Layer 2 of Bitcoin (BTC): An ecosystem mapping
January 29, 2025
A comprehensive overview of the state of the Bitcoin Layer 2 (BTC) industry and the main protocols in the ecosystem.
Foreword: This article is partly derived from our 2024 year-end report on the cryptocurrency market. We invite you to read it for free or purchase the physical version to support our work.
→ You can also find our market report on Bitcoin (BTC) in 2024:
Why Does Bitcoin Need Layer 2 Solutions?
A Layer 2 is an infrastructure built on top of the main blockchain (Layer 1) to improve its scalability and capabilities while maintaining its security and decentralization. In Bitcoin’s case, Layer 2 solutions have emerged to address the protocol’s inherent limitations.
Although Bitcoin is recognized for its security and decentralization, it suffers from scalability limitations. A block is mined approximately every 10 minutes, and the network can process only around 7 transactions per second (TPS). This low throughput makes it unsuitable for daily payments and even less so for complex applications.
Today, most blockchains support smart contracts and decentralized applications (dApps). However, this was not Bitcoin’s initial purpose when it was created in 2008. The network was designed as a peer-to-peer digital payment system, prioritizing security and decentralization above all else.
Layer 2 solutions have emerged to overcome these limitations. They improve scalability by offloading some transactions or computations off-chain, then bundling them and securing them back on Bitcoin’s blockchain. The goal is to reduce network congestion, accelerate transactions, and lower costs.
But these Layer 2 solutions do more than just enhance scalability. They unlock new use cases, such as instant payments, smart contracts, token issuance, NFTs, and decentralized applications. They play a key role in expanding Bitcoin’s ecosystem into a more dynamic and programmable framework.
The Different Types of Bitcoin Layer 2 Solutions
Bitcoin’s Layer 2 solutions can be classified into two major categories based on their primary purpose. Some Layer 2s focus on digital payments, aiming to make Bitcoin transactions faster and cheaper. Others aim to bring programmability to Bitcoin, making it compatible with smart contracts and decentralized finance (DeFi) applications.
This distinction is ideological, but from a technical perspective, Bitcoin Layer 2s fall into three main categories.
State Channels
State Channels, like Lightning Network, allow two participants to open a private channel to conduct multiple transactions off-chain. Only the opening and closing transactions are recorded on the Bitcoin blockchain.
This approach significantly reduces fees and improves transaction speed, but it remains limited to simple use cases such as micropayments.
Sidechains
Sidechains, such as Rootstock (RSK) or Liquid Network, are parallel blockchains connected to Bitcoin—similar to a sidecar on a motorcycle. They allow faster transactions and introduce advanced features such as smart contracts. However, their security often depends on a more centralized model.
Rollups
Rollups, like Citrea, bundle multiple transactions off-chain before publishing a cryptographic proof on Bitcoin’s blockchain. Like Ethereum’s Rollups, they are divided into two categories:
- Optimistic Rollups: Assume transactions are valid unless proven otherwise.
- ZK-Rollups: Use Zero-Knowledge Proofs (ZKPs) to instantly and securely validate transactions.
Differences Between Ethereum and Bitcoin Layer 2 Solutions
| Aspect | Bitcoin Layer 2 | Ethereum Layer 2 |
|---|---|---|
| Blockchain | Bitcoin | Ethereum |
| Primary Goal | Increase transaction capacity, reduce costs, introduce programmability (including support for applications). | Accelerate transactions, reduce costs, and support a wide range of applications. |
| Settlement Layer | Bitcoin | Ethereum |
| Dominant Types | State Channels, Sidechains | Rollups |
| Virtual Machine | Developing execution layers with EVM-like capabilities. | Direct use of the Ethereum Virtual Machine (EVM). |
| Smart Contracts | Indirect support via execution layers similar to virtual machines. | Direct support through EVM. |
| Use Cases | More limited (primarily fast payments and specific solutions). | Full support for DeFi, NFTs, and blockchain applications. |
Mapping Bitcoin's Key Layer 2 Solutions
Lightning Network
Lightning Network is a Layer 2 payment protocol built on Bitcoin to enable fast and low-cost transactions. By using payment channels, Lightning solves scalability issues by recording only opening and closing balances on the blockchain.
- Goal: Fast and low-cost micropayments.
- Total Value Locked (TVL): $510 million.
- Features: Instant payments, low fees, theoretical capacity of 1 million TPS.
Rootstock (RSK)
Rootstock is a Bitcoin sidechain that supports smart contracts. The network is secured through Merged Mining, allowing Bitcoin miners to validate both Bitcoin and Rootstock blocks simultaneously.
Currently, Rootstock supports 30+ applications and stablecoins.
- Goal: Integrating smart contracts and dApps into Bitcoin.
- TVL: $245 million.
- Features: EVM compatibility, security via merged mining.
CORE
Launched in May 2022, CORE is an EVM-compatible Layer 2 that supports smart contracts. Its unique consensus mechanism, "Satoshi Plus," combines Bitcoin’s Proof of Work (PoW) with Proof of Stake (PoS).
- Goal: Integrating Ethereum dApps into Bitcoin.
- TVL: $845 million.
- Features: Hybrid consensus (Satoshi Plus), decentralization via CORE DAO.
Bitlayer
Bitlayer is a Bitcoin Layer 2 that utilizes BitVM, introduced in 2023, to support smart contracts and decentralized applications. This allows compatibility with multiple virtual machines, including EVM, SolVM, CairoVM, and MoveVM.
- Goal: Integrating dApps from Ethereum, Solana, and other ecosystems into Bitcoin.
- TVL: $478 million.
- Features: Built on BitVM, multi-VM compatibility.
Merlin
Merlin is a layer 2 based on ZK Rollups and compatible with the Ethereum Virtual Machine (EVM). Launched in February 2024, it is compatible with classic Bitcoin wallets thanks to the BTC Connect protocol. Merlin combines the efficiency of ZK-Rollups to aggregate transactions and validate them on the Bitcoin blockchain, while offering compatibility with Ethereum applications.
- Objective: Scalability and integration of smart contracts with Bitcoin.
- TVL: $158 million.
- Features: Use of ZK-Rollups for fast, low-cost transactions, EVM compatibility.
Stacks
Stacks is a layer 2 enabling the creation of smart contracts and decentralized applications on Bitcoin. Launched as Blockstack in 2018 before being rebranded as Stacks in 2020, this network uses the Proof of Transfer (PoX) consensus to anchor its operations to Bitcoin. Stacks also aims to introduce a system of sBTC, a token indexed on Bitcoin, to facilitate interactions between the two networks.
- Objective: to extend Bitcoin's functionalities with smart contracts and dApps.
- TVL: $141 million.
- Features: Consensus Proof of Transfer (PoX), direct interaction between smart contracts and Bitcoin.
