Blockchain offers decentralization, trustworthy transactions, and a tamper-proof record of multiple transactions, which has in turn generated an exciting ecosystem of crypto and ongoing technological innovations. However, a characteristic linking many blockchains is an inability to scale—that is, handle greater volumes of transaction data and be responsive in a timely fashion.
Theoretically, a blockchain should be able to handle infinite on-chain transactions per second (TPS); Visa’s centralized VisaNet electronic payment system, for example, supports about 20,000 TPS. Currently, the Bitcoin main chain handles only 6-8 TPS.
To address some of these issues, blockchain developers are currently concentrating on improving the scalability of blockchain. One way to scale up is by employing Layer 2 scaling solutions. So let us open the door to the world of Bitcoin Layer-2 solutions and see some of the most promising innovations in the field, marching towards overcoming the current known challenges of the Bitcoin blockchain.
Bitcoin Layer 2 solutions
Networks that function as expansion layers on top of the main chain (Layer 1) are called layer-2 networks. They help increase the scalability of the main chain and the speed of transaction execution by shifting transactions off the main chain, resulting in less congestion and faster throughput. They are vital to solving the trilemma that plagues blockchain technology: the scalability, security, and decentralization trade-off. And because scalability and transaction speed are particularly important ways in which Bitcoin lacks flexibility compared with traditional financial services, Layer-2 solutions aim to address these issues. This expansion enables Bitcoin to support intricate applications and systems, enhancing its overall utility and appeal.
How do Bitcoin Layer 2 Solutions operate?
Various Layer 2 solutions use different methods to improve Bitcoin’s transaction processing abilities:
● State Channels:
These enable users to conduct transactions privately off-chain, cutting down on transaction fees by only recording net balance changes on the main blockchain.
● Rollup Chains:
This approach consolidates numerous transactions into a single data block recorded on the main blockchain. There are two types: optimistic and ZK rollups, each verifying transaction validity in distinct ways.
● Sidechains:
These are separate blockchains that operate alongside Bitcoin’s main blockchain. They facilitate asset transfers between the two networks and accommodate additional Layer 2 solutions.
Lightning Network and Bitcoin Scalability
The Lightning Network (LN) was conceived in a 2015 white paper and became operational sometime around 2018. It is a crucial layer-two scalable transaction running on top of Bitcoin itself. It aims to solve Bitcoin’s scalability problem by shunting transactions off the main blockchain to increase speed and lower costs. This is achieved by establishing payment channels between users, enabling them to execute countless transactions without every detail needing blockchain recording. Only the initial and final balances of these channels get recorded, significantly streamlining transaction processes. The Lightning Network currently boasts a total value locked (TVL) exceeding $234 million.
Since its inception, the Lightning Network has witnessed substantial progress and expansion. Noteworthy enhancements include the introduction of features like Keysend and Wumbo Channels in 2020, which expanded the network’s transaction size capabilities. The LN ecosystem is now home to an increasing variety of products, projects, and solutions across many sectors, including gaming, wallets, payments, node hosting, and infrastructure.
In addition, its potential theoretical capability to process as many as 1 million transactions per second (TPS) as opposed to Bitcoin’s main blockchain throughput of about 7–10 TPS further illustrates its growth potential concerning its mission to improve the performance of Bitcoin as a peer-to-peer (P2P) system.
Rootstock Infrastructure Framework (RIF)
Rootstock (RSK) was deployed in 2018; its Total Value Locked (TVL) today is more than $200 million. RSK is the Rootstock Infrastructure Framework (RIF), a decentralized suite of infrastructure protocols that incorporates a tool chest of essential building blocks for dApp development on RSK, a Smart contract platform secured by the Bitcoin network. RIF’s vision is to enable a community of developers and fintech innovators to build decentralized products for the mass market. RIF sits on top of Rootstock and provides a suite of decentralized services, from payments and storage to naming systems, that make interacting with blockchains easier for users.
The technical basis of RIF is RSK’s blockchain, which brings with it the security and immutability of Bitcoin thanks to the fact that RSK is indeed a Bitcoin sidechain and is also EMV-compatible (so it can host Smart contracts like Ethereum), but with better capability. RIF aligns Bitcoin’s strong security with Ethereum’s flexible smart contracts to provide developers with a way to build decentralized applications securely and efficiently. The RIF token serves as the utility token within this ecosystem, granting access to and facilitating payments for these decentralized services.
Benefits of Layer 2 Solutions for Bitcoin
Bitcoin Layer-2 solutions bring a range of advantages to both the Bitcoin blockchain and the Layer-2 protocol itself. Let’s explore some of the key benefits:
1. Scalability:
Layer 2 makes Bitcoin a much more scalable system. Transactions can be settled outside of Bitcoin’s system—on, for example, a state channel or on a sidechain—thereby relieving loads on Bitcoin’s block and data ledger.
2. Smart contract abilities:
Bitcoin might be a little limited in its scripting (compared with the likes of Ethereum), but some of the Layer-2 solutions add this functionality, which then allows Smart contract functionality to connect the Bitcoin blockchain with chains that have full Smart contract abilities.
3. Faster Confirmation Speeds:
One notable advantage of Layer-2 protocols is the acceleration of transaction confirmation times. While Bitcoin blocks typically take about ten minutes to generate, full confirmation can take over half an hour. With Layer-2 solutions, transactions can be completed much faster, with state channels offering near-instantaneous transaction speeds without compromising on security.
4. Improved Security:
Layer-2 protocols also provide much-improved security for all of the assets and activities that will be conducted on that layer. Since the state channel or sidechain is linked to the Bitcoin chain, it inherits all the extremely robust security measures of Bitcoin.
Conclusion
Building off Layer 2 solutions offers better transaction speeds, considerably cheaper transaction costs, and more expansive Smart contract capabilities than are currently available on the main chain. Yet with increased functionality come fresh concerns over vulnerability to security issues and unintended centralization, especially if corporate and regulatory powers co-opt Bitcoin’s off-chain infrastructure to their ends. These concerns are crucial for the ongoing development and implementation of Layer 2 solutions.
Bitcoin’s Layer 2 second-layer solutions are the most vital step forward in blockchain technology in years, solving the final primary technical hurdle to mainstream blockchain adoption and unlocking new opportunities for users and developers alike.
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