Interpretation of the Past and Present of Bitcoin Layer 2 Expansion Scheme

Binance (Binance) posted on its official Twitter on June 20th that many netizens have discovered that Binance has completed the construction of Bitcoin Lightning Network (Lightning Network) nodes. And just after Binance announced that it has completed the deployment of Bitcoin Flashpoint network nodes, Binance CEO Changpeng Zhao also responded that the relevant construction is in progress.

Pulling the time back to the previous few months, it can be speculated that Binance’s involvement in the Bitcoin Lightning Network is actually related to the BRC-20 boom in early May that caused the Bitcoin network to explode and transaction fees to skyrocket. Suspension of Bitcoin withdrawals for the second time.

In the last research report (Can BRC-20 bring the Bitcoin ecology to new prosperity? What is the use of Bitcoin NFT? What is BRC-30?) We mentioned many concepts of BRC-20, and at the end we also mentioned the following One will be around the Lightning Network. First of all, I will first explain what is the relationship between the two? Then introduce the Bitcoin expansion plan, and finally conduct in-depth research and discussion with the Lightning Network as the main axis.

In the past, applications such as Bitcoin ecological NFT and BRC-20 have become more and more popular, which has caused the Bitcoin network to become more and more congested. From a technical point of view, if the circulation of BRC-20 is supported on the Lightning Network, it will help achieve faster and faster Efficient transactions and unlock new possibilities for BRC-20. However, this is also the key to Binance's establishment of the Bitcoin Lightning Network. According to the blockchain data platform Glassnode, the average transaction fee on the Lightning Network is US$0.00013. If you directly use the Bitcoin network for transactions, the average transaction fee on the Bitcoin network is about US$18.9, and the price difference between the two is huge.

It can be seen from this benefit that Binance began to integrate the Bitcoin Lightning Network to realize deposit and withdrawal functions. However, Binance also emphasized that there is still some technical work to be done before the Lightning Network integration is completed, and promised to continue to update everyone with the latest news.

Next, let's disassemble the Bitcoin expansion plan and the technical knowledge of Lightning Network in detail.

Blockchain Challenge

Let’s start with the challenges of the blockchain. Moving bitcoins on the blockchain is a slow, expensive, and inefficient process. Because the Bitcoin blockchain can only process a certain number of transactions (and data) at a certain time. If Bitcoin is to remain competitive with other blockchains, there must be innovative measures to increase the utility of the network.

We must first distinguish between two key concepts: "Bitcoin as an asset (BTC)" and "Bitcoin as a blockchain". Bitcoin as an asset has seen widespread adoption over the past few years and has enormous potential for digital assets today and in the future. However, for BTC to achieve mass adoption, it must have a seamless transaction environment (aka the Bitcoin blockchain). Bitcoin's blockchain is highly secure, decentralized, and stable, but Bitcoin has an obvious flaw: it has limited ability to process large amounts of transaction data. To confirm transactions on the Bitcoin blockchain, they must be approved through Proof-of-Work (PoW) consensus. Once a certain number of miners have verified the transaction, it can reach the final settlement state of the blockchain and then generate a new block system.

At present, there are several key factors that limit the Bitcoin blockchain: first, the block size, a Bitcoin block can only hold 1 megabyte (MB) of data; second, the block time, approximately every 10 Minutes to generate a new Bitcoin block; Third, throughput, due to Bitcoin’s block size and block time constraints, it can only process about three to seven transactions per second; Fourth, transaction costs, limited The throughput of Bitcoin leads to high demand for limited block space, which in turn causes fees to skyrocket when the Bitcoin network is congested; and finally there is programmability, Bitcoin's language capabilities are limited, making smart contract logic difficult to implement. This also makes creating decentralized applications on Bitcoin far less simple than on Ethereum.

