The 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, while some believe it has opened Pandora's box for the Bitcoin ecosystem. Among the many technological developments in the Bitcoin ecosystem, Layer 2 construction is of paramount importance. This article summarizes the basic knowledge of Bitcoin Layer 2 based on well-known articles online, discussions with industry insiders, and the team's exploration experience in Web3 product design and development. It is hoped that this will spark ideas and attract more people to refine related concepts, promoting the development of 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 of Bitcoin.

The terms "layer 2 construction" and "layer 2 network construction" in this article are basically synonymous, with layer 2 construction being a broader concept. To remain consistent with the commonly used terminology in the industry, the expression "layer 2 network construction" will also be used in the text.

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 first start with the fundamental characteristics of blockchain systems.

1.1 The Basic Characteristics and Requirements of Blockchain

We borrow the concept proposed by Vitalik: blockchain is a "world computer". Understanding the various characteristics of blockchain from this perspective will be clearer. The following summarizes some basic characteristics:

Open and Transparent: This is a characteristic of the blockchain as a "world computer" regarding data storage and instruction execution, and it is also an internal demand feature that requires the participation of numerous distributed nodes globally in the computation. This characteristic fulfills the users' right to know about the data, and is a joint result of the internal collaboration requirements of this "world computer" and the external demands of the users.

Decentralization: This is the architectural feature of this "world computer"; the degree of decentralization and fault tolerance are theoretically based on the Byzantine Generals' Problem. The degree of decentralization is an important indicator of blockchain security and also the foundation of certain characteristics.

Security: Security is composed of internal demands generated by the architectural characteristics of this "world computer" and external demands required by users. From a micro perspective, security is guaranteed by cryptographic technologies, while from a macro perspective, it is ensured by the decentralization of the architecture, so that the security of this "world computer" will not be affected by the forgery of micro data or the destruction of the macro architecture.

Computing Power: One of the main functions of the blockchain as a world computer is computing power. This metric is generally measured by whether it is Turing complete. Some chains are intentionally designed to be Turing incomplete in order to maintain their main characteristics. For example, in the Bitcoin network, Satoshi Nakamoto not only made its code instructions Turing incomplete but also deliberately reduced some instruction sets during its development to maintain its stability and security. All Turing complete technologies are aimed at expanding the computing power of the blockchain. From the perspective of layered design, simpler systems are more suitable for being the underlying layer.

Performance: Under the same computing power, performance is another key capability to assess the blockchain as a computer world. It is usually measured by TPS, which refers to the number of transactions processed per second.

Storage: The blockchain is described as a "world computer," so it must have a storage function, which is the ability to record data. Currently, data is primarily stored within blocks, while more specialized off-chain storage is still under development.

Privacy: Privacy is a sub-requirement in the "World Computer", which demands the maintenance of the authority scope of data producers and users during the computing and storage processes. This is fundamentally driven by the external needs of the users.

There is also a comprehensive indicator of scalability, which generally refers to the scalability of the entire architecture. This feature affects most of the fundamental characteristics. At the architectural level, the scalability of the system is a very important indicator.

Among the fundamental characteristics of these blockchains, most are constrained by the impossible triangle in their interrelated development. For example, the DSS conjecture refers to decentralization, security, and scalability.

In distributed systems, a similar impossibility triangle is the CAP theorem, which states that in a distributed system, consistency, availability, and partition tolerance cannot all be achieved simultaneously. Blockchain systems are distributed systems that involve the Byzantine Generals Problem, so the CAP theorem is also applicable.

1.2 The Role of Second Layer Construction

What roles need to be completed in layer 2 construction? What functions should it provide? Layer 2 construction must address the shortcomings of the layer 1 system and accomplish tasks that are not suitable to be completed on the layer 1 system.

From the blockchain characteristics summarized above, a preliminary conclusion can be drawn: it is essential to expand these fundamental capabilities: openness and transparency, decentralization, security, computing power, performance, storage, privacy, and so on. In addition to these technical foundational capabilities, there is also an important economic issue that needs to be addressed, which is cost reduction. Typically, the comprehensive cost of executing transactions on a first-layer network is relatively high, necessitating the use of a second-layer network to reduce these costs.

In summary, the solutions aimed at increasing capacity, reducing costs, and customizing features are all built on Layer 2. Regarding customization, it is currently not very evident and often obscured by the first two features, which can be somewhat perplexing. We can understand it this way: the characteristics of Layer 1 networks vary in necessity for many applications, and various feature implementations can be readjusted on top of Layer 2 for certain applications.

In the construction of layer two, the fundamental capabilities of the blockchain will be traded off, lowering some features and even discarding certain characteristics in exchange for significant improvements in others. For example, some layer twos will lower the degree of decentralization and security in order to improve performance; some layer twos, like the Lightning Network, will change the system's structure and settlement methods to increase throughput. There are also some that enhance certain features without lowering the fundamental characteristics, such as the RGB processing method, which significantly increases privacy and censorship resistance but raises the difficulty of technical implementation.

Reducing costs should be a fundamental requirement for all layer two constructions.

