Bitcoin is evolving beyond its role as a traditional financial asset to become a core platform for blockchain technology. The recent “Bitcoin Renaissance” is credited with enhancing Bitcoin’s utility and programmability through Layer 2 solutions. These scaling solutions enable Bitcoin to support a variety of applications, including finance, decentralized finance (DeFi), non-fungible tokens (NFTs), and gaming. This article examines the evolution of Bitcoin’s scaling solutions, recent Layer 2 networks, and their characteristics.

# Why Scaling Solutions Are Necessary

Bitcoin, despite being the most secure and decentralized asset with over 100 million holders and a market cap of $1.4 trillion, faces technical limitations. Slow transaction speeds (block confirmation time of 10 to 30 minutes), low scalability (seven transactions per second), and limited programmability have been significant drawbacks. To overcome these limitations, the Bitcoin ecosystem has been accelerating the development of Layer 2 networks for several years. Layer 2 solutions maintain Bitcoin’s decentralization and security while significantly improving scalability, speed, and functionality. These solutions can drastically increase transaction processing speed and support applications in DeFi, NFTs, and gaming.

# Ordinals and Runes: Heralding the Bitcoin Renaissance

One of the notable innovations in the Bitcoin ecosystem is the introduction of Ordinals and Inscriptions. These technologies have significantly increased interest in Bitcoin development, marking the onset of Bitcoin Season 2. Ordinals allow individual Satoshis to be inscribed with NFTs or meme coins, enabling various applications within Bitcoin’s script framework to be executed directly on the base layer. These innovations have led to higher fees and mempool congestion, indirectly expanding the ecosystem.

Technological advances like Ordinals, Inscriptions, BRC-20 tokens, and Runes have dramatically increased the Bitcoin network’s usage and demand for block space. Consequently, Bitcoin’s average transaction fee rose from $1.5 in 2022 to $4.2 in 2023, peaking at $9.5 in 2024. This fee increase underscored the necessity of scaling solutions.

The introduction of Inscriptions and BRC-20 has energized the Bitcoin ecosystem, ushering in a Renaissance. According to Binance Research, numerous projects launched or under development aim to incorporate applications like DeFi, staking, gaming, and social media into the Bitcoin ecosystem. Bitcoin Layer 2 solutions are crucial for these projects.

# Bitcoin L2 Market Opportunity Seen Through Ethereum

The potential of the Bitcoin Layer 2 market can be gleaned from Ethereum’s example. Forbes reports that the total value locked (TVL) in Bitcoin’s Layer 2 DeFi networks is about $1.5 billion, merely 2% of Ethereum’s TVL. Considering Bitcoin’s over $1 trillion in latent value, there is substantial growth potential. Binance Research notes that Ethereum’s market cap is approximately $446 billion, with around $45 billion locked in Layer 2 solutions. Given Bitcoin’s $1.4 trillion market cap, the Bitcoin Layer 2 market could grow to $140 billion.

Spartan Group, a global blockchain investment firm, predicts that Ordinals’ introduction and the spread of a Bitcoin-based development culture are turning Bitcoin into economic infrastructure beyond merely a store of value or asset.

# Evolution of Bitcoin Scaling Solutions: Taproot Upgrade and BitVM

It’s clear that solutions for scaling Bitcoin are essential. Among the various proposed solutions, Taproot and BitVM are pivotal for enhancing Bitcoin’s functionality and network efficiency.

### Taproot Upgrade: A Leap Toward Scalability and Privacy

Introduced in 2021, Taproot is a soft fork consisting of three Bitcoin Improvement Proposals (BIP 340, 341, and 342). This upgrade significantly enhances Bitcoin’s privacy, scalability, and composability. Taproot enables advanced scripting within the Witness section, laying the groundwork for more complex smart contracts on the Bitcoin network. Additionally, it removes data restrictions between block sections, permitting up to 4MB of data in the Witness section, which opens up the possibility for Bitcoin to support smart contracts similar to Ethereum.

### BitVM: Charting the Future of Programmable Bitcoin

Recently, the protocol BitVM, aimed at expanding Bitcoin’s smart contract functionality, has gained attention. In October 2023, Robin Linus of ZeroSync proposed BitVM as a means to implement smart contracts on Layer 2 networks without requiring major changes to Bitcoin’s code. BitVM maintains Bitcoin’s existing structure while introducing advanced logical functions to the network, offering extensibility for various use cases, including rollups.

### Applicability and Potential of BitVM

BitVM can be integrated into various Layer 2 solutions beyond Bitcoin rollups, significantly enhancing the network’s functionality. Although the mainnet launch date is not yet confirmed, many developers are exploring this protocol. In August, Linus introduced BitVM2, which incorporates permissionless challenging, enabling anyone to verify transactions. This feature maintains scalability and security while providing more efficient asset transfers and smart contract functionality. CoinDesk anticipates that BitVM2 will expand the usability of the Bitcoin ecosystem, contributing to a more reliable network.

# Categorizing Bitcoin Layer 2 Solutions

Numerous Bitcoin Layer 2 projects are currently under development, each following different frameworks and trust assumptions. These structures include sidechains, State Channels, ZK-Rollups, and Optimistic Rollups (BitVM). Each framework varies in how it interacts with the Bitcoin network and its security model.

### State Channels: Lightning Network

State Channels create separate channels off the main network to handle transactions off-chain, finalizing them on-chain only once. This is akin to gathering multiple letters and posting them all at once to save costs. This framework enables micropayments and rapid transactions, with the Lightning Network being the most well-known project.

