Check out this blog post in español, 简体中文, 繁體中文, 日本語, हिंदी, 한국어, tiếng-việt, português, français, русский, українська, persian, türkçe, indonesian, filipino, and italiano (non-English translations are created by the community, not ZetaChain).

At ZetaChain, our mission is to power Universal Apps that span all chains from native Bitcoin and Ethereum to Cosmos, Solana and beyond. That’s why we created the first universal blockchain to support an abstracted chain UX across crypto — whether a user is on Bitcoin, an EVM, L2, or somewhere else. In this post, we review Bitcoin L2s and address the following questions from a predominantly technical perspective:

• What does “Layer 2” actually mean?

• Are these really Bitcoin L2 solutions?

• Why do we need Bitcoin L2 solutions?

From Ethereum to Bitcoin: The Layer 2 frenzy

Layer 2 solutions were initially an Ethereum phenomenon, with hundreds emerging over the past few years. Many of these projects focused more on capturing value through marketing than on making genuine improvements in infrastructure and innovation. Recently, however, a new narrative has begun to form around “L2s” on Bitcoin. The core idea behind these solutions is that they inherit or derive security from their underlying Layer 1 — in this case, Bitcoin.

This is appealing because the Bitcoin network boasts strong security, and Layer 2 solutions could help Bitcoin scale its throughput, reduce transaction costs, and enable more sophisticated smart contract platforms. Many projects are now claiming, implying, or associating with Bitcoin Layer 2 solutions. However, questions about the validity of these claims are beginning to circulate.

What is Layer 2?

Layer 2 refers to a blockchain that extends a Layer 1 in some way and inherits some of its security. In 2016, the Lightning whitepaper [5] proposed a payment network that derives security from the Bitcoin network. Although the authors (Poon & Dryja) did not use the term “Layer 2,” the Lightning Network is indeed a Layer 2 solution on Bitcoin. It functions as its own network/blockchain with cheap payments secured by the Bitcoin network and robust game theory between participants. More modern Layer 2 solutions are likely popularized by Vitalik Buterin and the Ethereum ecosystem. There are three typical types of Layer 2s: state channels, plasma, and rollups [6].

State Channels

The Lightning Network is an example of a state channel, where two participants can open a channel and keep most transactions between them off-chain (outside of the Bitcoin network’s knowledge). Only opening and closing the channel, and perhaps disputes, invoke Bitcoin transactions or scripts. We’ll skip plasma here as it is more complicated than state channels and not general purpose.

Rollups

Rollups are the most interesting Layer 2 solution as they can be quite general-purpose, such as running a full Ethereum Virtual Machine (EVM), and are also quite secure, inheriting the security of Ethereum.

Rollups are separate blockchains that bundle and batch their transactions and states to the underlying L1 (e.g., Ethereum). They inherit the security of Ethereum L1 because they post data (their own transactions and state updates) to contracts on Ethereum, which handle the validation of the state updates (such as balances of rollup accounts). You do not need to trust the rollup nodes or RPCs; you simply look at the transactions and current state posted on Ethereum to be convinced that rollups are working as expected.

How they work: Optimistic and ZK Rollups

Ethereum contracts validate the pre-state to post-state transition due to the batched transactions on rollups in two ways: optimistic rollups with fraud proofs and zero-knowledge (zk) rollups.

In optimistic rollups, the Ethereum contract assumes rollup sequencers to be honest but accepts fraud proofs. It has economic penalties and rewards for false updates if someone can prove that certain state updates are incorrect. This system requires a period of time for challengers to find faults and submit proofs.

On the other hand, zk-rollup sequencers submit transactions, state updates, and zk-proofs of the validity of state updates. State updates are mathematical functions, where the function can be arbitrarily complex, such as a full Ethereum Virtual Machine. Zero-knowledge proof is used for efficiency: producing a proof can be computationally intensive, but verifying the proof is much faster and can be done by a smart contract at a reasonable cost. As a user of zk-rollups, if you see that the rollup transactions batch and state updates on Ethereum are accepted by the verifying contract, you know that the rollup is working correctly and that your transaction in the batch will produce the claimed post-state.

Limitations of Layer 2s

While Layer 2 solutions, especially rollups on Ethereum, seem promising, the technology is still developing and faces fundamental challenges. For example:

• Most optimistic rollups do not yet have fraud proofs [7], so they do not inherit Ethereum’s security.

• The long challenge time for fraud proofs affects transaction finality. To achieve full Ethereum security, the finality period can be very long, like 7 days.

• ZK-rollups rely on emerging cryptographic innovations and can be very complex, especially when the state transition function is a Turing-complete machine like the popular EVM.