So why can't developers directly improve Bitcoin's performance? Because improving the Bitcoin protocol is not as simple as imagined. First, Bitcoin was intentionally designed to be a simple blockchain. With no complicated coding and applications, Bitcoin has proven to be a highly secure, stable and decentralized blockchain today. Therefore, making sudden and substantial changes to Bitcoin would be counterproductive to the core rules of the protocol. While Bitcoin upgrades will certainly continue, no transformative solutions will be implemented overnight. Therefore, it will be difficult for the blockchain to achieve scalability on its own in the near future, however, since Ethereum has an L2 solution, there must be other solutions for the Bitcoin blockchain that can help scale the network to accommodate these billions of users and the current status of millions of transactions per day.

While Bitcoin has its limitations, it can still scale by implementing a layered solution, bringing enhanced performance and functionality to the entire network. By building on top of Bitcoin, developers can create scaling solutions without modifying Bitcoin itself. This approach improves the performance of regular Bitcoin transactions while benefiting from Bitcoin’s liquidity and network effects.

**Layering is ETH L2? **

Layering enables bitcoin (and other assets) to be transferred without directly using the blockchain. While each Bitcoin layer has its own unique consensus mechanism to interface with Bitcoin, the goal is the same: to move transactions off-chain to be faster, cheaper, more programmable, and scalable. next. Let's dig into the relationship between Bitcoin and these layers.

First of all, let's assume that Bitcoin can be used as the final settlement layer for transactions, and it will prioritize stability, decentralization, and security. These characteristics make Bitcoin the best foundation upon which to build broader economic activity. Additionally, its native currency, BTC, acts as a long-term store of value asset. At the same time, layered solutions can bring higher scalability and productivity to Bitcoin without compromising the security of its base layer.

Since these layers are built on top of Bitcoin, they have no impact on the base layer and pose no risk to it from a security perspective. The layered approach enables Bitcoin to adopt new, faster and more efficient processes without sacrificing the durability or decentralization of the base layer. To put it simply, Bitcoin layering has multiple advantages: first, faster transaction speed, transactions on layers can be processed within seconds, which is more suitable for Bitcoin users who need faster confirmation; second, more High throughput, transactions occupy less data, leaving more space for each new block; third, lower transaction fees, more efficient throughput means lower fees; fourth, increased Smart contract function, smart contracts with a complete execution environment make it possible to develop decentralized applications, which greatly expands the application scenarios of Bitcoin, including decentralized finance (DeFi), non-homogeneous tokens (NFT) and Decentralized Autonomous Organization (DAO).

Finally, Bitcoin layering also helps simplify settlement, as micropayments and microtransactions do not require the full security of the Bitcoin blockchain. Instead, they can be moved onto layers, where transactions can be confirmed almost instantly at little cost, eventually bundled and sent to Bitcoin for final settlement.

**What layered solutions are there? **

There are currently four main layered solutions that contribute to Bitcoin's scalability:

(1) Stacks:

Stacks is a Bitcoin Layer 2 that supports "decentralized applications" and "smart contracts". This technology uses a programming language "Clarity" for writing smart contracts. If you look at the overall system, Stacks actually has its own chain, compiler and programming language, and runs synchronously with Bitcoin to ensure its transactions and integrity. sex.

The core idea of the project is, "Because there is a basic settlement layer (Bitcoin) at the bottom to ensure consensus and security, users can add smart contracts and programmability on top of Stacks to achieve scalability and transaction speed." Among them, their core technology is to closely connect the Stacks block with the Bitcoin block through the Transfer Proof (PoX) consensus mechanism.

In Proof of Transfer, instead of using mining equipment and electricity to mine Stacks, miners on Stacks use BTC to mine new STX tokens and earn transaction fees. In order to win the opportunity to mine blocks, miners will submit BTC to the qualified Stacks address participating in the consensus, and then transfer the promised cryptocurrency to some other participants in the network to win the opportunity to mine blocks and earn STX Reward tokens. Through this system, miners earn STX coins and transaction fees (transaction fees), while STX stakers earn Bitcoin.

