Infrastructure is in the ascendant, a panoramic interpretation of the Bitcoin L2 ecosystem

2 months ago
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Bitcoin’s design limitations are particularly evident in ensuring withdrawal security in Layer 2 solutions.

Original article by: Caliber

Original translation: TechFlow

In the complex field of fintech, Bitcoin is an innovative digital currency that enables direct peer-to-peer transactions by bypassing traditional financial intermediaries. However, as it develops, Bitcoin also faces a series of inherent challenges, especially those related to scalability and transaction throughput, which are the main obstacles to its wider application.

These challenges are not unique to Bitcoin; Ethereum, while designed with more flexible application development capabilities, has similar problems. To address these issues, many solutions have been proposed, such as sidechains, Layer 2, or payment channel networks. In Ethereum, the Layer 2 ecosystem is expanding rapidly, with various solutions emerging, such as EVM rollups, sidechains transitioning to rollups, and projects pursuing varying degrees of decentralization and security. The security issues of Layer 2 solutions, especially asset protection and the ability of these systems to read and adapt to changes in the Ethereum blockchain, highlight a key trade-off: greater security often comes at the expense of scalability and cost-effectiveness.

While Bitcoin has made impressive progress in improving its functionality, there are still some significant challenges in developing Layer 2 solutions similar to Ethereum. Bitcoins design limitations are particularly evident in ensuring the security of withdrawals in Layer 2 solutions. Its limited scripting language and lack of Turing completeness limit its ability to perform complex calculations and support advanced features. This design choice prioritizes Bitcoins security and efficiency, but limits its programmability relative to more flexible blockchain platforms such as Ethereum. And probabilistic finality may also weaken the reliability and speed required for Layer 2 solutions, potentially leading to issues such as chain reorganizations that affect the permanence of transactions. Although Bitcoins design principles make it reliable and secure, these factors make it difficult for its Layer 2 system to quickly adapt to new changes.

Segregated Witness (SegWit) and Taproot are transformative for Bitcoin. SegWit optimizes Bitcoin’s infrastructure by separating signature data, increasing transaction speeds and enabling fast payment processing on the Lightning Network. Subsequent Taproot introduces efficiency and privacy improvements by compressing transaction data and masking transaction complexity. Together, SegWit and Taproot have ignited a new wave of Layer 2 innovation, becoming the foundation for future Layer 2 designs and significantly expanding Bitcoin’s functionality as a digital currency.

Understanding Bitcoin’s Layer 2 Solutions

Bitcoin’s Layer 2 Trilemma

In the growing Layer 2 solution for scaling Bitcoin, we see many different systems emerging that aim to improve scalability and increase adoption. These solutions offer unique approaches to overcoming Bitcoin’s inherent limitations. Trevor Owens proposed a taxonomy that categorizes these solutions based on how they solve Bitcoin’s Layer 2 trilemma, dividing them into off-chain networks, decentralized sidechains, and federated sidechains, each with unique approaches and tradeoffs:

  • Off-chain networks : Prioritize scalability and privacy, but may bring challenges to user experience. For example, Lightning RGB .

  • Decentralized sidechains : introduce new tokens and consensus mechanisms, expand functionality, but may complicate user experience and increase centralization concerns. For example, Stacks , Babylon , Interlay , etc.

  • Federated sidechains : Simplify operations through a trusted consortium, providing efficiency, but may come at the expense of Bitcoins underlying decentralization. Examples include Liquid , Rootstock , and Botanix .

Infrastructure is in the ascendant, a panoramic interpretation of the Bitcoin L2 ecosystem

This trilemma provides a useful way to categorize Bitcoin’s Layer 2 solutions, but may not fully capture all the intricacies of its design. Furthermore, it points out the trade-offs of current solutions rather than unsolvable obstacles, suggesting that elements of these trilemmas are part of the decision-making process of developers.

For example, decentralized sidechains issue new tokens to increase security and promote network participation, which may make user interaction more complicated and may not be popular with Bitcoin purists. On the other hand, federated sidechains choose to skip new tokens, making the user experience smoother and reducing resistance within the Bitcoin community. Another option is to use full VM/global state, which allows the implementation of complex functions, including the creation of new tokens on the smart contract platform. However, this approach makes the system more complex and generally increases its risk of attack.

