Beyond the Lightning Network: Exploring the Second Layer of Bitcoin

Article author: Siddhant Kejriwal

Article translation: Block unicorn

At the beginning of the article, we will first introduce the advantages and disadvantages of the Bitcoin Layer 2 network so that everyone can better judge the Bitcoin Layer 2 project.

Advantages

Enhanced scalability: Layer 2 solutions significantly improve transaction throughput, surpassing the capabilities of the base layer of Bitcoin.

Lower transaction fees: By processing transactions outside the main chain, the second layer network can significantly reduce transaction costs.

Smart contract features: Platforms like Stack and Rootstock introduce smart contracts and DApps, expanding the practicality of Bitcoin.

Improved privacy protection: Some second-tier solutions provide enhanced privacy features for transactions that are not available on Bitcoin’s main network.

Disadvantages

User Complexity: The second layer of ecosystem introduces an additional layer of complexity for end users, which may hinder adoption.

Security dependency base layer: While taking advantage of Bitcoin’s security, the second layer solution may face unique vulnerabilities that do not exist on the mainnet.

Liquidity fragmentation: Liquidity may be dispersed among different second-tier solutions, exacerbating the complexity of trading and other financial activities.

Developer Learning Curve: Understanding new protocols, languages, and environments may slow down development and innovation within the ecosystem.

introduction

In the crypto space, the Bitcoin network is unique in value, security and decentralization.As of February 2024, this groundbreaking blockchain has a market value of over $1 trillion, demonstrating its lasting appeal and robustness.

Bitcoin is often hailed as “digital gold” and is the cornerstone of the cryptocurrency and the most sought-after asset.It is appreciated for its attributes as a store of value and a “inflation hedge”.Its unparalleled status makes Bitcoin the largest crypto asset in the world, clearly demonstrating its profound impact on investors and the trust it gains.

The widespread adoption of Bitcoin has laid the foundation for the success of Lightning Network, an innovative second-tier solution designed to enable faster and more efficient payments on top of the Bitcoin network.

While the Lightning Network marks a major leap, solving some of the scalability issues that have long plagued Bitcoin, it has also sparked an awareness among its users and developers that the potential of the Bitcoin network is far from fully realized.This growing sentiment paves the way for pioneering projects seeking to unleash new capabilities in this ancient blockchain.

One of the transformative dynamics is Bitcoin Ordinals, which greatly expands the range of possibilities of the Bitcoin network.The Ordinals project demonstrates the diversity of Bitcoin beyond peer-to-peer payments, igniting a revival among developers by etching the only digital artifacts directly into Bitcoin’s blocks.Inspired by the immutable nature of Bitcoin blockchain security, these developers are now exploring and building complex smart contracts and second-tier execution environments that promise to further enrich the ecosystem.

This analysis explores the booming development of Bitcoin’s second-tier innovation beyond the capabilities offered by the Lightning Network.It aims to shed light on cutting-edge solutions emerging in the Bitcoin ecosystem.This article highlights how developers can leverage the unrivalled security and trust of the network to build smarter, more functional applications.As we begin this exploration, we will reveal groundbreaking efforts to enhance Bitcoin’s usefulness and consolidate its position as the cornerstone of the crypto world.

SegWit and Taproot – Improve Bitcoin Upgrades

Bitcoin’s evolution is characterized by continuous innovation and adaptation, with two milestone upgrades, SegWit (SegWit) and Taproot, playing a key role in its ongoing revolution.These upgrades address some of the most pressing challenges facing the network and lay the foundation for new developments and expansions within the Bitcoin ecosystem.

SegWit (Separation Witness): Improve memory efficiency

SegWit is a groundbreaking upgrade implemented in 2017 to address Bitcoin’s scalability challenges:

Increase block capacity: By separating (or “separating”) from transaction data, SegWit effectively reduces the size of transactions, allowing more transactions to adapt to a single block without adding zonesBlock size limit.Under optimal conditions, SegWit makes Bitcoin blocks theoretically support up to 4 MB of transactions.
Solved transaction tampering problem: SegWit solves an important security issue, which is the issue of allowing transaction details to be modified before blockchain confirmation.This improvement improves security and promotes the development of layer 2 solutions like Lightning Network, improving transaction speed and efficiency.