And in addition to using the anchor block in the final link with Bitcoin to help ensure the security and reliability of Stacks, Stacks also introduces the concept of micro-blocks, which can be shared between two Bitcoins. Thousands of transactions are published between blocks. As a result, the scalability of Stacks has been significantly improved to handle higher transaction volumes, making it a more efficient and practical blockchain solution.

We previously explained BRC-20 and Ordinals technology in the previous research report (Can BRC-20 bring the Bitcoin ecology to a new prosperity? What is the use of Bitcoin NFT? What is BRC-30 again?), just this It is an application case of Stacks.

With the increasing popularity of Ordinals and the upsurge of BTC NFT (Ordinals Technology), NFT activities on Stacks have also increased, which can be said to directly benefit from the lower cost and faster NFT casting speed of Stacks.

（二）RSK（Rootstock）：

RSK (also known as Rootstock) is a general-purpose smart contract platform secured by the Bitcoin network. RSK was founded by RSK Labs to leverage Bitcoin's stability, security, and economic underpinnings to address Ethereum's shortcomings. By moving its smart contracts from Ethereum to RSK, RSK makes all Ethereum applications compatible with the Bitcoin blockchain. RSK creates a new block approximately every 33 seconds, which is much faster than Bitcoin's 10-minute block time, and RSK can also process approximately 10-20 transactions per second, which is faster than Bitcoin's processing capacity of approximately 5 transactions per second. efficient.

The RSK sidechain design has some unique designs compared to other Bitcoin layering solutions. First, merged mining, the RSK blockchain uses the same proof-of-work (PoW) consensus algorithm as Bitcoin, but miners can generate blocks faster than the Bitcoin base layer. These RSK blocks are mined through a process called "merged mining". Since the two blockchains use the same consensus, miners can perform merge mining, simultaneously mining for the Bitcoin and RSK blockchains, but allowing Bitcoin and RSK to consume the same mining computing power, so the miners contribute The computing power can also mine RSK blocks, which allows merged mining to greatly increase the profitability of miners without investing additional resources.

Merged mining allows RSK to validate transactions, generate blocks and send them to Bitcoin. Through this mining process, users can rest assured that RSK's smart contracts benefit from the security of the Bitcoin blockchain.

The second unique design is Powpeg Powpeg, which is a two-way bridge between the RSK blockchain and Bitcoin. The Powpeg protocol is implemented through RSK's asset smartBTC (RBTC). Technically speaking, the RSK platform does not have its own native token. So RSK uses smartBTC (RBTC), which is to lock the tokens issued by BTC on Bitcoin at a ratio of 1:1. That is, RBTC is always worth the same as BTC to pay transaction fees on RSK.

Between RSK and Bitcoin, there are two main mechanisms to bridge funds: vaults and smart contracts. When we want to transfer bitcoins to RSK, the process is called "pegging-in" and requires users to lock a certain amount of bitcoins in a vault on the bitcoin network. In this way, the amount of bitcoin on the corresponding RSK can be unlocked. On the contrary, when we want to return Bitcoin from RSK to the Bitcoin network, this process is called "pegging-out", which requires users to send a certain amount of RBTC (RSK's asset) to the smart contract on RSK. A corresponding amount of bitcoins will then be unlocked from the bitcoin network's vault.

The last unique design is the RSK Virtual Machine (RVM), an advantageous component of RSK is its interoperability with Ethereum smart contracts. The RSK Virtual Machine (RVM) is based on the Ethereum Virtual Machine and can execute Ethereum smart contracts on RSK. Developers can seamlessly use the same code and tools when building RSK applications. This provides the Ethereum community with cheaper and faster options for interacting with their favorite decentralized applications (dApps). This means RSK developers can program using Solidity, the smart contract programming language used on Ethereum, and users can send their RSK holdings to Metamask.

(3) Liquid Network:

Liquid Network is a Bitcoin sidechain developed by Blockstream to facilitate fast settlement of Bitcoin transactions. The consensus mechanism of this network is similar to that of Bitcoin, but it has the characteristics of centralization in the governance structure of the chain.

