Bitcoin Layer 2 Landscape

Download report
Download PDF


Bitcoin's Layer-2 networks are developed as complementary protocols on top of the Bitcoin blockchain.  

These protocols play a vital role in improving the network's scalability and transaction efficiency. Operating above Bitcoin's base layer, they handle transactions off the main blockchain thereby effectively reducing network congestion and lowering transaction fees. This strategy not only enhances Bitcoin's overall functionality but also introduces advanced features such as support for smart contracts. It is noteworthy that while these Layer-2 networks interact with the Bitcoin network, they do not modify its base layer thereby preserving its robust security.

The integration of Layer-2 solutions represents a significant advancement in Bitcoin's capabilities by extending its utility to a wider range of applications. Such applications include payment systems, decentralized finance and non-fungible tokens amongst other functionalities. By overcoming Bitcoin's inherent constraints in transaction throughput, block confirmation times and costs, Layer-2 networks enhance Bitcoin's performance and open up new possibilities for its use.

Bitcoin Defi TVL

Layer-2 networks on the Bitcoin blockchain, although arriving later than their Ethereum counterparts, are expected to reap substantial benefits from Bitcoin's vast user base, liquidity and dominant position in the market. 

A useful metric for understanding the relatively nascent nature of Bitcoin Layer 2s is to compare their DeFi Total Value Locked (TVL) against that of Ethereum. Currently, Bitcoin's TVL stands at $297.45 million which is significantly less compared to Ethereum’s $36 billion. This disparity highlights the potential for growth as Layer 2 networks continue to expand.

Overview of most popular Bitcoin Layer 2’s:

Lightning Network 

The Lightning Network is bolstering the way Bitcoin transactions are handled by significantly enhancing scalability and reducing network congestion. Designed primarily to manage Bitcoin micropayments off-chain, this network forms direct channels between transaction parties thereby circumventing the need for global consensus on the main blockchain. This mechanism allows for a multitude of transactions to be conducted off-chain, only updating the blockchain when a payment channel is closed.

Widely recognized for its rapid processing and low fees, the Lightning Network is particularly favored for microtransactions and routine payments. Its growing network boasts an increasing number of nodes and payment channels, indicating significant adoption and effectiveness in addressing Bitcoin's scalability issues. 

Furthermore, the Lightning Network employs hashed timelock contracts (HTLCs), a type of smart contract that ensures secure multi-party transactions and payment routing. These contracts enable the recipient to access funds upon meeting specific conditions within a designated time frame, ensuring both efficiency and security in high-volume transaction processing.

Stacks enhances the Bitcoin ecosystem by introducing smart contracts and decentralized applications. It builds upon Bitcoin's strong network, allowing developers to create and innovate with increased functionality. Stacks supports microblocks which enable faster transaction processing and higher throughput compared to Bitcoin's approximate 10-minute block time. This significantly reduces latency and improves interaction efficiency.

The launch of Stacks 2.0 marked a significant evolution, introducing staking and decentralized finance capabilities all of which have drawn a wider user and developer base. Additionally, Stacks is closely integrated with Bitcoin through the Proof of Transfer consensus model. This model ensures that every transaction on Stacks is settled on Bitcoin's base layer, meaning Stacks’ blocks are intrinsically linked to and inherit the security of Bitcoin blocks all while maintaining the integrity of the Bitcoin network.

Rootstock enhances Bitcoin by integrating Ethereum's smart contract capabilities. It operates off the main Bitcoin blockchain, offering faster, cheaper transactions and it is connected to Bitcoin through a sidechain further reinforcing its security. Rootstock achieves quicker block confirmations and supports about 10 to 20 transactions per second, bundling transactions before settling them on Bitcoin's base layer.

Recent Bitcoin Layer 2 News
On January 11th, Bfinity successfully concluded a token financing round in which it secured $7 million in funding and achieved a company valuation of $130 million. Following this, Bitfinity is actively preparing for the launch of its mainnet, which is scheduled to occur either later this month or at the beginning of February.

Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.