Taproot: Make Bitcoin smarter

While SegWit lays the foundation for enhancing Bitcoin’s scalability and security, the Taproot upgrade was activated in November 2021, bringing additional improvements focusing on privacy, efficiency and smart contract capabilities:

Schnar Signature: Replaces the ECDSA signature scheme, Schnar Signature allows multiple signatures to be aggregated into one.This merger simplifies and reinforces complex bitcoin transactions, making it indistinguishable from simple transactions on the blockchain.
Enhanced Privacy and Efficiency: By making multi-signature transactions look the same as regular transactions, Taproot enhances user privacy and optimizes space on the blockchain, thereby increasing transaction throughput and reducing fees.
Smart Contract Features: Taproot facilitates the deployment of more complex and efficient smart contracts on the Bitcoin network, allowing developers to create innovative applications that leverage Bitcoin security and decentralization.

The upgrades to SegWit and Taproot are more than just technological improvements, they are transformative milestones that significantly expand Bitcoin’s capabilities beyond its original purpose as a peer-to-peer electronic cash system.These upgrades lay the foundation for the booming second-tier Bitcoin ecosystem we will explore next.

Bitcoin ecosystem

Lightning Network is the first important Bitcoin scalability solution, introducing Bitcoin micropayments.It increases the capacity of the Bitcoin network by creating a second layer payment channel to process a large number of off-chain transactions and settles the final state on-chain.

While the Lightning Network further enhances its utility as a store of value by making Bitcoin easier for daily value exchange, SegWit and Taproot have enabled the network to have a capability far beyond this initial purpose.The latest Bitcoin scalability solution takes advantage of the unused features of Bitcoin over the years – its value as the safest and most decentralized distributed ledger.

After the Taproot upgrade, the Bitcoin Layer 2 solution has introduced the following features to improve Bitcoin’s efficiency and expand its capabilities dynamics:

Programmability:

Smart Contracts: Supports complex and programmable smart contracts to achieve finality in the Bitcoin network.

Token Standard: Create new standards for issuing new tokens and expand the scope of decentralized finance.

DeFi Inclusion: Before these updates, Bitcoin was largely not involved in the DeFi space due to its rigidity and lack of programmability.

DApp: Build applications on networks built on Bitcoin networks to enhance their usefulness.

Scalability: A key innovation in the Bitcoin ecosystem is to create high-throughput networks that improve the scalability of the Bitcoin network through modular blockchain design, in which the Bitcoin mainnet ensures thatThe finality of the application and transactions executed in the second layer.

NFT: In addition to ordinals, networks built on the Bitcoin network are creating non-fungible token standards and building an NFT ecosystem.

Synthesis of Bitcoin: Layer 2 solution is creating a two-way anchor with trust minimization with the Bitcoin mainnet to issue its synthetic version on Layer 2 and implement DeFi on Bitcoin.

The evolution of Bitcoin and Ethereum reflects a shared vision for enhanced scalability, security and efficiency, despite their different technical approaches.

Ethereum’s transition to Ethereum 2.0 and its Rollup-centric roadmap highlight the strategic focus on optimizing the mainnet to make it the security and decentralized foundation for the second layer scaling solution.Key upgrades, such as Danksharding, are designed to enhance the ability of the Ethereum network to support Rollup, increase throughput, reduce transaction costs, while maintaining the decentralized spirit of the network.

The Bitcoin ecosystem is undergoing similar evolution, with a second layer of solutions to smart contract capabilities like Stacks and Liquid Network.These innovations leverage Bitcoin’s unrivalled security and decentralization to build efficient virtual machines and applications layers that sit on top of the Bitcoin blockchain.Just as Ethereum’s Rollup takes advantage of the mainnet to provide scalable solutions, Bitcoin’s second-tier project uses the properties of the core blockchain to extend its utility beyond the scope of simple transactions.

This trend towards building on a solid foundation of Bitcoin reflects Ethereum’s strategy, highlighting the broader trend in the blockchain space towards second-tier solutions that enhance functionality without sacrificing decentralizationprinciples of transformation and security.

The following sections will explore the leading scalability solutions in the Bitcoin network.Especially Rootstock, Stacks and Liquid Network.

Rootstock (RSK)

Rootstock (RSK, tokens are RIF) represents a significant advancement in integrating smart contract capabilities with the security and wide acceptance of the Bitcoin network.As a sidechain that is two-way anchored with Bitcoin, RSK makes it possible to deploy decentralized applications (DApps) and smart contracts without compromising the core principles of Bitcoin.

This analysis will explore the key features and components of the RSK network, highlighting its unique position in the blockchain ecosystem.

