BTC L2 paradigms and genres: Rollup-like will eventually win

General L2 being able to move up and down is the key.

Written by Zuo Ye

Starting from May 2023, the explosion of Inscription and its various derivatives protocols has made Bitcoin a new highland for entrepreneurship in the blockchain industry. In this wave, the “legitimacy” established by Bitcoin UTXO transactions and Ethereum’s The “migration” of the Fang series of innovations that feed back Bitcoin are two major features.

In terms of legitimacy, Ordinal (inscription) and Runes (runes) are protocols created by its author Casey Rodarmor for Bitcoin NFT and FT respectively. However, Runes is still under development, but the wave has arrived, and BTC L2 has gradually started to spread. potential.

In terms of mobility, almost all the circulation parts of Bitcoin asset issuance are connected to the EVM ecosystem. Therefore, it has become an industry consensus to learn from Ethereum’s L2 development ideas. Furthermore, ZK/OP are included in the package, but with Ethereum The road to expansion is similar, with many runners and few innovators.

The core of BTC L2 lies in the determination of paradigms and genres. Only by determining the specific technical direction can we bet on high-quality projects. At present, BTC L2 is still in the initial stage where the concept is greater than the reality.

The purpose of writing this article is to outline the possible development direction of BTC L2, rather than to list the current projects, and it will not involve too many technical principles (this article does not contain formulas and codes beyond the elementary school level, so you can eat with confidence~).

Bitcoin needs to expand, but “add water if there is too much water, add water if there is too much water” is not feasible

Before BTC L2, the more mainstream expression was “expansion” because Bitcoin’s weak TPS could not accommodate slightly larger-scale transactions, such as high-frequency micropayments, expensive Gas Fees and snail-like confirmation speeds. People can’t stand it, at least some people can’t stand it.

Expansion is imperative, especially in 2017-18, which gave birth to the two major fork projects of BCH/BSV, which in turn forced the SegWit upgrade of the Bitcoin main network. For the first time, Bitcoin made a decision that went against its ancestors - block Expanded to 4MB instead of 1MB designed by Satoshi Nakamoto.

According to Satoshi Nakamoto’s design, a Bitcoin block header without transaction information is about 80 bytes. According to the block generation time of 10 minutes, each block will only generate approximately 4.2 MB of data per year. After SegWit expansion, The data volume will increase to 16.8 MB, but the improvement in TPS is minimal, still hovering in single digits.

The paradox arises here. The improvement of TPS also requires the cooperation of a series of conditions such as hardware and network speed. If this speed is maintained, in order to achieve better transaction speed, Bitcoin will need to continue to expand and eventually become centralized.

Insightful people believed that capacity expansion should be stopped and instead seek L2. From this, the first wave of L2 craze was born, and the idea of Lightning Network also sprouted at this time.

Bitcoin, Ethereum, Dogecoin and Litecoin- data comparison

As shown in the figure above, Ethereum is the product of Vitalik’s suggestion that Bitcoin support smart contracts was rejected. LTC, BCH and Dogecoin are all variants of Bitcoin, which are nothing more than subtle differences in reducing difficulty and increasing speed.

However, certain key elements are missing, which has led to twists and turns in the process of establishing L2 in Bitcoin. The main problems are two:

1. The Bitcoin development language lacks Turing completeness and is difficult to support any complex functions;
2. Due to hardware level limitations in 2008, the Bitcoin mainnet is indeed too slow and needs to be improved;

Turing completeness actually refers to computability. The popular understanding is that complex problems can be calculated within limited rules, such as setting up automatic transfers. Ethereum relies on smart contracts to set a rule and it can be executed automatically. However, Bitcoin It is a public ledger that can only keep accounts and cannot set up automatic transfers. This brings absolute security, but it also leads to extreme inefficiency.

The Bitcoin mainnet is very slow and the support functions are too limited. Therefore, the SegWit upgrade was first implemented, which greatly expanded the block space, and then the Taproot upgrade was implemented. Inion, which Inscription relies on, is actually similar to code comments, and it also benefits from this.

