Basic Knowledge System of Bitcoin Layer 2 Network

The rise of Bitcoin inscriptions has brought new vitality to the Bitcoin ecosystem, attracting more attention to Bitcoin. Some believe this has opened Pandora's box for the Bitcoin ecosystem. Among the many technological developments in the Bitcoin ecosystem, Layer 2 construction is of utmost importance. This article summarizes the basic knowledge of Bitcoin Layer 2, hoping to spark further discussion and promote development in this field.

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

The concepts of "layer two construction" and "layer two network construction" in this article are basically the same, with the scope of layer two construction being broader. However, to adapt to industry practices, "layer two network construction" will also be used.

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 first start with the fundamental characteristics of the blockchain system.

1.1 The Basic Characteristics and Requirements of Blockchain

We use the concept proposed by Vitalik that "blockchain is a world computer" to understand the various characteristics of blockchain.

The fundamental characteristics of blockchain include:

Open and Transparent: This is a characteristic of data storage and instruction execution of the blockchain as a "world computer", as well as an internal demand feature for global distributed nodes to participate in computation together. This satisfies users' right to know about the data and is a common result of internal collaboration requirements and external demands.

Decentralization: This is an architectural feature of the "world computer". The degree of decentralization and fault tolerance is theoretically supported by the Byzantine Generals' Problem. The degree of decentralization is an important indicator of blockchain security.

Security: Composed of internal demands generated by the architectural characteristics of the "World Computer" and external demands from users. At the micro level, it is ensured by cryptographic technology, and at the macro level, it is ensured by a decentralized architecture.

Computing Power: One of the main functions of blockchain, generally measured by Turing completeness. Some chains are intentionally designed to be Turing incomplete to maintain their main characteristics.

Performance: Measured by the number of transactions processed per second using TPS( under the same computing power, ).

Storage: As a "world computer," the blockchain must have storage capabilities. Currently, most data is stored within blocks, while more specialized storage on external chains is still under development.

Privacy: The segmented needs in the "World Computer" require maintaining the scope of permissions for data producers and users during computation and storage.

There are also comprehensive indicators of scalability, which affect most fundamental characteristics and are important metrics at the architectural level.

These characteristics are largely constrained by the interdevelopment relationship of the "impossible triangle". For example, the DSS conjecture: Decentralization (, Security ), and Scalability (.

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) 1.2 The Role of Layer 2 Construction

Layer 2 development needs to expand these foundational capabilities: openness and transparency, decentralization, security, computational power, performance, throughput (, storage, privacy, etc. In addition, it is important to address a significant economic issue: reducing costs.

In summary, Layer 2 construction is a solution aimed at increasing capacity, reducing costs, and customizing features.

In Layer 2 development, the foundational capabilities of blockchain will have trade-offs, reducing or even discarding certain features in exchange for significant improvements in others.

) 1.3 Why do layered design?

Layered design is a means and methodology for handling complex systems, achieving modularity, maintainability, and scalability of the system by dividing the system into multiple layers and defining the relationships and functions of each layer.

Advantages of layered design:

1. Each layer is independent; the work of the upper layer does not affect the lower layer. As long as the interface remains unchanged, the working methods within the layers can be adjusted freely.

2. Good flexibility; when a certain layer changes, as long as the inter-layer interface relationship remains unchanged, other layers are not affected.

3. The structure is modular, with each layer able to adopt the most suitable technology for implementation.

4. Easy to implement and maintain, breaking down a large and complex system into relatively independent subsystems.

5. Promote standardization, with precise descriptions for every layer of functionality and service.

Layered modular design is a commonly effective method in the technology field for handling large-scale functions that require collaboration among multiple people and continuous improvement of projects.

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2. Several Construction Ideas for Bitcoin Layer 2

There are three significant routes for the layer two construction of Bitcoin:

)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 indexes, is a centralized structure.

The first two methods have their own characteristics, and there are already some products in use and exploration. The first method is relatively easier 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 at a slower pace. The third method is quite controversial, but it seems to have fulfilled the function of second-layer construction.

We measure the results with market tests: the layer two network with the highest Total Value Locked (TVL) ( is the optimal solution. The optimal solution will change over time and with technological development.

Definition of Bitcoin's second-layer network: As long as it relies on the Bitcoin network and establishes a technical connection, any features that outperform the first-layer network of Bitcoin can be considered as the construction of Bitcoin's second-layer network.

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) 2.1 Layer 2 Construction Based on Blockchain

Early Bitcoin imitation chains explored various options, such as "Colorcoin"( colored coins), "CovertCoins" and "MasterCoin"; various scaling Bitcoin imitation chains, such as BCH( Bitcoin Cash), BSV### Bitcoin SV(, BTG) Bitcoin Gold(; various sidechain technologies are all based on extension construction cases of chains and can be seen as a broad category of Layer 2.

Ethereum is also an exploratory improvement based on Bitcoin. Vitalik published a white paper addressing Bitcoin's imperfections: the UTXO's non-account system, the non-Turing complete execution language, poor scalability, and other issues, and developed a new generation of blockchain system.