Two-way anchoring with Bitcoin and RBTC

RSK uses a local cryptocurrency called RBTC, which is pegged to Bitcoin (BTC).This anchoring mechanism is achieved through bridging, ensuring a secure and seamless conversion between BTC and RBTC.Users can also deploy smart contracts and use DApps on the RSK network.

Merger mining with Bitcoin

RSK’s security model leverages Bitcoin’s existing mining infrastructure through merge mining.This approach allows bitcoin miners to mine both Bitcoin and RSK blocks simultaneously, using the same computational work.Merger mining enhances RSK security without additional energy consumption, complies with Bitcoin’s Proof of Work (PoW) consensus mechanism.Miners get most of the RSK network transaction fees from the RSK blocks they mine.

RSK Virtual Machine (RVM)

RVM is fully compatible with Ethereum’s virtual machines (EVMs), allowing the execution of Ethereum-designed smart contracts on the RSK network.This compatibility allows developers to deploy their existing Ethereum DApp on RSK, taking advantage of Bitcoin’s security while benefiting from Ethereum’s smart contract capabilities.RVM processes smart contracts and runs DApps, promoting a rich ecosystem of decentralized applications.

Decentralized alliances and security measures

The alliance further enhances the security and functionality of RSK.A semi-trusted third party is crucial in managing two-way anchoring and providing additional features such as Oracle information and transaction acceleration, a setup that contributes to network security.

Scalability solutions and RIF services

To address scalability issues, RSK combines off-chain transaction solutions and integrates with the Rootstock Infrastructure Framework (RIF) to provide a range of services to enhance user experience and scalability.These services include RIF storage, RIF identity and RIF payments, supporting a variety of applications and use cases in the RSK ecosystem.

Rootstock Ecosystem and DApp

The RSK ecosystem hosts a variety of decentralized applications, including Sovryn, a comprehensive DeFi protocol; Money on Chain, which provides crypto-staked stablecoins and decentralized stake; Liquality, a cross-chain wallet with built-in exchange capabilities; and Tropykus, a lending agreement with flexible repayment methods tailored to emerging markets.

In short, RSK seamlessly integrates the ultimate and liquidity of Bitcoin with the versatility and adaptability of Ethereum smart contracts, creating a unique and powerful platform for decentralized applications.By leveraging merge mining, two-way anchoring with Bitcoin, and compatibility with EVM, RSK not only enhances the capabilities of the Bitcoin network, but also opens up developers and users seeking to interact with the broader blockchain ecosystem.New ways.

Stacks Network

The Stacks Network is a Layer 2 solution built on the Bitcoin blockchain, aiming to expand the capabilities of Bitcoin by introducing smart contracts and DApps while leveraging Bitcoin’s unparalleled security and finality.

The following is a comprehensive analysis of Stacks network and its functions:

Proof of Transfer (PoX) Consensus Protocol

Stacks innovates through its transfer proof consensus mechanism, connecting Stacks and the Bitcoin blockchain.This unique protocol allows the creation of new Stacks (STX) blocks, and miners earn STX tokens through their own efforts.Meanwhile, STX holders (called “stackers”) can earn Bitcoin by participating in the consensus of the network, thus facilitating a symbiotic relationship between these two ecosystems.

Satoshi Nakamoto Hard Fork

Named after the anonymous creator of Bitcoin, Satoshi Nakamoto represents a major upgrade aimed at increasing transaction speeds, improving block generation through tenure-based systems, and incorporating the hash value of Stacks microblocks intoBitcoin blocks to enhance the security of Stacks transactions.This upgrade solves the micro extractable value (MEV) problem and introduces sBTC, a trustless Bitcoin synthesis representation on Stacks, which maintains a 1:1 peg to BTC.

Clarity Smart Contract

Stacks uses the Clarity language for smart contract development, emphasizing security and predictability.Clarity is designed to prevent common bugs and vulnerabilities in smart contract development, making it an ideal choice for developers who want to build on a secure platform.

STX Token

The local token of Stacks network, STX, plays a key role in network operations, including transaction fees and stack rewards.STX’s token economics is closely related to Bitcoin and affects miners’ commitment to the network.

Stacks Ecosystem

The Stacks ecosystem is dynamic and diverse, including Bitcoin NFT, Bitcoin Naming System (BNS), and various DApps such as Boom, Arkadiko, StackingDAO, and Arcane.These applications cover DeFi, revenue, stack and NFT platforms, demonstrating versatility and development potential in Stacks networks.