Technology Classification

From another technical perspective, we classify Bitcoins Layer 2 solutions based on their main technical characteristics. This different classification approach examines various technical details and structures, providing a nuanced understanding of how each solution contributes to enhancing Bitcoins scalability, security, and functionality. Each approach has its own unique purpose, which is not in conflict and does not create a trilemma. However, each approach has its own pros and cons in terms of security and scalability. Therefore, some systems may combine these approaches. We will discuss this in detail in the next section of the article. Lets explore these categories:

  • Sidechains using a two-way anchoring protocol . These sidechains are connected to Bitcoin like Layer 2 through a method called a two-way anchoring. This setup allows Bitcoin to be transferred between the main chain and the sidechain, supporting experiments and implementing features that the main chain does not directly support. This approach improves Bitcoins ability to handle more transactions and different types of applications by supporting a wider range of uses. The two-way anchoring mechanism plays a key role in transferring BTC value to the sidechain. On these sidechains, developers have set up a variety of environments; some choose to use an EVM-compatible ecosystem, while others choose to create a VM environment with their own smart contracts. For example, Stacks , Rootstock , Liquid , Botanix , etc.

  • Blockchain rollups . This approach uses Bitcoin as a layer to store data, providing inspiration for rollup technology. In this setting, each UTXO is like a small canvas where more complex information can be written. Imagine that each Bitcoin can store its own detailed data set, which not only increases value but also expands the types of data and assets that Bitcoin can handle. It opens up a wide range of possibilities for digital interaction and representation, making the Bitcoin ecosystem richer and more diverse. For example, B2 network , BitVM

  • Payment channel networks. These networks are like fast lane networks in the vast landscape of Bitcoin. They help speed up a large number of transactions on Bitcoin side roads, reduce congestion, and ensure that transactions are both fast and economical. For example, Lightning RGB .

Infrastructure is in the ascendant, a panoramic interpretation of the Bitcoin L2 ecosystem

By breaking it down this way, we can get a clearer picture of how each tool can help improve Bitcoin, making it more scalable, secure, and versatile. Let’s take a deeper look at each of these tools:

Two-way anchoring protocol

Two-way pegs allow assets to be transferred between two independent blockchains (usually a main chain and a side chain). This system enables assets to be locked on one chain and then unlocked or minted on the other chain, maintaining a fixed conversion rate between the original asset and the anchored asset.

Infrastructure is in the ascendant, a panoramic interpretation of the Bitcoin L2 ecosystem

Understanding the Anchoring Process

Imagine you want to transfer assets from a main chain (such as Bitcoin) to a side chain. The anchoring process is your starting point. Here, your assets are securely locked on the main chain, similar to depositing them in a vault for safety. Subsequently, a transaction is created on the main chain to solidify this lock. After the side chain recognizes this transaction, it mints an equal amount of the anchored asset. This process is similar to receiving a certificate of equal value in a foreign land, allowing you to use your wealth in a new environment while ensuring that your original assets remain intact and safe.

Guide the anchoring process

The peg-out process begins when you decide to restore your assets to the original main chain. This return process involves burning or locking the peg assets on the sidechain, meaning that these assets are set aside on the sidechain and are no longer in circulation. You then provide proof of this action to the main chain. Once the main chain verifies your claim, it releases an equal amount of the original assets to you. This mechanism ensures the integrity and balance of the distribution of assets between the two blockchains, preventing duplication or loss.

Implementation of the two-way anchor system


RSKs two-way peg system is an advanced framework designed to seamlessly integrate Bitcoin with smart contract functionality through RSKs platform. By using SPV for efficient transaction verification, adopting a robust federation model for transaction approval, and integrating SegWit and Taproot, RSK not only improves transaction efficiency, but also closely aligns with Bitcoins security model. In addition, the merged mining method increases the security of the system and incentivizes more miners to participate.

  • RSK federation model . Pegnatories (a selected functional group) are the bridge keepers or trust keepers in this federation model, ensuring that every anchor-in and anchor-out adheres to the protocol. Think of them as a committee of keepers, each holding the keys to a collective vault. Their role is critical - they ensure that every cross-bridge transaction follows integrity and consensus, maintaining the safe and orderly flow of digital assets in this critical channel.

  • Segwit and Taproot . SegWit reduces transaction size and increases processing speed by separating signature information from transaction data. In addition, combined with the Schnorr signature scheme and other enhancements of MAST (Merkelized Abstract Syntax Trees) and Taproot, transactions can be made more efficient and private.

  • RSK merged mining . In RSK’s merged mining approach, miners simultaneously secure both the Bitcoin and RSK networks without additional computational requirements, thus increasing the security of RSK. This approach leverages the mining intensity of Bitcoin to provide additional rewards to miners, demonstrating an innovative use of existing blockchain infrastructure. However, the success of this integration relies on accurately aligning tags within Bitcoin blocks with RSK blocks, highlighting the importance of detailed and precise execution to maintain the security and consistency of the interconnected network.


