Bitcoin ecosystem rises, Layer2 projects attract much attention

Recently, the popularity of the inscription project has driven the development of the entire sector, with related token prices continuously reaching new highs. At the same time, thoughts on how to maintain a healthy development between inscriptions and Bitcoin have emerged. Against this backdrop, the trend of Bitcoin's "L2" seems unstoppable. L2 not only addresses the controversial "garbage transaction" issue but also creates a broad prospect for DeFi applications by enhancing programmability. So, what is the current development trend of the Bitcoin L2 sector? What early projects are worth paying attention to?

Bitcoin "L2ization" Trend

With the ongoing craze for inscriptions, manually participating in new on-chain projects has become a red ocean. From a narrative perspective, inscriptions provide more ordinary users with opportunities to participate. However, the Bitcoin network, at the center of the storm, also faces numerous challenges, the most intuitive of which are network congestion and skyrocketing transaction fees.

Inscriptions are similar to NFTs, allowing users to record various data onto the blockchain. Since Bitcoin transaction fees are paid based on data size, inscription users tend to set lower transaction fees, which means they are willing to wait longer for confirmation. This can easily lead to inscription transactions being replaced by more urgent Bitcoin transfers.

A large number of inscribed transactions have surged and are willing to queue, overwhelming the Bitcoin memory pool. According to statistics, Bitcoin has accumulated 87 million UTXOs over the past 14 years, but in the 7 months since BRC20 began trading on April 24, it has skyrocketed to 140 million. Among the more than 50 million newly added UTXOs, 40 million are very small transactions of 100 to 1000 Satoshi.

Since its launch in February 2023, inscriptions have been the primary consumers of Bitcoin block space. Starting from February, the Bitcoin mempool has been in a state of full capacity, continuing to this day. This has resulted in the Bitcoin network being unable to clear its mempool, reaching the highest levels recorded in history.

Considering that the Bitcoin network limits transactions of a single UTXO to no less than 546 Satoshis to prevent dust attacks, this means that the vast majority of pending small transactions among tens of millions of inscription transactions are essentially equivalent to spam transactions of a DDoS attack, which may never be packed and broadcast on-chain.

Most of these small UTXOs may never be spent and will be stored in Bitcoin nodes for the long term, potentially causing a huge waste of hardware and electricity resources for the BTC network in the coming decades or even centuries.

In the context of the inscription market breaking through billions of dollars and maintaining strong growth momentum, traditional inscription projects issued on the Bitcoin main chain, constrained by network congestion and accusations of "spam transactions," will find their issuance models increasingly difficult to sustain, which will become a major obstacle limiting their further expansion.

In contrast, the advantages of the Bitcoin L2 track are highlighted: by packaging transactions to L2, it resolves network congestion and the "spam transaction" problem, while leveraging the programmability of newly added smart contracts to create a series of DeFi application scenarios for the Bitcoin ecosystem, including Swap, lending, liquidity mining, staking, and more.

Bitcoin L2 Project Overview

As the construction of a prosperous DeFi application layer on the current Bitcoin ecosystem becomes a new hotspot, Bitcoin L2 projects have become a key track carrying new expectations from Bitcoin supporters. In addition to well-known projects like Stacks, RSK, and Liquid, new solutions such as BitVM and BEVM also offer fresh ideas.

Stacks: Bitcoin smart contract layer

Stacks, as a second layer of Bitcoin, anchors on the Bitcoin blockchain on one hand, while introducing Ethereum-like smart contract functionality as an independent protocol on the other hand, and settles transactions permanently on the BTC blockchain, opening up new possibilities for applications such as DeFi and NFTs.

Stacks has its own chain, compiler, and programming language, running in sync with Bitcoin to ensure its transactions and integrity. However, due to the use of a "hook" method for BTC cross-chain implementation, there is a certain risk of centralization at a single point. At the same time, its network Gas uses the mainnet token STX instead of BTC, which may lead to hesitation from miners in participation.

Currently, both in terms of users and funds, Stacks' performance is relatively mediocre, still showing a significant gap compared to popular ETH L2 projects.

RSK: A universal smart contract platform based on Bitcoin

RSK is a general smart contract platform secured by the Bitcoin network, making all Ethereum applications compatible with the Bitcoin blockchain. RSK's block generation speed and transaction processing capability are superior to the Bitcoin mainnet.

The most unique design of RSK is merged mining, which uses the same PoW consensus algorithm as Bitcoin but has a faster block generation speed. Merged mining allows miners to mine both Bitcoin and the RSK blockchain simultaneously, significantly increasing profitability without the need for additional resources.

However, RSK uses smartBTC (RBTC) as a token, and despite bridging through vaults and smart contracts, it is still difficult to completely avoid smart contract security risks.

BitVM: A Promising Bitcoin Smart Contract Awaiting Verification

BitVM aims to achieve Turing-complete Bitcoin contracts without changing the operation code. Its key innovations include introducing state through Bit Commitments, achieving verifiability through logic gates, and keeping the Bitcoin network lightweight.

Currently, the BitVM functionality is extremely limited and remains largely in the theoretical stage. Future potential use cases include bidirectional hooks with sidechains, with implementation schemes similar to the Rollup logic on Ethereum. However, the smart contract layer of BitVM operates off-chain, and each smart contract does not share state. BTC cross-chain uses traditional Hash locks for asset anchoring, and true decentralized BTC cross-chain has not yet been achieved.

BEVM: A Fully Decentralized Bitcoin L2 Solution

BEVM is a BTC Layer2 that uses BTC as Gas and is compatible with EVM, aiming to expand the smart contract scenarios of Bitcoin. Users can build decentralized applications on BEVM with BTC as the native Gas.

BEVM implements a fully decentralized BTC cross-chain process, avoiding the asset security risks of centralized arbitration nodes. Due to its complete compatibility with EVM, BEVM allows BTC to easily enable various decentralized applications, and Ethereum DApp developers can directly and seamlessly migrate to BEVM.

MAP Protocol: Peer-to-peer cross-chain interoperability Bitcoin L2 network

MAP Protocol is a Bitcoin Layer2 network for peer-to-peer cross-chain interoperability, utilizing Bitcoin's security mechanisms to enable assets and users from other public chains to interact seamlessly with the Bitcoin network. It offers lower Gas transaction fees and implements BRC20 cross-chain capabilities.

Users can trade BRC20 tokens on SATSAT with low gas fees and no congestion, and can also roll back to the Bitcoin main chain through Rolluper, enabling transactions on various Bitcoin L1 trading platforms.

Summary

As the cryptocurrency community recognizes the importance of Layer 2 solutions in shaping the future of Bitcoin, the entire Bitcoin L2 space is ushering in new development opportunities. This construction cycle may be lengthy, and now is the time for early positioning.

Bitcoin L2, as a new problem-solving approach, has ample imaginative space and is still in the early blue ocean phase, representing an untapped dividend period that deserves long-term attention. In the future, there may emerge a number of leading Bitcoin L2 projects worth billions of dollars, similar to Ethereum Layer 2 solutions like Arbitrum and Optimism in 2021.

The approval of ETFs is currently the largest catalyst in the cryptocurrency market, expected to bring huge upside potential and limited downside risk. Despite some liquidity risks, if investor demand increases significantly, ETFs could greatly improve market conditions.