Stacks claims to have the same security and immutability as Bitcoin by distinguishing its entire transaction history from other Layer 2 solutions on the Bitcoin blockchain.Additionally, Stacks is exploring integrated rolling upgrades to enhance scalability and functionality.

In short, Stacks demonstrates the ever-evolving landscape of blockchain technology, where the fundamental principles of Bitcoin are expanded to create a more functional and flexible ecosystem.Through its innovative consensus mechanisms, smart contract capabilities and ongoing development efforts, Stacks aims to unlock the full potential of Bitcoin as a platform for decentralized applications and financial instruments.

Liquid Network

Liquid Network is a Layer 2 solution designed to enhance the Bitcoin ecosystem by providing faster, more confidential transactions and enabling the issuance of digital assets.The network runs as a sidechain for Bitcoin and is built on the Elements open source platform based on the Bitcoin code base.Elements facilitates the creation of standalone blockchains or sidechains that can be connected to other Layer 1s and provide features such as confidential transactions, joint two-way pegging, asset issuance and Schnorr signatures.

The main features and operations of the Liquid Network side chain

Liquid Network supports seamless transfer of Bitcoin between the Bitcoin network and the Liquid Network through a two-way peg, allowing the minting of Liquid Network Bitcoin (L-BTC) on the Liquid Network sidechain.This process is assisted by a consortium called the Liquid Network Alliance, which consists of large exchanges, financial institutions and Bitcoin-centric companies all over the world, ensuring there is no single point of failure due to its decentralized nature.

Participant roles in Liquid Network:

Block Signator: Responsible for generating blocks every minute and ensuring the security and consistency of the Liquid blockchain through a joint consensus model.This model requires a super majority to make decisions, enhancing the security and reliability of the network.

Guardian: This role involves managing Bitcoin held by the alliance, overseeing the peg-in and peg-out processes between Bitcoin and Liquid Network, and ensuring the integrity of funds moving across the network.

Asset Issuance and Confidential Trading

Liquid Network has the ability to issue assets, opening up many possibilities for tokenized fiat currencies, cryptocurrencies other than Bitcoin, digital collectibles, etc.These issued assets are assigned unique identifiers, and their transaction details can be kept confidential, providing privacy protection for users on the network.

Advantages and use cases

The network is designed to improve the speed and confidentiality of Bitcoin transactions.Since the block time is only one minute and the transaction can quickly reach final confirmation, Liquid Network is particularly beneficial for traders and institutions that require fast, private transactions.Issuing digital assets on Liquid Network, including stablecoins and security tokens, further broadening the scope of Bitcoin’s usefulness.

Liquid Network introduces features such as confidential transactions and asset issuance without compromising Bitcoin’s security premises, allowing applications ranging from financial instruments to gaming assets.Through the operation of the Liquid Network Alliance, a certain degree of decentralization is ensured, and alliance members play a key role in maintaining the integrity and functionality of the network.

In essence, Liquid Network utilizes Bitcoin’s robust security model to provide enhanced functionality for digital asset issuance and transactions, solving specific needs that the Bitcoin main chain in the cryptocurrency ecosystem cannot meet.

Other emerging Bitcoin Layer 2 solutions

While Rootstock, Stacks, Lightning Network and Liquid are one of the most extensive Bitcoin-centric innovations in the ecosystem, many other projects are building numerous scaling solutions, trusted bridges and innovative Bitcoin layers.Let’s list some more prominent ones:

Babylon

Babylon aims to expand Bitcoin to protect the Proof of Stake (PoS) economy.It introduces a Bitcoin Proof of Stake protocol that allows Bitcoin holders to earn from their idle Bitcoin without trusting third parties, bridges, or pinning their Bitcoin to another chain.This is achieved through a trustless, self-hosting mechanism that gives them the right to validate the PoS chain and get benefits.

Key features of the Babylon method include:

Trustless Equity Mining: Bitcoin holders can lock their Bitcoins in a self-custodial manner, obtain the right to verify the PoS chain and earn profits, emphasizing an ecosystem without the trust of third parties.
Security against PoS attacks: This protocol is designed to provide complete security against PoS attacks and ensure the security of collateral assets.
Quick Unlock and Scalable Resolution: These features are designed to provide the most liquidity and benefits to Bitcoin stakers, allowing them to enjoy the benefits of staking without significant adverse effects.
Ecosystem Partnership: Babylon’s ecosystem includes partnerships with a variety of blockchain projects, aiming to enhance the practicality and security of Bitcoin in a decentralized economy.