    Botanix combines the Proof of Stake (PoS) consensus based on Bitcoin and the decentralized EVM network Spiderchain multi-signature architecture to manage Turing-complete smart contracts outside the main chain. With Bitcoin as the main settlement layer, Botanix ensures transaction integrity through advanced multi-signature wallets and off-chain cryptographic verification.

    • Spiderchain , a distributed multi-signature network, is responsible for custody of all actual Bitcoins on Botanix.

    • Architecture : Spiderchain consists of a set of coordination nodes (node operators and sources of liquidity for the entire chain). It consists of a sequence of multi-signature wallets that manage asset custody within the network. Transactions in each wallet require approval from multiple coordination nodes to ensure there is no single point of failure.

    • Dynamic Operation. For each new Bitcoin block, a Verifiable Random Function (VRF) based on the Bitcoin block hash is used to determine the corresponding coordinating node for the upcoming cycle (defined in the Botanix system as the period between Bitcoin blocks). Subsequently, fairness and randomness of the coordinating node selection is ensured by hashing the block hash with SHA 256 and applying a modulo operation with the number of active coordinating nodes (N). This ensures a fair and secure distribution of operational tasks, minimizing centralization risks.

    • Two-way anchoring system. Multi-signature wallets play a key role here, requiring consensus among the selected coordination nodes to execute any transaction.

    • The anchoring process. The user sends Bitcoin to a new multi-signature wallet, which is securely locked. This action mints an equal amount of synthetic BTC on the Botanix chain. Creating this wallet requires multiple coordination nodes, who must all agree and sign, ensuring that no one can independently control the wallet.

    • Peg-out process. Conversely, for peg-out, the synthetic BTC is destroyed and the corresponding bitcoin is released from the multi-signature wallet back to the users bitcoin address. This process is protected by the same multi-signature protocol and requires multiple coordination nodes to approve the transaction.

    • PoS consensus and EVM implementation

    • Consensus . In Botanix’s PoS system, coordinating nodes stake their Bitcoin to participate in the network. They are responsible for validating transactions and creating new blocks on the Botanix chain. These coordinating nodes are selected based on their stake and the randomization method mentioned above in the Spiderchain section.

    • EVM Implementation . The EVM on Botanix supports all operations compatible with Ethereum, enabling developers to deploy and execute complex smart contracts.


    The Stacks platform aims to expand Bitcoins infrastructure through innovative mechanisms such as sBTC two-way anchoring, Proof of Transfer, and Clarity smart contracts to support smart contracts and decentralized applications (dApps).

        • sBTC two-way anchoring agreement:

        • Threshold Signature Wallet : This wallet uses a threshold signature scheme that requires a set of predefined signers (Stackers) to co-sign the anchor transaction. These Stackers are selected using a verifiable random function (VRF) based on the amount of STX they lock up, and rotated every period (usually two weeks), ensuring dynamic membership and continuous alignment with the current state of the network. This significantly enhances the security and robustness of the anchoring mechanism, preventing dishonest behavior and potential collusion, while ensuring the fairness and unpredictability of the selection process.

        • Proof of Transfer (PoX) :

          Infrastructure is in the ascendant, a panoramic interpretation of the Bitcoin L2 ecosystem

        • In PoX, miners transfer BTC to the Stack network to participate, rather than burning Bitcoin as in Proof of Burn. This not only incentivizes participation through BTC rewards, but also directly ties Stacks operational stability to Bitcoins verification security properties. Stacks transactions are anchored to Bitcoin blocks, and each Stacks block records a hash value in a Bitcoin transaction using the OP_RETURN opcode, which allows up to 40 bytes of arbitrary data to be embedded. This mechanism ensures that any changes to the Stacks blockchain require corresponding changes to the Bitcoin blockchain, thereby benefiting from Bitcoins security without changing its protocol.

        • Clarity . Clarity, the smart contract programming language used by the Stacks blockchain, provides predictability and security for developers by enforcing strict rules to ensure that all operations are performed as defined and to avoid unexpected results. It provides decidability, and the results of each function are known before execution, preventing surprises and enhancing the reliability of contracts. In addition, Clarity interacts directly with Bitcoin transactions, allowing the development of complex applications and taking advantage of Bitcoins security features. It also supports features similar to interfaces in other languages, helping code reuse and maintaining a clean code base.