Based on this, we can first establish a minimalist framework for Bitcoin expansion-L2 development, and then gradually fill in the details:

1. In 2017/18, L2 carried out early attempts: Lightning Network, ChainX, Stacks (established in 2015);
2. After the Taproot upgrade in 2021, some L2 attempts based on this were born, and EVM compatibility became standard, such as Liquid Network (forecast in 2020);
3. After the popularity of Inscription in 2023, many L2 practices in Ethereum, such as ZK/OP Rollup, WASM, and multi-signature bridges, and EVM are fully popularized, such as BitVM, BEVM, and Interlay V2. Generally speaking, Rollup-EVM exploration will feed back Bitcoin. stage.

In addition, it should be noted that the division of the three stages is not a substitution relationship, but more of an integration. For example, the current BTC L2 basically covers EVM, but the implementation ideas are different. This article does not detail the history, but only selects Interpret representative plans.

General L2: Being able to move up and down is the key

In a nutshell, the current BTC L2 can be divided into four categories, namely Lightning Network, Bridge, Smart Contract (early based on the main network, now similar to Rollup) and side chain. This division method has nothing to do with technology. It mainly examines how to connect to the EVM ecosystem. Different from Ethereum L2, the first consideration is how to connect to the main network. BTC L2 needs to link to the Bitcoin main network and L2 itself. and EVM three layers.

BTC L2 Paradigm Deconstruction

Among them, the Lightning Network cannot be connected to EVM. The Lightning Network is also the BTC L2 that is most similar to Ethereum L2, but now it is an outlier. In addition, the remaining BTC L2s ideas can be included in the picture above. At the same time, it is not the smart contract class that can support EVM. The above division is only for convenience of explanation to highlight the characteristics of other types.

In terms of development ideas, BTC L2s all need to consider the issue of upper and lower channels, that is, how to let BTC settle in their own L2, bear the actual use of BTC flowing into EVM, and how to transmit the final results back to the Bitcoin mainnet transaction. With the absolute security of using Bitcoin.

Here, we will focus on the WBTC and Lightning Network mechanisms. Subsequent solutions can be regarded as decentralization of the former and general transformation of the latter in a sense. WBTC solves the problem of BTC entering. The problem with EVM and DeFi is that it is in a centralized manner. The Lightning Network ultimately uses Bitcoin for settlement, and the security after settlement is exactly the same as the main network.

BTC L2 Function Description

How WBTC works

WBTC, the full name of Wrapped Bitcoin, is an ERC-20 token circulating in Ethereum, which is supported by BTC 1:1. Operationally, it consists of users - listings - custodians. The specific functions can be divided into acceptance, minting and redemption:

1. To accept WBTC, users need to apply to the merchant. The merchant will conduct KYC and AML on the user and then confirm the identity. Then the user will send BTC to the merchant, and the merchant will send WBTC to the user;
2. To mint WBTC, the merchant applies to the custodian, the merchant sends BTC to the custodian, and the custodian sends WBTC to the merchant;
3. To redeem BTC, the merchant applies to the custodian, the custodian returns the BTC to the merchant, the merchant destroys the WBTC, the custodian confirms the merchant’s destruction, and the transaction ends.

It can be seen that WBTC operates based on custody and centralized verification. Although there are factors such as DAO, multi-signature and circulation anonymity, it is generally similar to USDT. It is the logic of traditional finance that penetrates into the blockchain, and it is difficult to serve as the cornerstone of BTC L2. .

WBTC Operational Structure

Settlement principle of Lightning Network

As mentioned earlier, the Lightning Network ultimately used the Bitcoin mainnet for settlement. Specifically, the Lightning Network opened multiple pledge nodes for BTC and built a PoS-like operating network on top of Bitcoin, which can establish P2P off-chain The transaction channel does not need to be confirmed in real time, so it is extremely efficient, and the Gas Fee is very low. The off-chain transaction channel will only be closed when the two parties finally want to settle. After entering the final on-chain settlement link, the transaction parties need to actually transfer BTC.