Interlay

Interlay focuses on integrating Bitcoin with Decentralized Finance (DeFi) on multiple blockchains, providing a comprehensive platform for trading, lending, borrowing, and creating leveraged positions using BTC.The project launched iBTC, the trustless Bitcoin representation in DeFi, protected by decentralized networks and insurance mechanisms, in line with the description provided.

Key aspects of Interlay include:

Modular approach: Interlay is designed as a modular, programmable layer between Bitcoin and the multi-chain ecosystem, providing novel decentralized use cases for BTC.

Control of private keys: Users maintain control over their private keys when participating in DeFi activities, emphasizing security and user sovereignty.

iBTC: This mechanism allows users to securely lock their BTC, mint iBTC at a 1:1 ratio, and participate in DeFi activities on various blockchains.iBTC can be exchanged for native BTC on Bitcoin, ensuring trustless interactions.

Security and Trustworthiness: Interlay builds on cutting-edge, peer-reviewed research and audited by leading blockchain security companies to provide its users with a high level of security and trustworthiness.

Decentralized Governance: Interlay is governed by the community through the voting rights of Governance (INTR) tokens, allowing stakeholders to participate in decision-making.

Mintlayer

Mintlayer is an efficient and energy-efficient blockchain solution designed to transform the status quo of DeFi by enhancing token interoperability and enabling asset trading and system functionality.It is built on Bitcoin and aims to address the limitations of current blockchains by providing the following features:

Legalized tokenization: Supports compliance tokenization of assets such as equity and real estate, supports complex token economic models, and does not require native chain tokens as GAS.
Decentralized transactions: Improve scalability and security through unique consensus mechanisms and promote decentralized transactions.
Cost Efficiency and Throughput: Reduce transaction costs and improve throughput throughput through transaction batch processing and lightning networks.
Bitcoin Compatibility: Maintain compatibility with Bitcoin, implementing two-way pegging and cross-blockchain transfers.
Enhanced Privacy: Provides enhanced privacy features through UTXO structure and optional “confidential transaction” mode.

Mintlayer’s innovative approach aims to leverage Bitcoin’s infrastructure to create a more inclusive, efficient and secure DeFi ecosystem for a wider range of financial market applications.

Threshold Network

Threshold Network enhances users’ sovereignty on public blockchains by leveraging threshold cryptography to protect digital assets.Key features and features of Threshold Network include:

tBTC: is a decentralized bridge for Bitcoin in DeFi, allowing users to deposit and redeem BTC without an intermediary, promoting seamless integration of Bitcoin and the DeFi ecosystem.
TACo plug-in: Provides end-to-end decentralized encryption for DApps, ensuring privacy and security by managing access to data encrypted through independent threshold node groups.
DAO Governance Model: The network operates with the DAO governance model, enabling T token holders to participate in the decision-making process, reflecting a community-driven approach to network governance.
Security and Decentralization: Threshold uses threshold cryptography to distribute operations between independent parties, enhancing security, reducing trust assumptions, and ensuring privacy on public blockchains.

The network aims to provide a secure, private and decentralized infrastructure for digital assets, supporting a strong governance framework that empowers users and token holders.

Drivechain

Drivechain proposes a way to interact with the sidechain through BIPs 300 and 301, implementing new features and applications without compromising the security of the main blockchain.Key points of Drivechain include:

Peer-to-peer Bitcoin Sidechain: Drivechain allows the creation, deletion and transfer of BTC between Bitcoin and sidechains, allowing users to opt in to new features or trade-offs.
No permission innovation: It emphasizes that anyone can create new blockchain projects and enable Bitcoin to adopt any beneficial features of other cryptocurrencies, promoting the formation of an innovative environment.
Zero Risk Solution: Drivechain was proposed as a zero risk solution that can be easily recovered if needed, solving major challenges of Bitcoin such as scalability and flexibility.
BIPs 300 and 301: These Bitcoin improvement proposals detail the technical mechanisms behind Drivechain’s operation, including “computer power custody” and “blind merger mining” to facilitate interaction between side chains.

Drivechain’s approach to enhancing Bitcoin capabilities through sidechains is designed to provide a scalable, flexible and secure framework for the development of new applications and capabilities within the Bitcoin ecosystem.

