The Basic Knowledge System of Bitcoin Layer 2 Networks

The rise of Bitcoin inscriptions has injected new vitality into the Bitcoin ecosystem, sparking renewed interest in Bitcoin. Some believe this has opened Pandora's box for the Bitcoin ecosystem. Among the many technological developments in the Bitcoin ecosystem, the construction of layer two is crucial. This article aims to summarize the basic knowledge of Bitcoin layer two, hoping to inspire further development in this field.

The blockchain world begins with Bitcoin and ends with the Bitcoin ecosystem. Ethereum can also be seen as an exploration of a sidechain technology for Bitcoin.

The terms "layer 2 construction" and "layer 2 network construction" can be used interchangeably in this article, with the latter being more specific and the former being broader. However, in order to remain consistent with commonly used terminology in the industry, we will also use the concept of "layer 2 network construction."

1. The mission of Layer 2

To understand the basic issues that need to be addressed in the construction of Bitcoin's second layer, we will start with the fundamental characteristics of blockchain systems.

1.1 Basic Characteristics and Requirements of Blockchain

We adopt the concept proposed by Vitalik: blockchain is a "world computer." Understanding the various characteristics of blockchain from this perspective will be clearer. Later, we will also analyze the development possibilities of this "world computer" based on the von Neumann architecture.

The fundamental characteristics of blockchain include:

Open and Transparent: This is a characteristic of the "world computer" of blockchain in terms of data storage and execution of instructions, as well as an internal demand feature that requires the participation of numerous distributed nodes globally in computation. This characteristic satisfies users' right to information regarding data and is a common result of the internal collaboration requirements of this "world computer" and the external demands of users.

Decentralization: This is the architectural feature of this "world computer". The degree of decentralization and fault tolerance is theoretically supported by the Byzantine generals' theorem. The degree of decentralization is an important indicator of blockchain security and is also the basis for certain characteristics.

Security: Security is composed of the internal demands generated by the architectural characteristics of this "world computer" and the external demands required by users. At the micro level, it is ensured by cryptography-related technologies, and at the macro level, it is guaranteed by the decentralization of the architecture.

Computing Power: One of the main functions of this world computer, the blockchain, is its computing power. It is usually measured by Turing completeness. Some chains are deliberately designed to be Turing incomplete in order to maintain their main characteristics.

Performance: Under the same computing power, performance is another key capability to examine the blockchain as a world computer. It is usually measured by the number of transactions processed per second, or TPS(.

Storage: The blockchain, as a "world computer," must have storage capabilities, that is, the ability to record data. Currently, data is primarily stored within blocks, while more specialized storage on external chains is still under development.

Privacy: Privacy is a segmented requirement in the "world computer", which demands that the scope of permissions for data producers and users be maintained during the computation and storage processes. This is mainly driven by the external needs of the users.

These basic characteristics of blockchain are mostly constrained by the impossible triangle, such as the DSS conjecture: Decentralization ), Security (, and Scalability ) cannot be optimized simultaneously.

(# 1.2 The Role of Layer 2 Construction

The role of Layer 2 construction is to expand the shortcomings of the Layer 1 system and achieve functionalities that the Layer 1 system cannot realize. Specifically, Layer 2 construction aims to enhance these foundational capabilities: public transparency, decentralization, security, computational power, performance ) throughput (, storage, privacy and so on. In addition to the technical perspective, it is also necessary to address an important economic issue: reducing costs.

In summary, layer two construction is designed to increase capacity, reduce costs, and customize features in these three dimensions.

In layer two construction, the fundamental capabilities of the blockchain may be traded off, potentially reducing or even discarding certain features in exchange for a significant improvement in other features. For example, some layer twos may lower the degree of decentralization and security to enhance performance; others may change the system structure and settlement methods to increase throughput. Additionally, some have enhanced certain features without compromising fundamental characteristics, such as RGB increasing privacy and censorship resistance, but it also raises the difficulty of technical implementation.

)# 1.3 Why do layered design?

Layered design is a common method for dealing with complex systems. By dividing the system into multiple hierarchical structures and defining the relationships and functions between each layer, it achieves modularity, maintainability, and scalability of the system, thereby improving the efficiency and reliability of system design.

For a large protocol system, using a layered design has obvious advantages: it facilitates understanding, division of labor in implementation, and modular improvements. Similar to the ISO/OSI seven-layer model in computer networks, certain layers may be merged in specific implementations, such as the four-layer protocol of TCP/IP.

The advantages of layered design include:

1. Each layer is independent, and the work of the upper and lower layers does not affect each other.
2. Good flexibility, changes in one layer do not affect other layers.
3. The structure is modular, and each layer can adopt the most suitable technology.
4. Easy to implement and maintain
5. Promote Standardization

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) 2. Several construction ideas for Bitcoin Layer 2

The second layer construction of Bitcoin mainly has three routes:

###1( The chain-based expansion route, similar to EVM's second layer, is a blockchain structure;

)2### Based on a distributed route, represented by the Lightning Network, is a distributed structure;

(3) The route based on centralized systems, represented by centralized indexing, is a centralized structure.

The first two methods have already seen some practical applications and explorations. The first method is relatively easier to implement due to the vigorous development of Ethereum and the exploration of other Bitcoin imitation chains. The second distributed-based method is usually more challenging and develops more slowly, with the Lightning Network as a representative. The third method is more controversial; it does not seem like layer two construction, but it appears to have accomplished the functions of layer two construction.

We can use the total locked value ( TVL ) as a benchmark, and the higher the TVL, the better the layer two solution. With the development of time and technology, the optimal solution will continue to change.