        Liquid Network provides a federated sidechain for the Bitcoin protocol, significantly enhancing transaction capabilities and asset management. The core concept of the Liquid Network architecture is a strong federation consisting of a group of trusted functionaries responsible for block verification and signing.

        • Watchmen : Watchmen manages the peg-out process from Liquid to Bitcoin, ensuring that every transaction is authorized and valid.

        • Key Management: Watchmen’s hardware security module protects the keys needed to authorize transactions.

        • Transaction Verification: Watchmen verifies transactions through cryptographic proofs that confirm compliance with Liquid’s consensus rules, using a multi-signature scheme for enhanced security.

        • Anchoring mechanism:

        • Anchoring : Bitcoin is locked on the Bitcoin blockchain (by using Watchmen’s multi-signature address), and the corresponding Liquid Bitcoin (L-BTC) is issued on the Liquid sidechain through cryptographic methods to ensure the accuracy and security of the transfer.

        • Peg-out : This process involves destroying L-BTC on the Liquid sidechain and releasing the corresponding bitcoins on the Bitcoin blockchain. This mechanism is closely monitored by designated officers called Watchmen to ensure that only authorized transactions can be carried out.

        • Proof of Reserves (PoR) : This is an important tool developed by Blockstream that provides transparency and trust in the networks asset holdings. PoR involves creating a partially signed Bitcoin transaction that proves control of funds. While this transaction cannot be broadcast on the Bitcoin network, it proves the existence and control of the claimed reserves. It allows an entity to prove its fund holdings without moving the funds.


        Babylon is designed to enhance the security of PoS chains by allowing Bitcoin holders to stake their assets, integrating Bitcoin into the PoS ecosystem and leveraging Bitcoins massive market capitalization without requiring direct transactions or smart contract functionality on the Bitcoin blockchain. Importantly, Babylon maintains the integrity and security of staked assets by avoiding the need to move or lock Bitcoin through vulnerable bridges or third-party escrows.

        • Bitcoin Timestamping : Babylon uses a timestamping mechanism that embeds PoS chain data directly into the Bitcoin blockchain. By anchoring PoS block hashes and key staking events on the Bitcoin immutable ledger, Babylon provides a historical timestamp secured by Bitcoins extensive proof-of-work. Using the Bitcoin blockchain for timestamping leverages not only its security but also its decentralized trust model. This approach ensures an additional layer of security against long-range attacks and state corruption.

        • Accountable Assertions : Babylon uses accountable assertions to manage pledge contracts directly on the Bitcoin blockchain, allowing the system to disclose the private keys of pledgers in the event of misconduct (such as double signing). The design uses Chameleon hash functions and Merkle trees to ensure that pledgers assertions are closely related to their pledges, enforcing the integrity of the agreement through cryptographic accountability mechanisms. If a pledger deviates, such as signing a conflicting statement, his private key will be deterministically disclosed, triggering an automatic penalty.

        • Staking Protocol : A key innovation of Babylon is its staking protocol, which allows for rapid adjustment of staking allocations based on market conditions and security needs. The protocol supports fast staking release, enabling stakers to quickly move their assets without the long lock-up periods typically associated with PoS chains. Additionally, the protocol is built as a modular plugin that is compatible with a variety of PoS consensus mechanisms. This modular approach allows Babylon to provide staking services for a wide range of PoS chains without requiring significant modifications to existing protocols.

        Payment Channels and the Lightning Network

        Payment channels are tools designed to conduct multiple transactions between two parties without submitting all transactions to the blockchain at once. They simplify transactions by:

        • Initial : A channel is opened via a single on-chain transaction, creating a multi-signature wallet shared by two parties.

        • Transaction process : Within the channel, both parties conduct transactions privately and adjust their respective balances through instant transfers without broadcasting to the blockchain.

        • Closing : The channel is closed via another on-chain transaction, settling the final balance based on the most recent mutually agreed-upon transaction.

        Exploring the Lightning Network

        Building on payment channels, the Lightning Network extends these concepts into a network that allows users to send payments across blockchains via connected pathways.

        • Routing : Just like using back roads to find a path through a city, the network can find a path for payments even if you don’t have a direct channel with the final recipient.

        • Efficiency : This interconnected system significantly reduces transaction fees and processing time, making Bitcoin suitable for everyday transactions.

        • Smart Locks (HTLCs) : The network uses advanced contracts called Hashed Time Lock Contracts to secure payments between different channels. This is like ensuring that your delivery reaches its destination safely through several checkpoints. It also reduces the risk of intermediary defaults and makes the network reliable.