### Lightning Network: Optimized for Micropayments

The Lightning Network comprises thousands of nodes and wallets. Participants process transactions off-chain collaboratively, recording only the final results on-chain. To ensure transaction accuracy, participants must monitor them continuously, requiring appropriate nodes and liquidity to prevent fraud. The Lightning Network excels in facilitating fast, low-cost micropayments while providing the option to revert to Bitcoin’s base layer. However, it struggles to support complex DeFi applications or automated contract execution.

### Sidechains: Stacks, Rootstock, Liquid

Sidechains maintain communication with the main network while defining an independent architecture, similar to a modern urban postal system synchronized with the central post office. They use centrally managed pegs for asset transfers between Bitcoin’s base layer and sidechains, which operate and verify transactions independently. Sidechains like Liquid, Rootstock, and Stacks offer more features and scalability than Bitcoin.

#### Liquid Network

Launched by Blockstream in 2018, Liquid Network is a Bitcoin sidechain that significantly improves transaction speed and scalability. Unlike Bitcoin’s 10-minute block generation time, Liquid Network generates new blocks every minute, enabling transaction completion in two minutes. Users can issue new tokens and utilize smart contracts and decentralized finance (DeFi) services using L-BTC. Currently, 3,863 L-BTCs have been issued.

#### Rootstock: Combining Bitcoin and Ethereum’s Strengths

Rootstock (RSK), a project combining Bitcoin’s security with Ethereum’s smart contract functionality, operates as a sidechain, allowing Ethereum-based applications to run on the Bitcoin blockchain. It bundles transactions for submission to the Bitcoin blockchain, reducing fees and improving processing speed. Rootstock also enables merged mining, where Bitcoin miners can mine Rootstock for RBTC rewards.

#### Stacks: Expanding Bitcoin’s Functionality

Stacks (formerly Blockstack) is a Bitcoin-based Layer 2 solution with a unique Proof of Transfer (PoX) consensus mechanism. In PoX, miners pay Bitcoin to earn the right to mine new Stacks blocks, receiving STX tokens as rewards. STX holders can lock (stack) their STX to earn Bitcoin rewards, which has yielded an annual return of 8%. Stacks recently introduced the Nakamoto Upgrade, enhancing its integration with the Bitcoin network, and introducing sBTC, a Bitcoin-equivalent token that enables Bitcoin liquidity to be directly used within the Stacks ecosystem. Forbes predicts that Stacks will firmly establish itself as a true Bitcoin Layer 2 solution utilizing Bitcoin’s security, economy, and decentralization comprehensively after the Nakamoto Upgrade.

### Bitcoin Rollups: BitVM

Rollups are a scaling solution that processes multiple transactions off-chain and settles them on Bitcoin’s Layer 1 (L1). While promising, rollups for Bitcoin are still in the research and early development stages. Ethereum can process rollup transactions directly using its on-chain virtual machine (EVM). Bitcoin lacks such a virtual machine, requiring additional trust-based settings for validating rollup proofs. Some projects are exploring BitVM for rollup proof verification and adding new opcodes through soft forks to validate rollup proofs directly on L1. Projects aiming for Bitcoin rollups include Merlin Network, Build on Bitcoin, B², and BitLayer.

#### Merlin Network

Merlin Chain, launched by Bitmap Tech, uses ZK-Rollup technology to significantly enhance Bitcoin’s scalability and efficiency. ZK-Rollup compresses transaction data for faster and cheaper processing than the Bitcoin main chain. Having launched its testnet in early 2024, Merlin plans to integrate a decentralized oracle network and on-chain BTC fraud prevention module, bolstering security and transparency. Merlin uses BitVM to implement on-chain fraud proofs, publishing zero-knowledge proofs of transactions to the Bitcoin mainnet.

Merlin is building zkEVM infrastructure using the Polygon CDK (cloud development kit) to implement Ethereum-like smart contract functionality on the Bitcoin network. When Merlin’s BitVM-based fraud proof mechanism is completed, it is expected to offer greater flexibility and scalability to the Bitcoin ecosystem.

#### BOB: A Hybrid L2 Merging Bitcoin and Ethereum

BOB (Build on Bitcoin) is the first hybrid L2 solution merging Bitcoin’s security with Ethereum’s functionalities like stablecoins, NFTs, and DeFi. BOB processes transactions on Ethereum L1 while monitoring Bitcoin’s state to enable cross-chain swaps and smart contract execution. BOB’s ultimate goal is to implement its own BitVM-based rollup. Co-founder Alexei Zamyatin emphasizes solving real product issues over flashy technology and focuses on sustainable growth instead of artificially inflating TVL through unrealistic incentives.

# Not All Bitcoin L2’s Are Revolutionary: Be Cautious

While the aforementioned projects represent significant innovations in the Bitcoin Layer 2 space, not all self-proclaimed L2 projects offer genuine advancements. For instance, Fractal Bitcoin claimed to be a native scaling solution fully integrated with Bitcoin but has faced criticism for potentially compromising security with its modified merged mining system. Bitcoin Magazine warned that Fractal might undermine Bitcoin’s security and operates more like a token project benefiting early investors.

# The Evolution of Bitcoin’s Ecosystem: A Focus on Layer 2

Overall, the Bitcoin ecosystem is likely to evolve by reducing transaction costs and incorporating successful dApps and games from Ethereum. New DeFi services, such as staking platforms like Babylon, offer novel approaches to Bitcoin. Bitcoin, a global asset with a market cap of around $1.4 trillion, is evolving into a platform integrated with innovative technology and centered on Layer 2 solutions. As these projects mature and seamlessly integrate with Bitcoin, the network will further develop into a scalable, programmable ecosystem.