For the second layer network of Bitcoin, as long as it relies on the Bitcoin network, establishes a technical association, and has certain characteristics that are superior to the first layer network of Bitcoin, it can be regarded as the construction of the second layer network of Bitcoin. In other words, any system that consumes BTC as gas, using BTC as the underlying asset, and expands the performance of Bitcoin is considered a second layer construction.

(# 2.1 Layer 2 Construction Based on Blockchain

Early Bitcoin imitation chains explored various avenues, such as "Colorcoin") colored coin(, "CovertCoins" and "MasterCoin"; various scaling Bitcoin fork chains, such as BCH) Bitcoin Cash###, BSV( Bitcoin SV), BTG( Bitcoin Gold); various sidechain technologies are all based on chain expansion construction cases and can be seen as a broad definition of layer two.

Ethereum can also be seen as an exploration of improvements based on Bitcoin. Vitalik developed a new generation blockchain system targeting the shortcomings of Bitcoin, such as the UTXO unaccounted system, non-Turing complete execution language, and poor scalability, (. Although Ethereum is not a direct second-layer construction on Bitcoin, it is broadly considered an exploration of chain-based construction.

The exploration of improvements that Ethereum has made compared to Bitcoin, as well as the development and verification of Ethereum's second layer, provides a reference for the development of Bitcoin's second layer network based on the chain. Various Rollup solutions, cross-chain solutions, messaging channel technologies, and Ethereum's sharding technology have driven the vigorous development of the Ethereum technological ecosystem.

The layer two construction based on the chain in Bitcoin mainly includes two typical chain types: one is the EVM-compatible account model, and the other is the Bitcoin-like UTXO model. Existing cases ) broadly define layer two ( including: Ethereum, Polygon, Bsc, Arbitrum, etc. as EVM account models, and CKB ) Nervos (, Chia as UTXO models.

In addition, successful Layer 2 projects on Ethereum will also join the Bitcoin Layer 2 development. For these projects, the workload and challenges of transforming into Bitcoin Layer 2 will be relatively small. Based on the maturity and modular development of Ethereum rollups, this method of Layer 2 development may become the mainstream in scaling discussions and is also the fastest solution to yield results.

Advantages and disadvantages of layer two construction based on the chain:

Advantages:

• Maintained most of the fundamental characteristics of blockchain
• Usually solves the Turing completeness problem
• Significantly reduce transaction fees
• Expanded the network capabilities to a certain extent.
• Rich construction cases, relatively easy to implement technology
• Upper layer application migration is convenient

Disadvantages:

• Still restricted by blockchain, performance improvements are limited
• It may be necessary to reduce the level of decentralization or security to improve performance.
• It may require Layer 3 or Layer 4 construction on Layer 2 ).

(# 2.2 Layer 2 Construction Based on Distributed Systems

Some layer-two constructions are based on distributed systems, and their structure and framework are no longer blockchain structures, but rather distributed systems based on channels. The Lightning Network is a typical representative.

Distributed systems consist of a limited number of processes and channels. To transmit messages, it is necessary to control data, events, and channels, which is already a complex issue. Here, the Channel refers to the upper-layer channel concept, such as payment channels in the Lightning Network and message channels in Nostr, rather than the lower-layer Channel concept in distributed networks.

The distributed layer two construction is divided into two categories:

)1( only completes value transfer, such as the Lightning Network;

)2( both achieves value transfer and completes Turing complete technology, such as RGB.

The distributed layer two construction faces many challenges beyond message transmission due to its involvement in value transfer, such as total value capacity within the channel, transaction rigor, and prevention of double spending. Therefore, the development of such layer two constructions is relatively slow, and there are not many mature cases.

Implementing Turing complete computation on such a layer is even more challenging, that is, establishing a Turing complete virtual machine system on the Channel. For example, the RGB protocol achieves Turing complete computation on distributed systems through client verification and one-time sealing.

The second-layer construction cases based on distributed systems in Bitcoin include: Lightning Network, RGB, etc. According to the broad standard of second-layer construction, does Nostr also belong to the distributed system second-layer construction of the Channel mechanism? Examples of Channel usage in Ethereum include Connext, Raiden, Perun, which can serve as directions for in-depth research.

Advantages and disadvantages of Layer 2 construction based on distributed systems:

Advantages:

• The system is more decentralized
• The second layer network can accommodate countless nodes.
• Stronger privacy and censorship resistance.
• Theoretically has infinite scalability and extremely high performance

Disadvantages:

• The technical implementation is complex.
• The routing algorithms, value splitting, and encapsulation algorithms in large distributed systems are complex.
• Lack of engineering implementation experience and infrastructure in value transfer.
• Achieving a Turing complete system ) Channel+ computing ### is a huge challenge

(# 2.3 Layer 2 Construction Based on Centralized Systems

Centralized indexing structures like Ordinals, or the indexers of certain functional nodes, are also centralized structures and represent a kind of Layer 2 construction approach. This method is less recognized because Layer 2 is too centralized and has limited scalability for Layer 1 networks. Various blockchain base characteristics in Layer 2, based on centralized structures, rely on Layer 1 networks, and Layer 2 merely serves as simple computation and statistical functions, seeming dispensable and easily replaceable. However, from the perspectives of On-Chain and Off-Chain, as well as improving the capabilities of Layer 1 networks, this centralized structure is also a form of Layer 2 scaling.

Apart from Ordinals, centralized exchanges can also be considered as such cases.

Advantages and disadvantages of layer two construction based on centralized systems:

Advantages:

• Centralized systems are very successful