        • Security Protocol : If any disputes arise, the blockchain acts as a judge, verifying the latest agreed balances, ensuring fairness and security.

        Taproot and Segwit enhance the privacy and efficiency of the Bitcoin network, especially the Lightning Network:

        • Taproot: Like an aggregator for Bitcoin transactions — bundling multiple signatures into one. This not only keeps off-chain transactions tidy, it also makes them more private and cheaper.

        • Segwit: Changes the way data is stored in Bitcoin transactions, allowing more transactions to be included in a block. For the Lightning Network, this means cheaper and smoother opening and closing channels, further reducing fees and increasing transaction throughput.

        Layer 2 solution based on inscription

        Inscriptions have sparked a wave of innovation in Bitcoin’s Layer 2 ecosystem. With the launch of two groundbreaking updates (Segwit and Taproot), the Ordinals protocol was introduced, enabling anyone to attach additional data to the Taproot script of a UTXO, up to 4 MB. This development made the community realize that Bitcoin can now serve as a data availability layer. From a security perspective, inscriptions provide a new perspective. Data, like digital artifacts, are now stored directly on the Bitcoin network, making them unchangeable and protecting them from tampering or loss from external server issues. This not only enhances the security of digital assets, but also embeds them directly into Bitcoin’s blocks, ensuring their permanence and reliability. Most importantly, Bitcoin rollups became a reality, and inscriptions provided a mechanism to include additional data or functionality in transactions. This allows for more complex interactions or state changes outside of the main chain, while still relying on the main chain’s security model.

        Infrastructure is in the ascendant, a panoramic interpretation of the Bitcoin L2 ecosystem

        Implementation of Layer 2 solution based on inscription


        BitVM utilizes a combination of optimistic rollup technology and cryptographic proof design. By moving Turing-complete smart contracts off-chain, BitVM significantly improves transaction efficiency without sacrificing security. While Bitcoin remains the base settlement layer, BitVM ensures the integrity of transaction data by cleverly utilizing Bitcoins scripting capabilities and off-chain cryptographic verification. Currently, BitVM is being actively developed by the community. In addition, it has become a platform for several top projects such as Bitlayer and Citrea.

        • Inscription-like storage method : BitVM leverages Bitcoins Taproot to embed data into Tapscript, similar to the concept of the inscription protocol. This data typically includes important computational details, such as the state of the virtual machine at different checkpoints, the hash of the initial state, and the hash of the final computational result. By anchoring this Tapscript in the unspent transaction output (UTXO) stored at the Taproot address, BitVM effectively integrates transaction data directly into the Bitcoin blockchain. This approach ensures data persistence and immutability while protecting the integrity of the recorded computation using Bitcoins security features.

        • Fraud proof : BitVM uses fraud proofs to ensure the security of its transactions. Here, the prover makes a commitment to the result of the calculation for a specific input, and this commitment is not executed on the chain, but verified indirectly. If the verifier suspects that the commitment is wrong, they can use Bitcoins script function to prove the falsity of the commitment by providing a concise fraud proof. This system significantly reduces the computational burden of the blockchain and avoids full on-chain calculations, which is in line with Bitcoins design philosophy of minimizing transaction burden and maximizing efficiency. The core of this mechanism is hash locks and digital signatures, which link statements and challenges to actual off-chain computational work. BitVM adopts an optimistic verification method - operations are assumed to be correct unless proven to the contrary, which improves efficiency and scalability. Ensure that only valid calculations are accepted, and anyone in the network can independently verify their correctness using available cryptographic proofs.

        • Optimistic rollups : BitVM uses optimistic rollup technology to significantly improve Bitcoins scalability by batching multiple off-chain transactions. These transactions are processed off-chain and their results are periodically recorded on the Bitcoin ledger to ensure integrity and availability. In practice, BitVM processes these transactions off-chain and intermittently records their results on the Bitcoin ledger to ensure integrity and availability. The optimistic rollups used in BitVM represent a way to overcome Bitcoins inherent scalability limitations by leveraging off-chain computing power while ensuring that transaction validity is maintained through periodic on-chain verification. This system effectively balances the load of on-chain and off-chain resources, optimizing the security and efficiency of transaction processing.

        Overall, BitVM is more than just another Layer 2 technology, it represents a potential fundamental shift in how Bitcoin scales and evolves. It offers a unique solution to Bitcoins limitations, but still requires further development and improvement to fully realize its potential and gain wider acceptance within the community.