Are Bitcoin and Ethereum’s second-layer network equivalent?

Many of the Bitcoin Layer 2 networks we have discussed share a common claim – inheriting Bitcoin’s security, finality, and decentralization.So let’s dive into this statement and critically analyze it to compare it with the second-tier architecture that stands out on Ethereum.

Ethereum’s second layer solution and validator interaction

In Ethereum’s second-tier solutions, such as optimistic Rollups and zk-Rolups, validators on the Ethereum network play a key role in ensuring the security and integrity of layer 2 transactions.These solutions involve the following mechanisms:

Optimistic Rollup requires validators to challenge fraudulent transactions during the dispute period, assuming that the transaction is valid unless there is evidence to prove the opposite.
zk-Rollups uses zero-knowledge proofs, allowing validators to verify transactions without viewing complete data, ensuring privacy and scalability while maintaining security.

This model means that Ethereum Layer 2 solution directly utilizes the security mechanism of the Ethereum mainnet, including its validators, to ensure the integrity of the Layer 2 transactions.The validator is provided with the necessary data (or proof, in the case of zk-rollup) to rebuild the second layer state and verify the transaction, which makes the second layer security closely related to the Ethereum mainnet.

Bitcoin Layer 2 Solutions Interaction with Verifiers

After Taproot, Bitcoin has enhanced its ability to conduct more complex transactions and smart contracts by increasing efficiency and privacy.However, Bitcoin’s consensus mechanism and its approach to layer 2 solutions, such as using Stacks protocol, Rootstock (RSK), or Liquid Network, will not essentially change the bitcoin validators in directly verifying layer 2 block datarole.

Bitcoin verifiers continue to protect the network by verifying and confirming transactions in the Bitcoin block without directly participating in the execution or verification of layer 2 transactions.Therefore, the second layer solutions on Bitcoin rely on their own security and consensus mechanisms, although usually anchored to the finality and security of the Bitcoin blockchain.

Influence

This operational difference means that while Ethereum’s Layer 2 solution can inherit security directly from the Ethereum mainnet through active validator verification, Bitcoin’s Layer 2 network may not inherit in the same direct wayBitcoin security.They benefit from the finality of transactions that Bitcoin resolves on the mainnet, but rely on their own security protocols in terms of verification within the second layer.

Therefore, Bitcoin’s second-layer network may face a challenge that malicious transactions may achieve finality if the security mechanisms of the second layer are compromised without direct intervention from Bitcoin verifiers.This requires a strong second-tier security measure and may introduce a different trust assumption than Ethereum’s second-tier solution.

However, this does not necessarily undermine the security of Bitcoin’s Layer 2 solutions; instead, it highlights the importance of designing and implementing these Layer 2 cybersecurity models.This also underscores the need for users to understand the specific trust assumptions and security guarantees of any layer 2 solution they use, whether on Bitcoin or Ethereum.

The Challenge of Bitcoin’s Second Layer Ecosystem

The Bitcoin Layer 2 (L2) ecosystem is in a critical stage of development, facing a series of challenges that span the technological, economic and regulatory fields.Addressing these challenges is essential to foster growth, adoption and innovation in the field.Here is a comprehensive review of nine key obstacles, including relevant examples and support data:

1. Technical limitations: Unlike Ethereum’s second layer solution, where validators are actively involved in verifying layer second transactions, Bitcoin’s second layer solutions such as Stacks and RSK rely on independent security mechanisms.This divergence requires a strong independent security model that may limit the possibility of direct inheritance of security from the Bitcoin blockchain.

2. Ethereum-centric DeFi: Ethereum’s dominance in the DeFi field is due to the active developers and the large number of DApps.For example, data from DeFi Llama shows that Ethereum’s DeFi platform locks in billions of dollars in value, highlighting the challenges of Bitcoin attracting similar participation based on DeFi.

3. Launch new liquidity: The new Bitcoin Layer 2 platform must provide compelling reasons to attract liquidity to shift from established ecosystems.Activities like liquidity mining on Ethereum have shown that incentives can attract a lot of capital; Bitcoin’s second layer may require similar strategies.

4. Developer Learning Curve: Developers must deal with the complexity of Bitcoin-specific programming languages (e.g., Stacks’ Clarity) and unique consensus mechanisms, which may slow down development and innovation.

