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Bitcoin was created as a decentralized blockchain that enables peer-to-peer exchange without the need for a third party like a bank. However, the network faces scalability challenges as its popularity and adoption grow.
This is where Layer 2 solutions come in. They act as secondary protocols built on top of the Bitcoin blockchain (Layer 1), aiming to address these scalability bottlenecks.
Read on to learn what Bitcoin layers are and what utility they are bringing to the network.
Layer 2s were created to help solve some of Bitcoin’s scalability issues. They help process transactions off-chain, reducing the load on the mainnet and enabling faster, cheaper transactions.
Furthermore, they rely on the security of the Bitcoin blockchain for final settlement. This allows them to inherit Bitcoin’s robustness while offering improved scalability and functionality.
Additionally, Bitcoin layers can also bring new features and functionalities to the Bitcoin ecosystem by introducing complex smart contracts to the ecosystem.
Let’s look at the Bitcoin layers that were created to bring more utility to Bitcoin.
Lightning Network operates through a network of payment channels established between users who can transact with each other off-chain at high speeds and minimal fees.
Imagine two people, Alice and Bob, who frequently transact with each other. They can set up a payment channel by locking up a certain amount of Bitcoin on the main chain. This creates a secure space where they can exchange funds back and forth off-chain without involving the mainnet for each transaction.
Hash Time Locked Contracts (HTLCs) ensure secure transactions within a payment channel. They allow Alice to send Bob a payment by locking up her funds on the channel with a secret key. Bob can only claim these funds by providing the correct key and ensuring he receives the payment before closing the channel.
With the channel established, Alice and Bob can send and receive payments as many times as needed within the channel’s capacity without involving the mainnet. This enables near-instantaneous transactions with negligible fees.
When the channel is exhausted or needs to be closed, the final state is settled on the Bitcoin blockchain. This final state reflects the net balance owed to each party.
Due to its efficiency, the Lightning Network is ideal for micropayments and everyday transactions. However, setting up and using payment channels requires some technical knowledge. Additionally, the network is still under development, and its long-term scalability remains to be seen.
Liquid Network focuses on providing a confidential and fast settlement layer for institutions.
Unlike Lightning Network’s peer-to-peer payment channels, Liquid Network utilizes a sidechain model with a limited number of trusted participants (federation members) who validate transactions. These participants can be institutions like exchanges and custodians.
By having fewer validators, Liquid Network can achieve faster block confirmation times compared to the Bitcoin mainnet. This allows for quicker transaction settlements, catering to the needs of institutions dealing with large volumes of transactions.
Liquid Network supports features like Confidential Transactions (CT) that allow users to hide transaction amounts while still maintaining cryptographic verification. This can be beneficial for institutions that value privacy and regulatory compliance.
However, the reliance on trusted participants introduces a degree of centralization compared to Bitcoin’s fully decentralized nature. This centralization could raise concerns for users who prioritize absolute control over their funds.
RSK aims to bring smart contract functionality to Bitcoin. It achieves this by creating a sidechain pegged to Bitcoin.
Although it operates as a separate blockchain, it is pegged to the Bitcoin blockchain in a 1:1 ratio. This means that the value of one RSK token is always tied to the value of one Bitcoin.
RSK utilizes the Ethereum Virtual Machine (EVM), allowing developers familiar with Ethereum to build dApps (decentralized applications) on RSK readily. This opens up a wider range of functionalities compared to Bitcoin’s basic functionalities.
The security of the RSK sidechain is ultimately backed by the Bitcoin blockchain. Miners on the Bitcoin mainnet periodically checkpoint the RSK chain, ensuring its security and immutability.
RSK caters to developers and businesses seeking the security and brand recognition of Bitcoin while leveraging the power of smart contracts. However, the security of the sidechain relies on a mechanism called ‘federated mining.’ Here, a group of pre-selected miners secures the RSK chain by validating transactions and producing blocks.
While this approach offers faster transaction speeds compared to Bitcoin, it introduces a degree of centralization compared to the fully decentralized Proof-of-Work (PoW) consensus mechanism used on the Bitcoin mainnet.
Stacks takes a unique approach by anchoring data and smart contracts directly onto the Bitcoin blockchain.
The L2 solution uses a novel consensus mechanism called Proof of Burn (PoB). In this system, users burn STX tokens to secure the network. When a user wants to participate in consensus and potentially earn rewards, they burn a certain amount of STX. This burning process removes tokens from circulation, potentially increasing the value of remaining STX tokens.
Unlike sidechains, which operate as separate blockchains, Stacks anchors data and smart contracts directly onto the Bitcoin blockchain. This leverages Bitcoin’s security and immutability for the applications built on Stacks.
Stacks is particularly appealing to developers seeking to build secure and reliable DeFi on Bitcoin and NFTs. However, the PoB consensus mechanism can be resource-intensive, and the Clarity language requires developers to learn a new programming language.
Merlin Chain is a new Bitcoin layer that leverages a technology called “Schnorr Signatures” for efficient multi-signatures.
Schnorr Signatures allow for aggregating multiple signatures into a single, smaller signature. This can significantly improve transaction throughput on the network compared to traditional Bitcoin signatures.
Merlin Chain utilizes a scaling technique called Optimistic Rollups. In this approach, transactions are initially processed off-chain, but “fraud proof” can be submitted to the Bitcoin mainnet in case of a dispute. This allows for faster transactions while maintaining the ultimate security of the Bitcoin blockchain.
While other Layer 2 solutions cater to a wider range of assets, Merlin Chain has a strong focus on Bitcoin (BTC) and Ordinals (inscriptions on the Bitcoin blockchain). It aims to facilitate a vibrant DeFi, specifically for Bitcoin-based assets.
Merlin Chain has the potential to revolutionize Bitcoin scalability. However, its success hinges on its ability to achieve high transaction throughput while maintaining security and decentralization. As it’s still under development, long-term testing, and real-world use cases are needed to fully evaluate its capabilities.
Layer 2 solutions are playing a critical role in addressing Bitcoin’s scalability challenges and opening doors for new applications. By leveraging the security of the Bitcoin blockchain while offering faster transactions and additional functionalities, Layer 2 solutions are poised to play a key role in the future of Bitcoin and the broader cryptocurrency landscape.
Disclaimer: This content is meant to inform and should not be considered financial advice. The views expressed in this article may include the author’s personal opinions and do not represent Times Tabloid’s opinion. Readers are urged to do in-depth research before making any investment decisions. Any action taken by the reader is strictly at their own risk. Times Tabloid is not responsible for any financial losses.
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