoX) Consensus Mechanism, which is an adaptation of the concept of Proof of Burn, involving Miners transferring BTC to ensure the security of the Stacks blockchain and receive rewards.

On August 28th, after months of latency, Stacks launched the long-awaited Nakamoto upgrade. This upgrade will increase the Block production speed of the Stacks network by 120 times, reducing the confirmation time of BTC from an average of 10 minutes to just a few seconds. This upgrade also prepares Stacks for the launch of sBTC, a 'Programmability-based BTC asset' that enables users to bridge their BTC to the Stacks network in a relatively decentralized manner. The sBTC code is expected to be completed in September.

Rootstock

Rootstock (RSK) was first proposed in 2015 and officially launched in 2018. In addition to Rootstock, the team has also developed various products based on RSK, including DEX, Wallet, domain services, and other dApps. These dApps are built on top of a universal protocol, covering payments, storage, computing, communication, and gateway/bridge. The goal is to establish a comprehensive RIF ecosystem (RSK infrastructure framework) and unify under RIF OS technology.

The Rootstock team closely follows the progress of the BTC ecosystem, especially the BitVM technology, which is the foundation of their upcoming BitVMX project. In addition, from 2024 to 2025, the team focuses on developing RBTC super applications to consolidate their latest progress in Decentralized Finance tools on the Rootstock network.

Merlin Chain

BTCLayer2 solution, launched by Bitmap Tech in February this year, integrates ZK-Rollup network, Decentralization Oracle Machine, and on-chain BTC anti-fraud module. Bitmap Tech's metaverse platform and Bitmap.Game and BRC-420 asset protocol have received positive feedback in this year's market.

At the end of August, Polyhedra Network, a ZK interoperable infrastructure, announced that its Decentralization verification network (DVN) has been integrated with Merlin Chain through LayerZero. After the integration, Merlin's more than 100 application ecosystems can benefit from ZK's secure interoperability.

On September 9th, Merlin Chain released its semi-annual report, reviewing its growth trajectory in the first half of 2024, including: $12 billion TVL, $16 billion bridge volume, 1.9 million on-chain Addresses, and 12.7 million transactions; TVL exceeded $3.9 billion within 50 days of the Mainnet launch (88% are native assets such as BTC, Ordinals, etc.), and the Market Cap of M-BTC reached $1.2 billion in the first half of the year; Asset volume exceeded $3 billion, and DEX Liquidity surpassed $78 million. It is reported that Merlin Chain plans to continue to focus on technology, ecology, and community in the second half of the year, promoting the sustainable development of the BTC ecosystem.

Fractal Bitcoin

Fractal Bitcoin improves transaction processing capacity and speed by recursively creating infinite expansion layers on the BTC mainchain using BTC core code, while maintaining full compatibility with the existing BTC ecosystem. According to data, the block confirmation time on the Fractal network is about 30 seconds, and the transaction processing capacity is said to be 20 times that of the BTC mainchain.

The Unisat development team has been continuously attracting follow from the market. The entire team is composed of developers who are proficient in BTC technology (such as SegWit, Lightning Network, and TAPROOT). The team's previous projects also performed well in the BRC20 trading market. The Token $PIZZA, which has undergone issuance, also performed well in the market, with investors including Binance and OKX.

On September 9th, Fractal Bitcoin's Mainnet officially went live, bringing renewed enthusiasm to the BTC ecosystem. As of 5:00 PM on September 12th, the total number of FB holding addresses on the entire network reached 200,165, with an increase of 79,484 addresses in the past 24 hours and a total of 118,454 active addresses.

RGB++

Recently, the first over-collateralization stablecoin protocol Stable++, based on RGB++, was launched, using BTC and CKB as collateral to mint RUSD, a stablecoin pegged to the USD. By leveraging the advanced Leap feature of RGB++, Stable++ achieves seamless asset transfer within the BTC ecosystem.

In addition, on August 23, the next-generation public Lighting Network Fiber Network, built on Nervos CKB and off-chain channels, was launched, which can provide fast, low-cost, and Decentralization multi-currency payments and peer-to-peer transactions for RGB++ assets.

Babylon

On August 22nd, BTCstakeprotocolBabylon launched the first phase of BTCstakeMainnet, bringing a third native use case for BTC assets beyond store of value and simple payments: stake to secure PoS networks and earn rewards. The launch of BabylonstakeMainnet's first phase caused BTC network gas to soar that evening, but also sparked more market thinking about the returns of the BTCstake project.

B²Network

B²Network was established in 2022 and is a BTCLayer2 network developed based on ZK-Rollup. It is compatible with EVM and enables EVM ecosystem developers to seamlessly deploy DApps. On August 28th, B² Network reached a strategic cooperation with Aptos and Echo Protocol to promote the expansion of BTCFi into the Move ecosystem. This cooperation is BTCFi's first attempt in the Move ecosystem.

Bitlayer

On March 29th, Bitlayer announced the launch of a $50 million ecological incentive plan to promote the development of its Mainnet ecosystem.

On September 2nd, Bitlayer announced the official launch of its ecosystem application center - DApp Center. The Bitlayer App Center aims to create a one-stop platform for users to explore and experience innovative applications in the Bitlayer ecosystem. The App Center is an important portal for the Bitlayer ecosystem, gathering the latest and most popular applications.

Financing situation of BTCLayer2 in the past 5 months

In the past 5 months, there have also been frequent investments and financing in the BTC Layer2 track, with 14 public financings totaling over $71.1 million. The highest financing amount was $21 million in Series A for Mezo.

On August 22, the BTCL2 project Ark Labs raised $2.5 million in Pre-seed round; on August 22, the BTCLighting Network payment startup TMRW announced the completion of a $1.3 million Pre-Seed round of financing; on July 26, the BTC expansion network Mezo completed a $7.5 million financing, led by Ledger Cathay Fund. In addition, Bitlayer, BOB, QED Protocol, also demonstrated a good ability to attract capital and received favor from investors.

Currently, active VC in the BTCLayer2 field include Draper Dragon, ABCDE Capital, Ledger Cathay Capital, Waterdrip Capital, Polychain, etc. Some well-known domestic investment institutions such as Hashkey Capital, OKX Ventures, and Binance Labs also have a significant presence.

In general, at present, there are many BTCLayer2 projects, and even the phenomenon of "Inflation" has emerged. The technical routes adopted by various projects are different. Well-known BTC Layer 2 projects such as Stacks and Rootstock were established relatively early and have explored related technologies for a long time, but the projects currently lack more highlights. With the maturity of the BTC basic protocol, projects such as Merlin, RGB++, and Babylon are making the BTC ecosystem more diverse, which also brings more possibilities for the development of Layer2.

However, the development of BTCLayer2 also faces some bottlenecks. In the view of Haotian, an independent researcher at CryptoInsight, the chaotic market of BTC layer2 has not really brought significant increment to the BTC ecosystem. When the market falls into silence, there are occasional controversies about whether BTC layer2 is a false proposition. Although the lack of standards gives BTC layer2 more possibilities for opportunism, directly stitching mature expansion solutions onto the already limited BTC Mainnet may not necessarily feedback the expansion gains of the second layer to the Mainnet, but may instead harm the BTC Mainnet user community due to security and stability issues. In his view, the prosperity of the BTC layer2 without standards phase is about to pass, and the BTC layer2 will evolve towards a direction with higher technical barriers in the future.

As Haotian said, the narrowing of the technical standards for Layer2 may be a trend for future development. At present, challenges and opportunities coexist. In the future, we still look forward to more Layer2 projects that can "break through", bringing more innovation and surprises to encryption users and the market.

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