• ZK-rollups also suffer from long finality periods. For cost reasons, zk-rollups verify batches at infrequent intervals such as every 24 hours, much longer than Ethereum’s L1 finality of about 10 minutes.

• Rollups are separate blockchains, and moving assets in and out can take a long time, leading to friction and liquidity fragmentation.

Additional challenges for Bitcoin L2s

For Bitcoin Layer 2 solutions, these problems are even more pronounced due to Bitcoin’s limited scripting support and long finality time:

• Bitcoin script may not be capable of verifying zk-proofs for arbitrarily complex state transitions.

• While Bitcoin script might verify fraud proofs with the Taproot upgrade using innovations like BitVM, it could be quite expensive.

• “Inheriting” Bitcoin’s security is challenging due to these limitations.

Do we really need Bitcoin L2s?

Layer 2 solutions promise to scale throughput and increase the programmability of the Bitcoin network, which seems desirable. However, inheriting Bitcoin’s security presents many fundamental challenges. Simply posting data and proofs to the Bitcoin network is not sufficient for inheriting its security, as the network does not verify these. This approach uses the Bitcoin network as a data availability layer, which is not ideal.

Even if these issues are addressed, Layer 2 solutions still face drawbacks like longer finality periods and friction between Layer 2s and the base layer. From a user experience standpoint, Bitcoin L2s, rather than support the tools users already have, often require users to install new wallet applications, sign up for accounts, and acquire new tokens. Transferring assets to another blockchain via an L2 is a two step process and does not bring, in this case BTC, into compatibility with assets and users from other chains.

Therefore, do we really need Bitcoin Layer 2 solutions to solve the problems the Bitcoin network faces? The answer might not be a clear yes.

Refocusing on native Bitcoin programmability

At ZetaChain, we believe the focus should be addressing the utility and programmability of Bitcoin together with assets and data from other blockchains. Real Bitcoin users want to swap between tokens, do staking, and other actions across the ecosystem from their preferred wallet, and you need seamless interoperability between blockchains to achieve this.

We need a way to build decentralized, transparent, secure dApps that manipulate native BTC (instead of wrapped BTC, which has its own issues). Ideally, we should support dApps that not only handle native BTC, but also other native assets like SOL, ETH, USDT on BSC, and more from other chains. Furthermore, these dApps should be able to interact with and compose with dApps on other networks.

At ZetaChain, we are building a platform for Universal Apps to achieve this vision. Visit ZetaChain 2.0 to learn more about how ZetaChain’s Universal EVM for chain abstraction.

References:

1. Coleman, J. (n.d.). State Channels. Retrieved from https://www.jeffcoleman.ca/state-channels/

2. Buterin, V. (n.d.). Plasma: Scalable Autonomous Smart Contracts. Retrieved from http://plasma.io/plasma-deprecated.pdf

3. Cointelegraph. (n.d.). Bitcoin Layer2 and Sidechains: Not Really Bitcoin L2s. Retrieved from https://cointelegraph.com/magazine/bitcoin-layer2-sidechains-not-really-bitcoin-l2s/

4. Ellicott, K., & Spartan Group. (2023). Bitcoin Layers: Tapestry of a Trustless Financial Era. Retrieved from https://bitcoinlayersreport.com/

5. Poon, J., & Dryja, T. (n.d.). The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments. Retrieved from https://lightning.network/lightning-network-paper.pdf

6. Buterin, V. (2021). An Incomplete Guide to Rollups. Retrieved from https://vitalik.eth.limo/general/2021/01/05/rollup.html

7. Scaling Summary. (n.d.). Retrieved from https://l2beat.com/scaling/summary

About ZetaChain

ZetaChain is the first universal L1 blockchain. It serves as the base-layer of the decentralized internet, providing a platform for global access, simplicity, and utility across any blockchain. Zetachain’s Omnichain Smart Contracts on the Universal EVM are purpose-built for general chain abstraction across the entire crypto ecosystem. ZetaChain can connect to any blockchain, from Ethereum and Cosmos to Bitcoin and beyond, enabling unified liquidity, user experience, and data all from a single place. Universal Apps on ZetaChain are future-proof and have full compatibility with both existing and new chain integrations. With a proposed Universal Proof-of-Stake capability, ZetaChain supports staking of assets like native Bitcoin and Ethereum in exchange for rewards, powering unbounded scale for economic security.

Follow ZetaChain on Twitter @zetablockchain and join the conversation on Discord and Telegram. Reach out to [email protected] if you’re building on top of ZetaChain.

Any projects mentioned are 3rd party, not ZetaChain.