Bitcoin layers are various technologies and protocols built on top of the basic Bitcoin blockchain to enhance its functionality, efficiency, and scalability. These layers are designed to solve some of the challenges faced by the Bitcoin network and to expand its capabilities beyond just being a platform for financial transactions with Stacks blockchain wallet. Let’s break down what these layers are and how they contribute to the Bitcoin ecosystem:
What Are Bitcoin Layers?
Table of Contents
Also known as Layer-2 (L2) networks or Bitcoin protocol layers, Bitcoin layers are a set of off-chain technological improvements that use the Bitcoin blockchain. These separate blockchains facilitate new use cases and functionalities or extend the network’s capabilities. Developers add these layers to the Bitcoin network to improve its speed, security, and scalability, besides supporting new applications, features, and developments.
Why Are Bitcoin Layers Important?
Decentralization and security are the bedrock of the Bitcoin network, but, unfortunately, they cause Bitcoin’s low transaction output. Compared to Ethereum’s 15 transactions per second (TPS) and XRP’s 1500 TPS, Bitcoin processes 7 relatively slow TPS.
Bitcoin mainchain’s limited functionality and programmability rendered it unable to directly support newer developments like smart contracts, decentralized applications (DApps), NFTs, etc. Enter layers and developers could implement new use cases without interfering with Bitcoin’s core characteristics of security and decentralization.
L2 networks are a significant launching pad for new Bitcoin applications that could further the cause of its adoption. By moving transactions from the main blockchain onto the sidechain in an off-chain scaling process, layers help improve privacy, scale, cost, and functionality. The result is enhanced speed, utility, cost savings, and entirely new industries like lightning network providers, value-4-value and liquidity providers.
3 Bitcoin Layers Bringing Utility to The Network
As Bitcoin’s popularity grew, congestion became synonymous with its blockchain, leading to slow transaction times and high fees. The following Bitcoin tech stacks of different layers have emerged to host new use cases and introduce scaling solutions.
1. Lightning Network
The Lightning Network (LN) is a popular Bitcoin layer introduced in a 2016 whitepaper renowned for facilitating cheap high-speed transactions. The LN implements real-time payment channels that use smart contracts to facilitate multiple off-chain transactions without submitting them to Bitcoin’s mainchain. By allowing settlement of balances on the blockchain after transactions are completed, Lightning Network’s users, making small frequent transactions, don’t have to wait for confirmation on Bitcoin’s base layer.
Stacks is an L2 network that offers a unique approach to incorporate smart contract capabilities previously unavailable within the Bitcoin network. Users on the Stacks platform can implement smart contracts using a two-way peg called BTC. The protocol uses a unique architecture that enables DApps, DeFi, and NFT developers to lock BTC as sBTC on a ratio of 1:1, which they can burn later to unfreeze their BTC. The sidechain uses the proof of transfer (POX) consensus mechanism, enabling users to earn BTC rewards for securing the network.
3. Liquid Network
As a sidechain of the Bitcoin network, the Liquid Network is designed to facilitate better privacy and scalability. It is ideal for large institutions like crypto exchanges that need to execute large-volume transactions quickly and privately. The independent protocol is linked to the Bitcoin mainchain via a two-peg mechanism that allows a synchronized and secure transfer of assets between blockchains. The Liquid Network confirms new blocks using signed blocks instead of mining, which takes two minutes compared to the 10 minutes it takes the Bitcoin blockchain to mine and add a block to the network.
It may appear like Bitcoin’s developers first constructed a base layer and later realized the foundation had faults that needed to be improved as the building progressed. However, dynamic technologies like Bitcoin that are constantly developing require some flexibility. Also, that is one of it’s main functionality as envisioned by Satoshi Nakamoto, to allow developers to improve the network. By allowing new layers, Bitcoin has used every chance to redesign its home’s foundation to improve its monetary policies and market reliability.