The growing popularity of bitcoin has brought not only widespread acceptance, but also technical challenges. As the number of users and transactions increased, the load on the network became too much for traditional solutions to handle. That's why Layer 2 networks were developed, offering new ways to scale and extend bitcoin's functionality.

In this article, we'll explore what Layer 2 solutions are, how they work and why they are the key to bitcoin's future.

What are BTC Layer 2s and why are they needed?

Layer 2 (L2) solutions are technologies and protocols built on top of the underlying bitcoin blockchain, designed to improve its scalability and functionality. Rather than modifying the bitcoin protocol itself, L2s work in parallel to enable faster and cheaper transactions. They help to offload the core network while maintaining the security and decentralisation inherent in the bitcoin blockchain.

The main purpose of L2s is to address scalability issues that make it difficult to use bitcoin on a global scale. Currently, the BTC network processes a limited number of transactions per second, resulting in delays and higher fees. Layer 2 technologies take transaction processing off of the main blockchain, greatly improving the efficiency of the network.

In addition, the bitcoin scripting language used to create transactions is limited and does not fully support complex smart contracts and decentralised applications (DApps). L2s help overcome these limitations by extending bitcoin-based programming capabilities.

How BTC Layer 2 works

Layer 2 networks operate on the principle of off-chain processing, which means that transactions are executed outside of the main blockchain. This significantly reduces the load on the Layer 1 (L1), resulting in high throughput and low fees. The main L2 mechanisms are state channels, rollup chains and sidechains:

- State channels.

Allow two parties to open a temporary payment channel where transactions take place outside the blockchain. Once the transaction is complete, information about the initial and final balances is recorded on the main network. This solution enables near-instantaneous and almost free payments.

- Rollup chains.

Compresses multiple transactions into a single one, processing them outside the main blockchain and writing back only the final result. This greatly reduces the amount of data that needs to be stored on the blockchain.

- Sidechains.

Independent blockchains linked to the main bitcoin blockchain that can use their own consensus mechanisms and features. They allow additional features to be developed without changing the underlying BTC protocol.

Advantages of Layer 2s

1. Scalability.

Reducing the load on the L1 blockchain allows more transactions to be processed simultaneously.

2. Improved programmability.

Support for smart contracts, DApps, NFT and Web3 applications that were previously unavailable on bitcoin.

3. Bitcoin-based DeFi.

L2s enable the development of decentralised finance on the bitcoin platform.

4. Solving the blockchain trilemma.

Layer 2 networks help to solve the blockchain trilemma — the balance between decentralisation, security and scalability.

BTC Layer 2 use cases

Today, the bitcoin ecosystem includes several Layer 2s, each offering unique capabilities:

- Lightning Network

One of the most popular L2s, enabling instant and low-cost micropayments and making BTC more convenient for everyday use.

- Rootstock (RSK)

A platform that brings smart contracts and decentralised applications to the bitcoin ecosystem using the concept of sidechains.

- Stacks

A blockchain that integrates smart contracts and DApps with bitcoin, making them work while maintaining the security and decentralisation of the core network.

- Liquid Network

A sidechain focused on fast and confidential transactions, primarily used by exchanges and traders.

Rise of BTC Layer 2 networks

Layer 2 networks continue to grow and evolve, offering increasingly complex and efficient solutions. For example, the Lightning Network is already being actively used by many large companies and services to process micropayments. It is expected that the number of L2 users will only increase as the demand for fast and cheap transactions grows. The decentralised finance ecosystem based on bitcoin is also actively growing, contributing to its increasing appeal to developers and investors.

Despite its initial limitations, bitcoin remains a leader in the world of cryptocurrencies, and Layer 2 networks are opening up entirely new horizons for growth. With their help, BTC not only solves old problems, but also acquires new features, becoming an even more relevant and powerful tool.