The exploration of improvements of Ethereum compared to Bitcoin, as well as the development and verification of layer two on Ethereum, provides a reference for the development of layer two networks based on chain on Bitcoin. Various Rollup solutions, cross-chain solutions, message channel technology, and Ethereum's sharding technology have contributed to the flourishing of the Ethereum technology ecosystem.

The layer two construction based on the chain in Bitcoin roughly includes two typical chain types: one is the account model compatible with EVM, and the other is the UTXO model similar to Bitcoin. Existing cases ) broadly define layer two ( to include: Ethereum, Polygon, Bsc, Arbitrum, etc., which are EVM account models, while CKB ) Nervos ( and Chia are UTXO models.

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

Disadvantages: Generally still limited by blockchain constraints, with limited performance improvements; either makes the system more centralized or reduces the block generation interval, increases block capacity, which usually compromises security.

Advantages: Retains most of the fundamental characteristics of blockchain, generally solves the Turing completeness issue, significantly reduces transaction costs, and expands network capabilities to a certain extent. There are rich construction cases, the technical implementation is relatively easy, upper-layer application migration is convenient, and it is a faster realization method.

Generally speaking, due to the limitations of expansion, there should be numerous projects based on a chain structure on the second layer, with one or more second layers possibly existing in each vertical field. Each project needs to complete its own unique second layer construction to meet certain application requirements. Its value is determined by the number and total value of the applications built on it.

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) 2.2 Layer 2 Construction Based on Distributed Systems

Some Layer 2 constructions are based on distributed systems. In this scheme, the structure and framework of Layer 2 are not blockchain structures, but are based on channel-based distributed systems. The Lightning Network is a typical representative.

A distributed system consists of a finite set of processes and a finite set of channels. The channels referred to here are the upper-layer concept of channels, such as payment channels in the Lightning Network and message channels in Nostr, rather than the specific technical underlying concept of channels in distributed networks.

The distributed layer two construction is divided into two categories:

(1) Only completes value transfer, similar to the Lightning Network;

(2) not only achieves value transfer but also completes Turing-complete technology, such as RGB.

The construction of layer two based on distributed systems involves value transmission, which presents many challenges that go beyond traditional message transmission, such as total value capacity within the channel, the rigor of transactions, and issues like preventing double spending. Therefore, the development of this type of layer two construction is not as fast as that of blockchain-based layer two constructions, and there are not many mature cases.

If you want to achieve Turing-complete computation on such a layer, that is, to establish a Turing-complete virtual machine system on the Channel, it will be more difficult. The RGB protocol achieves Turing-complete computation in a distributed system through client verification and one-time sealing.

The second-layer construction based on distributed systems in Bitcoin already has cases including: Lightning Network, RGB. According to the broad standards of second-layer construction, does Nostr also belong to the second-layer construction of distributed systems under the Channel mechanism?

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

Advantages: The system is more decentralized, the second-layer network can accommodate countless nodes, better privacy and censorship resistance, has unlimited scalability, and theoretically great performance.

Disadvantages: The technical implementation is complex, with routing algorithms in large distributed systems, and the algorithms for value splitting and encapsulation are also quite complicated. Compared to information transmission, there is still a lack of engineering implementation experience and infrastructure in value transmission. Implementing a Turing-complete system in such systems is a significant challenge.

Generally speaking, a layer two based on Channel's distributed structure will usually only have a few parallel projects, mainly due to its infinite scalability and the technical difficulty of implementation. Such systems require a more open design and concept, capable of accommodating more people and teams to participate.

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) 2.3 Layer 2 Construction Based on Centralized Systems

Centralized indexing structures like Ordinals, or indexers of certain functional nodes, are also centralized structures and represent a kind of Layer 2 construction approach. However, this construction approach is rarely recognized because Layer 2 is too centralized, leading to very limited expansion of the Layer 1 network. The various fundamental blockchain characteristics of this centralized Layer 2 construction rely on the Layer 1 network, with Layer 2 serving only as some simple computational and statistical functions. Sometimes Layer 2 seems like a dispensable temporary existence, easily replaceable by another Layer 2, and its importance seems not that high. However, from the perspectives of On-Chain and Off-Chain, and from the standpoint of anything that can enhance the capabilities of the Layer 1 network, this centralized structure is also a form of Layer 2 expansion.

In addition to Ordinals, what other centralized exchanges are examples of such systems.

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

Advantages: The centralized system is very mature, with countless available use cases and optimization solutions, fully Turing complete and with excellent performance.

Disadvantages: The second layer is extremely centralized, and all the basic features of the blockchain depend on the first layer network.

Generally speaking, there will be fewer projects based on centralized layer two structures, or they may only exist temporarily. After the distributed structures based on chain structures and Channels become mature and perfected, most centralized layer two developments will disappear, or only a few centralized layer twos for special scenarios will remain. At the current stage, due to the maturity of centralized systems, when it is possible to write data on the base chain, it can well meet the scenarios of On-Chain data and Off-Chain computation, making it the most easily implementable model for basic applications within the current Bitcoin ecosystem, and it is widely used.

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