Therefore, the Lightning Network takes into account the security of Bitcoin and the convenience of transactions. Of course, the Lightning Network still has security risks because it is not a real-time settlement. Expanding the Lightning Network into a universal settlement system is another focus of BTC L2. .

At this point, the basic ideas of BTC L2 have been sorted out. My original intention is not a technical explanation, so I will omit quite a few implementation details. I also invite experts to explain, so I can just give you some ideas.

Next, I will take representative projects in each category as examples to explain the current development status of BTC L2 for your reference when investing or using it.

Paradigms and schools: small thoughts on various types of BTC L2

I sorted out the various types of L2 that are currently emerging, and it is obvious that the blowout period is concentrated in 2023. The popularity of Inscription has created a focus on funding and technology. At the same time, the accumulation of Inscription on the main network has also caused great controversy in the community. For example, Luke hopes to put Inscriptions are prohibited, but miners are strongly opposed due to economic interests. I have made a detailed analysis of this. There is a big debate about restricting inscriptions. Behind the quarrel among developers is a competition for interests.

What can maintain a balance between miners and developers is the large-scale use of L2. This kind of “creativity” is transferred to L2, and the Bitcoin mainnet is only responsible for the final settlement. For example, the Runes protocol is also for this purpose. Refer to Ethereum Based on the development history of the blockchain, it is possible that Bitcoin will become “modular” in the future and form the mainnet–Ordinal (BRC-20)–L2–dApp architecture system.

List of establishment time of BTC L2

The above projects themselves will undergo changes. This is based on the confirmable establishment time, such as the release of the white paper or the launch of the main network, but this does not affect their classification and explanation. The emphasis is on understanding.

According to the different ways of BTC going up and transaction results going down, I have further divided L2. The specific parameters can be divided into BTC mapping method, L2 fund management method, data return method, supplemented by EVM compatibility, Token issuance, etc. Construct a comparison table of existing L2 representative projects of various types.

Representative projects of each BTC L2 paradigm

As can be seen from the above table, there is almost no perfect decentralized L2 solution. All of them more or less need to be moved off-chain or run using multi-signature, and in terms of efficiency, decentralization and scalability (EVM compatibility) ) to strike a balance.

Take the Lightning Network as an example. This is almost the only L2/scaling solution that has survived to this day in the past era. It fully uses all the characteristics of the Bitcoin main network and does not issue tokens. However, the payment channel limits its versatility and is not Real-time settlement also makes it impossible to transfer large amounts.

The subsequent Liquid Network can be regarded as a special Lightning Network with a strong access system. To be more precise, Liquid is a specialized, centralized variant of the Lightning Network for B-side organizations, called Side chains are more suitable. Although BTC can be reissued and circulated, it cannot be open to all users and the degree of decentralization is too low.

Stacks is even more open and is trying to introduce smart contracts. Its plan can be linked to the issuance of sBTC and has certain no-access features, especially in the future, it will support EVM, but it requires miners to pledge BTC to mine its token STX, and its token The coin exists more as a governance token and lacks sufficient usage scenarios. It can be understood as an EVM compatibility attempt before Inscription.

Similar to Stacks, there are projects such as RGB and Rootstock. The overall difference is not big, but in terms of decentralization, the issuance of its own tokens has increased or decreased. I judge that this will not be the mainstream in the future.

The mainstream has emerged, that is, the Rollup L2 solution similar to Ethereum will eventually win. Sidechains, Lightning Network, etc., according to the expansion category of Ethereum, do not belong to L2, especially Rollup L2. This article only mixes them together for the convenience of discussion. When it comes to Bitcoin expansion, I estimate that I will also follow the path of Ethereum.

Specific to Ethereum Rollup L2, BitVM uses hash locks to introduce BTC, and then uses Bitcoin scripts to store optimistic verification results to ensure security. In essence, the calculation is off-chain and the results are on-chain. However, there is a time difference in optimistic verification, especially As it involves BTC, the efficiency of fund utilization and how to deal with fraud may not be completely consistent with the Ethereum OP system plan. Since the project is still in its early stages, I will continue to pay attention.