1.3 Why do layered design?

Layered design is a means and methodology for humans to handle complex systems. By dividing the system into multiple hierarchical structures and defining the relationships and functions between each layer, it aims to achieve modularity, maintainability, and scalability of the system, thereby improving the design efficiency and reliability of the system.

For a broad and extensive protocol system, using layering will have obvious benefits. This approach makes it easier for people to understand, facilitates division of labor for implementation, and allows for modular improvements. This is similar to the seven-layer model design of ISO/OSI in computer networks, but in specific implementations, some layers can be merged; for example, the specific network protocol TCP/IP is a four-layer protocol.

The specific advantages of protocol layering:

1. Each level is independent of the others. A particular level does not need to know how its next level is implemented, but only needs to know the services provided by that level through the inter-layer interfaces. This reduces the overall complexity of the problem. In other words, how the previous level operates does not affect the work of the next level, so when we design the work for each level, we only need to ensure that the interfaces remain unchanged and can freely adjust the working methods within the layer.

2. Good flexibility. When any layer changes, as long as the inter-layer interface relationship remains unchanged, the layers above or below will not be affected. When a certain layer experiences technological innovation or encounters issues during operation, it will not affect the work of other layers. When troubleshooting, only the issues of that specific layer need to be considered.

3. Structurally separable. Each layer can adopt the most suitable technology for implementation. The development of technology is often asymmetric, and the hierarchical division effectively avoids the bucket effect, ensuring that the overall work efficiency is not affected by the imperfection of a particular aspect of technology.

4. Easy to implement and maintain. This structure makes it easier to handle the implementation and debugging of a large and complex system, as the entire system has been broken down into several relatively independent subsystems. During debugging and maintenance, each layer can be debugged individually, avoiding situations where problems cannot be identified or resolved.

5. It can promote standardization work. Because the functions of each layer and the services they provide have been precisely described. The benefit of standardization is that one can freely replace a certain layer, which is very convenient for use and research.

The layered modular design concept is a common approach in the technology field for dealing with large-scale functions that require collaboration among multiple people and continuous improvement of engineering projects. It is a method that has been tested through practice and proven to be effective.

2. Several Construction Ideas for Bitcoin Layer 2

There are three notable construction routes for Bitcoin's second layer:

(1)The expansion route based on the chain is very similar to the second layer of EVM, which is the 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 indexing, is a centralized structure.

The first two methods are quite distinctive, and there are already some products in use and others in exploration. For the first method, due to the vigorous development of Ethereum and the exploration of other Bitcoin imitation chains, layer two scaling based on chains is relatively easier, with more reference cases available. The second distributed-based method is usually more difficult and develops more slowly, represented by the Lightning Network. The third method is controversial because it does not seem like a layer two construction but appears to have accomplished the functions of layer two construction.

Which layer two construction plan is better? We use the total locked value (TVL) of a layer two network as a benchmark for evaluation; the plan with the highest TVL is the optimal plan. With the development of time and technology, this optimal plan will be a changing process.

For the definition of Bitcoin's second-layer network, as long as it relies on the Bitcoin network and establishes a technical association with the Bitcoin network, and has some characteristics that are superior to Bitcoin's first-layer network, it can be considered as the construction of Bitcoin's second-layer network. In other words: as long as BTC is consumed as gas and BTC is used as the underlying asset, any system that expands Bitcoin's performance is considered a second-layer construction. Based on this judgment, we should recognize a third type of second-layer network construction, namely the centralized structure of second-layer construction.

The development of Bitcoin's technology itself, such as modifying OP_RETURN, Taproot, Schnorr signatures, MAST, and Tapscript, should be designed for the purpose of connecting layer one and layer two. These technologies should not be overly developed for additional functionalities, as no matter how much the layer one network is expanded, there will not be a qualitative breakthrough; layer two construction is essential. However, in the absence of better Bitcoin layer two products, these technological capabilities connecting layer one and layer two will be excessively used for a period of time.

2.1 Layer 2 Construction Based on Blockchain

Early Bitcoin imitation chains have explored various avenues, such as "Colorcoin", "CovertCoins", and "MasterCoin"; various scaling Bitcoin imitation chains, such as BCH, BSV, and BTG; various sidechain technologies are based on the expansion construction cases of the chain, which can be considered a broad form of second layer.

Including Ethereum, it is also an exploration of improvements based on Bitcoin. In the case of failing to persuade other project teams, Vitalik formed a team to publish a white paper and develop a new generation of blockchain system, addressing Bitcoin's imperfections: the UTXO unaccounted system, non-Turing complete execution language, poor scalability, and other issues. Although Ethereum's exploration is not a direct second-layer construction on Bitcoin, it is, in a broad sense, an exploration of construction based on the chain.

The exploration of improvements to Bitcoin's shortcomings through Ethereum, as well as the development and verification of second layers on Ethereum, provided a reference case for the development of chain-based second layer networks on Bitcoin. Various Rollup solutions, cross-chain solutions, message channel technologies, and Ethereum's own sharding technology,