        B2 Network

        The B2 network, as the first zero-knowledge proof verified commitment rollup, enhances transaction speed and reduces costs for Bitcoin. This setup allows Turing-complete smart contracts to be executed off-chain, significantly improving efficiency. Bitcoin serves as the basic settlement layer of the B2 network, storing B2 rollup data. This setup allows full retrieval or recovery of B2 rollup transactions using Bitcoin inscriptions. In addition, the computational validity of B2 rollup transactions is verified through zero-knowledge proof confirmation on Bitcoin.

        • The important role of inscriptions : The B2 network uses Bitcoin inscriptions to embed additional data into Tapscript, including the storage path of the rollup data, the Merkle root hash of the rollup data, the zero-knowledge proof data, and the parent B2 inscription UTXO hash. By writing this Tapscript to a UTXO and sending it to a Taproot address, B2 effectively embeds the rollup data directly into the Bitcoin blockchain. This approach not only ensures the persistence and immutability of the data, but also protects the integrity of the rollup data using Bitcoins strong security mechanism.

        • Zero-knowledge proofs for enhanced security : B2’s commitment to security is further reflected in its use of zero-knowledge proofs. These proofs enable the network to verify transactions without exposing transaction details, thereby protecting privacy and security. In the context of B2, the network breaks down computational units into smaller units, each represented as a bit-valued commitment in a tapleaf script. These commitments are linked in a taproot structure, providing a compact and secure method for verifying the validity of transactions on the Bitcoin and B2 networks.

        • Rollup technology improves scalability : At the core of the B2 architecture is rollup technology, specifically ZK-Rollup, which aggregates multiple off-chain transactions into one. This approach significantly increases throughput and reduces transaction fees, solving Bitcoins most pressing scalability problem. The rollup layer of the B2 network processes user transactions and generates corresponding proofs to ensure that transactions are verified and finalized on the Bitcoin blockchain.

        • Challenge-Response Mechanism : In the B2 network, after batching and validating transactions using zk-proofs, nodes have the opportunity to challenge the batches if they suspect they contain invalid transactions. This critical phase utilizes a fraud proof mechanism and the challenge must be concluded before the batch proceeds. This step ensures that only transactions that are verified to be legitimate proceed to final confirmation. If there are no challenges or the existing challenges fail within the specified time lock, the batch will be confirmed on the Bitcoin blockchain. On the other hand, if any challenge is verified, the rollup will be reverted afterwards.

        Infrastructure is in the ascendant, a panoramic interpretation of the Bitcoin L2 ecosystem

        Final Thoughts


        • Unlocking the DeFi Market : By enabling features such as EVM-compatible Layer 2 solutions, Bitcoin can enter the multi-billion dollar DeFi market. This not only expands the utility of Bitcoin, but also unlocks new financial markets that were previously only accessible through Ethereum and similar programmable blockchains.

        • Expanding usage scenarios : These Layer 2 platforms not only support financial transactions, but also support various applications in fields such as finance, games, NFTs or identity systems, thereby greatly expanding the original scope of Bitcoin as a simple currency [3, 4, 5].


        • Centralization risk : Some Layer 2 solutions involve mechanisms that may lead to increased centralization. For example, in the mechanism that requires locking the value of BTC, unlike Ethereums Layer 2 solution, Layer 2s interaction with Bitcoin is not protected by the Bitcoin security model. Instead, it relies on a smaller decentralized network or federation model, which may weaken the security of the trust model. This structural difference may introduce failure points that do not exist in the decentralized model.

        • Increased transaction fees and blockchain bloat : Data-intensive uses (such as Ordinals and other inscription protocols) can cause blockchain bloat, slowing down the network and increasing transaction costs for users. This can result in higher costs and slower transaction verification times, impacting the efficiency of the network.

        • User experience and technical complexity : The technical complexity of understanding and interacting with Layer 2 solutions can be a significant barrier to adoption. Users need to manage additional elements like payment channels on the Lightning Network or handle different token types on platforms like Liquid.

        The ugly side

        • Regulatory and ethical issues : The immutability of inscriptions, while a technical advantage, also raises potential regulatory and ethical issues. This poses significant challenges if the data is illegal, unethical, or simply erroneous, leading to permanent consequences without remedies.

        • Fungibility impact : If some bitcoins are “tokenized” as non-financial data, this could affect their fungibility — each unit is supposed to be indistinguishable — potentially leading to a situation where some bitcoins are less valuable or accepted than others.

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