Then there is the ZK series L2 B² Network. At present, it seems (not entirely sure) to officially bridge BTC to L2, and then the ZK result is written into the Bitcoin script to ensure security forever. The hidden premise here is that the generated ZK result is completely Correct, Bitcoin is only confirmed as the final DA layer. The white paper shows that BSQ tokens will be issued. You can also pay attention to subsequent development ideas.

Another Ethereum-like solution is BEVM, which emphasizes the “synchronicity” of Bitcoin and L2. When BTC is bridged to BEVM, the Bitcoin block header data will be synchronized to maintain data consistency. In terms of final result generation, PoS consensus is used, and the final result is written into the Bitcoin script. However, it is necessary to ensure that there are no problems in the operation of the consensus itself. It can only be said that it will take time to verify.

In addition, there is also a bridge + WASM solution. This is one of the few BTC L2s that uses Polkadot as a solution. It is still the familiar bridge issuance of iBTC. The innovation is that the treasury management plan emphasizes liquidity market making and encourages each treasury to Putting iBTC into DeFi, and then connecting to the Near/EVM/Cosmos ecosystem through a variety of cross-chain bridges, stacking up the stacks is a great test of security. However, it has won the Polkadot parachain auction twice, as the link between Polkadot and Bitcoin. The main docking plan will also issue INTR tokens, so you can pay attention to it.

Since there is Polkadot, there must be ICP. They are all heterogeneous chains, and they are all former Ethereum killers and SkyDeath projects. Bitfinity built the EVM-compatible BTC L2 based on ICP, which has better support for BTC assets. , not only allows BTC to be bridged to L2 through threshold signatures, but also allows BRC20 assets to be bridged to L2. However, it is not yet sure how to handle the funds on the chain and the data return method. Welcome everyone to add to me.

We started with the Lightning Network and will eventually return to Bitcoin. The Runes protocol of the founder of Ordinal can also issue tokens. I also classify it into L2. Similar to BRC20, it is completely based on The Bitcoin mainnet will be run and UTXO will be used to implement token issuance. Although it is not currently in use, it is very likely that there will be a Bitcoin mainnet craze. After all, miners earn fees and they have enough motivation. Create FOMO to attract funds.

Going back to the beginning of this section, the main idea of each project is to issue tokens, even governance tokens. The siphon effect of BTC is too strong. If the ecosystem is built entirely based on BTC, then only the miners will benefit in the end. L2 may only get a small share of the handling fees. In the business model of Ethereum L2, almost all L2 will eventually issue Tokens, and I think this pattern will also happen with BTC L2. The only problem is that BTC is too strong, and it is not easy to convince users to use BTC to pledge or exchange it for their own governance tokens.

At this point, I have basically sorted out the existing BTC L2 paradigm and representative projects. You can feel that I focus on explaining the BTC L2 classification and the possibility of future development, while omitting the introduction and ecology of each project. That is not important. What is important The most important thing is to see the direction of the future, and the most important thing is to take the right path.

BTC L2 imagination: multi-layer folding, LSD/LRT detonates liquidity

For a long time, BTC has only been used as a single purpose of digital gold, and together with USDT, it has been used as a value measure and trading medium in the crypto market. Although WBTC is enough for daily use, after the inscription, BTC has become an asset issuance platform, whether it is a layer of BRC20 & Ordinal The protocol, or the various types of BTC L2 that are booming, all mean that BTC itself has surpassed its previous single function. Even as a handling fee, it also generates new growth points due to asset casting, issuance and transfer.

You can continue to imagine that most BTC is not active and is simply used as a store of value. However, after the mining reward is halved and the adoption of BTC spot ETF is superimposed, BTC needs to learn how to survive after ETH is converted to PoS, such as LSD /LRT’s leverage effect, BTC’s current market value is around one trillion US dollars. If a large amount of BTC is pledged for L2, its capital efficiency will be reduced. Referring to Blast’s idea, interest-bearing L2 can attract retail investors and funds to pour into it, and BTC itself The value is enough to support ten times or dozens of times of leverage. It would be a pity not to use it as an LSD/LRT linked product.