The background of the team behind Blockstream is a digital core developer of Bitcoin. Some foreign media believe that it is an all-star development team in the circle.

Here is a brief description of the unique functions and features of Liquid Network:

1. Fast settlement: Liquid Network's block time is only 60 seconds, which is much faster than Bitcoin's 10 minutes, which means that transactions on Liquid Network can be confirmed and settled faster.
2. Low transaction fees: The average transaction fee of Liquid Network is only about one-tenth of Bitcoin. This makes micropayments and everyday transactions more cost-effective.
3. Centralized structure: Unlike Bitcoin's decentralized structure, Liquid Network has a relatively centralized structure. This is a performance compromise for faster transaction confirmation and higher throughput.

The main purpose of Liquid Network is to provide a solution better suited to Bitcoin's fast, high-frequency transaction needs. It can be widely used in cryptocurrency exchanges, payment services and other financial applications to make these transactions more efficient and convenient. It should be noted that Liquid Network is still built on the basis of the Bitcoin blockchain, so it inherits the security and reliability of Bitcoin. At the same time, Liquid Network also provides faster and cheaper transaction methods to meet the growing transaction demand.

(4) Lightning Network

The Lightning Network is a new system for off-chain Bitcoin transactions that allows users to transact with each other without the need for a central authority like a bank. As a Bitcoin L2 solution, it can be used to expand micropayments and daily transactions, and by using smart contracts and payment channels, two parties can quickly conduct Bitcoin transactions at almost zero cost.

Earlier we talked about the relationship between BRC-20 and Lightning Network, and then we will analyze the technical principles, applications and future development of Lightning Network in detail.

Lightning network technology principle and origin

The Lightning Network takes advantage of Bitcoin's multi-signature wallet and offline transaction capabilities, allowing participants to establish payment channels outside the blockchain. These payment channels allow fast and low-cost transactions between participants without recording each transaction on the Bitcoin blockchain.

In the Lightning Network, payment channels are established by two-way multi-signature wallets between participants. For example, suppose there are participants A and B who wish to transact on the Lightning Network. They can create a jointly controlled multi-signature wallet in which a certain amount of bitcoin is locked to fund the payment channel. Once the payment channel is established, A and B can conduct multiple transactions in the channel without submitting each transaction to the Bitcoin blockchain. These transactions are only recorded and verified inside the payment channel. The latest channel state needs to be transmitted to the blockchain only when they want to close the payment channel and commit the final settlement to the Bitcoin blockchain.

Payment channels in the Lightning Network use a technique called "off-chain transactions," which allow participants to transact without a blockchain network connection. This is done by using previously confirmed transaction data on the blockchain to verify the validity of the transaction. Offline transactions allow transactions within payment channels to be completed quickly without waiting for confirmation from the blockchain.

In the Lightning Network, if A and B want to transact within the payment channel, but there is no direct payment channel between them, they can use relay nodes to transact. Relay nodes are participants in the Lightning Network that allow the flow of funds between payment channels. Through the relay node, A and B can establish an indirect payment channel to realize the transaction. And the Lightning Network also uses a mechanism called "routing" to ensure the smooth delivery of payments in the network. When a payment needs to be transmitted through multiple relay nodes, the router will choose an optimal path to ensure that the payment reaches the destination smoothly.

I believe that anyone who has used Google Maps navigation can imagine that the navigation guide function of Google Maps provides driving route suggestions for drivers on the "fastest route" between the two places from point A to point B, and through big data and their own Algorithm function to help users estimate the fastest route and estimated time required for the recommended navigation. This is the role of a router, which specifies the routing of payment channels using a concept called "lightning paths".

