Bitcoin Layer 2 on the Eve of Explosion: Learning from Ethereum L2 Experience

With the birth of the Ordinal protocol in 2023, Bitcoin has welcomed a new asset type known as "inscriptions." Inscriptions can be seen as a derivative of Bitcoin, this "digital gold," possessing unique value.

This method of issuing native assets on the Bitcoin chain has quickly gained popularity in the market, not only giving rise to more protocols such as BRC20, Atomical, and Runes, but also giving birth to well-known inscriptions like ORDI and SATS, as well as numerous native Bitcoin NFTs.

The Bitcoin ecosystem has regained vitality in a short time, attracting a large amount of capital, users, and developers. However, as development progresses, people are gradually realizing the limitations of Bitcoin as a Layer 1 solution. On one hand, Bitcoin does not support smart contracts, making it difficult to expand richer application scenarios based on inscriptions. On the other hand, Bitcoin's performance and miner fees have become significant obstacles to the further development of the ecosystem; when the inscription gameplay is active, it can lead to a surge in transfer fees, even affecting normal transactions.

Therefore, the inscription craze quickly spread to the Bitcoin scaling track, opening up a new hotspot for Bitcoin Layer 2.

Bitcoin Layer2 Development Status

Some old Bitcoin scaling solutions are regaining attention, while many new Bitcoin Layer 2 projects have emerged. Among them, the Bitmap Tech team has pioneered the launch of a Bitcoin Layer 2 called Merlin Chain, thanks to their deep involvement in the inscription field and the success of the BRC420 nested protocol.

Merlin Chain launched in February 2024 and quickly initiated a staking activity called Merlin's Seal. The staking targets include Bitcoin, some inscriptions, and assets like the BRC420 blue box. This triggered a surge in the price of the blue box. Less than 30 days after the activity launched, Merlin Chain's TVL surpassed $3 billion, reaching a peak of $3.5 billion, becoming a star project in the Bitcoin ecosystem at the time.

However, after the listing of Merlin on April 19, the price of its token MERL quickly fell after a brief surge, dropping more than 80% within a few weeks. Subsequently, Merlin opened BTC unlocking, and the TVL also plummeted, currently down to around 1.3 billion USD, a decrease of over 60%. The price of the participating blue box also crashed from a peak of around 1 BTC to less than 0.05 BTC.

As a star project of Bitcoin Layer 2, Merlin experienced a sharp decline in both price and TVL after its listing, frustrating many participants and raising doubts about the prospects of Bitcoin Layer 2.

Ethereum Layer 2 Development History

Looking back on Ethereum's scalability journey can provide insights for the development of Bitcoin Layer 2.

1. Early Exploration Stage: Ethereum learned from Bitcoin's experience and explored solutions such as state channels, the Lightning Network, and sidechains, but all had limitations.

2. The Plasma framework proposed: The Plasma framework proposed in 2017 made improvements based on sidechains, but still has data availability issues and does not support smart contracts.

3. Rollup Technology Breakthrough: The Rollup technology was born in 2018, solving the critical data availability problem and supporting smart contracts. Projects like Optimism and Arbitrum have gained widespread recognition after their launch, and Ethereum Layer 2 began to explode.

4. The Blooming Stage: More and more teams are beginning to explore Layer 2 solutions. Optimism has launched tools like OP Stack, which have lowered the barriers to releasing Layer 2. Currently, there are over 50 Layer 2 projects that have entered a vigorous development stage.

5. Continuous Optimization: Some teams have begun exploring solutions such as decentralized sorters to further enhance the security and maturity of Layer 2.

Bitcoin Layer2 Development Direction

The main challenges faced by Bitcoin Layer 2 at present are insufficient decentralization and security, which deter professional institutions and large funds from entering on a large scale. Some existing solutions are as follows:

1. Lightning Network: the earliest Bitcoin Layer 2 payment protocol, but it does not support smart contracts.

2. Liquid Network: Uses multi-signature nodes to host Bitcoin, which poses a centralization risk.

3. RSK: An earlier sidechain solution that is no longer receiving attention.

4. RGB: Recently released a version that supports smart contracts, but there is still a distance to true implementation.

5. Stacks: A well-known Layer 2 that claims to support smart contracts, but the recent upgrade has been delayed.

6. BitVM: adopts a solution similar to Optimistic Rollup, but smart contracts run off-chain and do not achieve true decentralized cross-chain.

Two emerging projects worth paying attention to:

1. BEVM: A trustless BTC network solution based on Taproot Consensus, achieving a higher level of decentralization through Schnorr signatures, MAST, and Bitcoin light node networks.

2. Mezo: Using tBTC as a basis to bridge Bitcoin and Ethereum, but the security guarantee still adopts multi-signature, and the degree of decentralization remains to be discussed.

Outlook

Despite the recent market fluctuations impacting the cryptocurrency ecosystem, this will not hinder the development of the Bitcoin ecosystem. BTC Layer2 is currently in a challenging uphill phase, requiring more projects with trustlessness, native characteristics, and security to emerge, as well as the continuous optimization of existing projects.

Only by forming a diverse ecosystem can BTC Layer2 truly迎来爆发. The potential of this trillion-level track has already emerged, and we need to remain patient and persistent, looking forward to the true prosperity of the Bitcoin ecosystem.