5. Interoperability and Integration: Like encapsulated tokens such as WBTC on Ethereum, the ability of assets to flow freely between chains highlights the importance of interoperability.Bitcoin Layer 2 solutions must develop or integrate cross-chain communication protocols to facilitate similar functionality.

6. User Adoption and Experience: The success of platforms like Uniswap proves the value of user-friendly design in attracting non-technical users into the DeFi field.Bitcoin Layer 2 solutions must prioritize simplifying user interaction for enhanced adoption.

7. Regulatory and Security Issues: As the global regulatory framework continues to evolve, Bitcoin Layer 2 projects must remain flexible to meet diverse legal requirements while ensuring the highest level of security to prevent hacking and exploitation.

8. Network Effects and Ecosystem Development: Developing a thriving ecosystem is not just about attracting developers and users, but also about building a community and fostering partnerships.Ethereum’s annual Devcon is a great example of how community engagement drives the growth of the ecosystem.

9. Scalability and Throughput: It is crucial to ensure that the second layer of Bitcoin can handle high transaction volume without degrading performance.Solutions such as zk-Rollup on Ethereum demonstrate the potential to improve throughput while maintaining security, a model that Bitcoin’s second layer can learn from.

Addressing these challenges requires a multifaceted approach, including technological innovation, strategic incentives, regulatory navigation and community building.The evolution of Bitcoin’s second layer ecosystem depends on its ability to adapt and overcome these obstacles, thus unlocking new possibilities beyond the original design of Bitcoin as a digital currency.As the blockchain field continues to mature, solutions developed to solve these challenges will not only shape the future of Bitcoin’s second layer, but will also affect the broader landscape of decentralized finance and blockchain technology.

Is Bitcoin still considered a commodity?

The SEC (SEC) acceptance of Bitcoin as a commodity and distinguishing it from securities is an important milestone, bringing clarity to the regulatory environment for Bitcoin.This classification is based mainly on the characteristics of Bitcoin as a decentralized digital currency, whose main design uses are as a store of value and medium of exchange, without the participation or commitment of return from central issuers, which is a typical feature of securities.

The second layer of smart contract-enabled solutions that emerge on the Bitcoin network bring it closer to the capabilities of Ethereum.So, is Bitcoin’s classification likely to be challenged?Let’s analyze this idea:

No change in Bitcoin core consensus

The second layer solution discussed above runs on Bitcoin without changing its underlying consensus mechanism.Bitcoin’s main function as a peer-to-peer trading network and the role of miners in protecting network security remains the same.

The architectural separation between Bitcoin and its second layer ensures that the innovation and complexity introduced by the second layer does not affect Bitcoin’s consensus.

Functional and classification regulatory perspective

From a regulatory perspective, the classification of an asset as a commodity or securities usually depends on its issuance, the expectation of profiting from the efforts of others, and the extent of dispersion.The increase in the second layer of functionality does not necessarily imply expectations of profits or involvement of the centralized parties responsible for the assets, which are important considerations in securities classification.

Precedents for other products

The evolution of products and services around traditional commodities (such as gold or oil) increases the level of practicality or financialization, but does not change the basic classification of basic commodities.Similarly, the development of the second layer solution on Bitcoin can be seen as these enhanced analogies that extend practicality but do not change the core characteristics of the commodity.

In short, while the second layer development on the Bitcoin network enhances its utility and brings its functionality closer to Ethereum, they do not fundamentally violate Bitcoin’s classification as a commodity.The core principles and functions of the Bitcoin network remain focused on its role as a digital store of value and medium of exchange, while the second layer solution serves as a complementary enhancement to its fundamental nature rather than modifying it.

End thinking

As the Bitcoin ecosystem embraces new developments, it finds itself at a fascinating crossroads, getting closer to Ethereum in terms of functionality and innovation.While Bitcoin remains unparalleled as a store of value, its technological framework has traditionally lagged behind Ethereum in terms of the complex infrastructure needed to support DeFi.

On the contrary, although Ethereum is not widely recognized in the storage of value attributes, it occupies a dominant position in the DeFi field and carries the vast majority of activities and innovations.This division underlines the unique advantages and trade-offs between these two leading cryptocurrencies.Therefore, the value orientation of each cryptocurrency depends on the priorities of investors and users: the unrivalled security and value store offered by Bitcoin, or the dynamic and extensive DeFi ecosystem implemented by Ethereum.

As the two ecosystems continue to evolve, the interaction between these fundamental features will continue to shape the future of the digital asset space.