Finally, in addition to providing fast and cheap transactions, the Lightning Network also scales well. Because transactions on the Lightning Network do not need to be confirmed on the Bitcoin blockchain, it can support millions of transactions while remaining fast and low-cost. In summary, the Lightning Network is an innovative technology that provides an efficient, fast and low-cost transaction method by establishing a payment channel on top of the Bitcoin blockchain. It solves the scalability problem of Bitcoin and opens up new possibilities for the application scenarios of the Bitcoin blockchain.

The Lightning Network originated in a 2015 paper by researchers Thaddeus Dryja and Joseph Poon. Their research is based on Bitcoin creator Satoshi Nakamoto's derivative discussion of payment channels. This paper describes an off-chain protocol consisting of payment channels designed to address Bitcoin's scalability issues.

As recently as 2016, Dryja and Poon co-founded a company called Lightning Labs to develop Lightning Network technology. Lightning Labs has worked hard to ensure that the protocol is compatible with Bitcoin's core network.

With Bitcoin's SegWit soft fork in 2017, it paved the way for the implementation of the Lightning Network. SegWit increases the transaction capacity of Bitcoin, providing more space in each block, while solving the long-standing problem of transaction malleability. Developers have already begun building applications on the Lightning Network during the testing process ahead of launch. These applications include simple use cases like wallets and gambling platforms, leveraging the Lightning Network’s micropayment capabilities.

Supplement: SegWit (Segregated Witness) is an important soft fork (soft fork) upgrade aimed at improving the scalability and security of the Bitcoin blockchain. The goal of this upgrade is to address the limited transaction capacity of Bitcoin while increasing the throughput of the network and reducing transaction fees.

The main change in SegWit is to separate the transaction signature (witness data) from the transaction body and place it in a new block called a "segregated witness block". This reduces the amount of data per transaction, freeing up more space for transactions. Specifically, SegWit made changes to the transaction data structure, moving signature data out of the transaction itself and storing it in a new block. In this way, the amount of transaction data in the block is reduced and more transactions can be accommodated.

At the same time, this change also provides greater flexibility to introduce more transaction types and functions. The implementation of SegWit will require participants on the network to upgrade their Bitcoin software to support the new transaction format. Although SegWit is a soft fork, it was widely accepted by the Bitcoin community and was successfully activated in August 2017. In addition, SegWit also provides the necessary foundation for the subsequent implementation of the Lightning Network, enabling it to function better.

In 2018, Lightning Labs launched a beta version of the Lightning Network on the Bitcoin mainnet and began its practical application. Since then, many famous people, including Twitter founder Jack Dorsey, have also become involved in the Lightning Network project. Since then, the Lightning Network has continued to grow, attracting more developers and users. It is considered to be an important solution to Bitcoin's scalability problem, providing Bitcoin with a faster and lower-cost transaction method, and opening up new possibilities for a wider range of application scenarios.

Lightning Network Limitations, Challenges

At present, the Lightning Network is considered by many people to be the most effective solution to the Bitcoin transaction fee problem, but it is not. First of all, although the Lightning Network can move transactions from the main blockchain to off-chain to reduce transaction fees, there are still other costs and challenges. When using the Lightning Network, you need to pay a fee equal to the Bitcoin transaction between opening and closing the channel, and these fees are the cost of using the Lightning Network. In addition, in addition to the cost of switching channels, there is an additional routing fee for transferring payments between channels. Even though the Lightning Network has a low fee, this may cause nodes to not have enough incentive to participate in the payment routing process.

(In the Lightning Network, nodes play the role of processing payments and are responsible for transferring payments from one channel to another. However, due to low routing fees, nodes may not be willing to bear these costs or provide corresponding services. This may lead to Nodes are unwilling to participate in the payment routing process, resulting in delayed or failed payments.)

In contrast, there are some cryptocurrencies on the market that reduce payment costs by offering free software plugins or through special nodes. For example, Dash allows users to pay extremely low fees when paying. Its system is designed with Masternodes that need to deposit a certain amount of Dash coins in order to be able to process transactions quickly.

In addition to the Lightning Network being mistaken by everyone as the most effective way to reduce transaction fees, there is one more point that needs to be clarified. “A node that is always online is vulnerable.” In Bitcoin’s Lightning Network, nodes must always be online to send and receive payments. This means that if the two parties involved in the transaction are offline or their computers are compromised, funds could be stolen.

However, the Lightning Network also allows funds to be secured using cold storage, a method of storing funds offline and considered one of the safest forms of cryptocurrency storage. In addition, there are also some problems if offline operations are performed on the Lightning Network. For example, when one of two transacting parties closes a payment channel and withdraws the money, the other party is not online. This is called a fraudulent channel closure. While there is a period of time to contest the closing of a channel, if one party is offline for an extended period of time, the opportunity to contest may be missed. In addition, malicious attacks also pose a risk to the Lightning Network. If the payment channel is congested and maliciously attacked, participants may not be able to get their funds back in time because the channel is congested. Therefore, although the Lightning Network provides Bitcoin with faster payments and low-cost transactions, the requirement that nodes are always online and the risks associated with offline operations and malicious attacks still require users to consider and pay attention.

Finally, the advent of the Lightning Network would have meant that Bitcoin could be used as a medium for everyday transactions. Users can open payment channels with businesses or individuals who frequently conduct transactions. For example, they can open a payment channel with a landlord or an e-commerce store where they often shop, and use Bitcoin to conduct transactions. However, Bitcoin still has a long way to go before becoming a mainstream payment method. The increase in its transaction volume is mainly attributed to the increase in trading volume. In other words, Bitcoin's popularity is a double-edged sword, as increased attention attracts investment but also attracts more traders, increasing the cryptocurrency's volatility, or price swings.

Price volatility makes it difficult for merchants to use bitcoin as a payment method when pricing products to sell to customers or to buy inventory from suppliers. For example, suppose a company needs to pay a supplier invoice in Bitcoin. Usually, suppliers give customers a certain amount of time to pay, such as 30 days. If the price of Bitcoin increases by 10% within these 30 days, the business needs to prepare an additional 10% of fiat currency or other cryptocurrencies to convert to Bitcoin to pay the invoice. This exchange rate risk exists because businesses may receive fiat currency from customers instead of bitcoin. For consumer transactions, there is also exchange rate risk, since most people's salaries are not paid in Bitcoin, so the transaction needs to be converted from fiat currency to Bitcoin. Therefore, the overall impact of the Lightning Network on reducing transaction fees and scaling Bitcoin may be limited, as Bitcoin is not yet widely accepted as a payment method.

Latest Apps, News

On July 6 this year, Lightning Labs launched a new developer tool that enables the Lightning Network and AI developer community to build inclusive, out-of-the-box, cost-effective LLM (Large Language Model) tools, Seamlessly integrate Lightning Network and Bitcoin.

These tools are built on the L402 protocol, Lightning Network's native authentication mechanism, and Langchain to simplify the use of AI agents by adding external data, allowing more advanced features to be enabled.

Conclusion

It can be seen that Bitcoin's Lightning Network still faces some challenges, whether it needs to increase its scale or reduce transaction fees. However, the core team of this technology has also developed some new application scenarios and invested a lot of research to help improve the performance of the network.

The Lightning Network now supports larger payment amounts than in the past. Previously, it had a channel size limit of 0.1677 bitcoins, but these limits have now been removed, allowing users to create larger channels. It’s these new designs, dubbed “Wumbo” channels, aimed at increasing the adoption and utility of the Lightning Network for consumers and businesses.

In addition, the Lightning Network is also being adopted by cryptocurrency exchanges, such as Kraken and Block's Cash App, which has also integrated the Lightning Network to make transactions more convenient for users.

In the end, Bitcoin's Lightning Network still has great potential to provide a faster and lower-cost transaction method. With the continuous development and improvement of technology, we can expect the Lightning Network to bring more convenience and wide application possibilities to the use of Bitcoin and cryptocurrencies in the future.