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The Lightning Network, one of the most Satoshi-consistent Bitcoin scalability solutions, is based on state channels and has developed payment channels, creating a broader and more convenient Bitcoin payment network. However, due to the lack of smart contracts and the emergence of various new technologies, both the Lightning Network and the underlying state channel concept are gradually being forgotten.
Additionally, most current Bitcoin Layer 2 solutions deliberately ignore user fund security. For example, how to ensure the safety of funds from the Bitcoin network to L2 and cross-chain security.
A particularly important issue is the lack of an escape hatch mechanism. That is, how users can still control their funds if L2's validation nodes or the custodians of Bitcoin multi-sig wallets maliciously alter information or misuse Bitcoin.
The core builders of BEVM have discovered that we can try to introduce state channels into Bitcoin Layer 2, allowing users to genuinely control their own funds.
This article will continue this idea, exploring the escape hatch solution for Bitcoin Layer 2 based on the basic principles of state channels.
State channels are a Bitcoin scalability solution mentioned in Satoshi's whitepaper. Bitcoin developers Joseph Poon and Thaddeus Dryja published a paper on the Lightning Network based on state channels. Eventually, teams like Lightning Labs, Blockstream, and ACINQ developed and implemented it, gaining support from Bitcoin OGs like Jack Dorsey.
State channels applied to the Lightning Network enable fast, nearly zero-cost peer-to-peer payments.
Let's first review the basic operation principles of state channels:
State channels are essentially multi-sig addresses jointly created by both participants, each depositing a certain amount of Bitcoin as funds for the payment channel.
When the two parties establish a state channel for transactions, only the first transaction (establishing the state channel) and the final transaction (closing the state channel) occur on the Bitcoin chain, while all other transactions occur off-chain.
Bitcoin transactions within the state channel are fast and low-cost. The transaction ledger between the two parties will display a real-time "BTC balance sheet," and each transaction requires a signature to ensure legality and accuracy.
When either party closes the state channel, the latest "BTC balance sheet" is submitted to the Bitcoin Layer 1 for verification, typically with a 7-day verification period or "challenge period," during which both parties can initiate challenges. After the period, A and B will receive their respective BTC amounts based on the latest "BTC balance sheet."
If both parties confirm in time, the transaction can be completed immediately. (Ethereum's Layer 2 scaling solution OP-Rollup mimics the principle of state channels, with all transactions occurring on Layer 2 and then verified on Ethereum Layer 1, with a 7-day challenge period.)
Here's an example:
Suppose LN nodes A and B want to use a state channel for BTC transactions. The steps are as follows:
1. Establishing the State Channel:
LN nodes A and B create a multi-sig address C, each depositing a predetermined amount of BTC, e.g., A deposits 10 BTC, and B deposits 5 BTC. The "BTC balance sheet" is:
A: 10 BTC
B: 5 BTC
C: 15 BTC
2. Updating the Balance Sheet:
Suppose in the first transaction, A signs and sends 1 BTC to B. The updated balance sheet is:
A: 9 BTC
B: 6 BTC
C: 15 BTC
In the second transaction, B signs and sends 5 BTC to A. The updated balance sheet is:
A: 14 BTC
B: 1 BTC
C: 15 BTC
The balance sheet updates with each transaction.
3. Closing the State Channel:
Either A or B can close the state channel anytime. Suppose the balance sheet is:
A: 12 BTC
B: 3 BTC
C: 15 BTC
Upon closing, the latest balance sheet is submitted to Bitcoin Layer 1 for a 7-day verification. If neither party contests, the transaction completes. If either party does not confirm in time, after 7 days, BTC is distributed according to the balance sheet.
In summary, state channels use mutual signatures and time locks to enable secure Bitcoin peer-to-peer payments without third-party custody, achieving fast, low-cost transactions through off-chain transactions and main chain verification.
Understanding the basic principles of state channels, we will discuss upgrading them by integrating state channels with Bitcoin Layer 2 and smart contracts for more innovative scenarios.
Using BEVM's state channel and Taproot Consensus as an example:
Taproot Consensus is BEVM's Bitcoin Layer 2 solution. BEVM network nodes generate a Taproot contract address on Bitcoin Layer 1 using Schnorr signatures and MAST, maintained by BEVM network consensus, similar to Ethereum Layer 2's ETH custody contract address on Ethereum Layer 1.
This Taproot contract address can become a Lightning Network node (LN node), named LN node B.
Any Bitcoin user or institution can operate a Lightning Network node, named LN node A.
Thus, BEVM's Taproot contract address can establish state channels (multi-sig addresses) with any Bitcoin user or institution, co-managed or single-managed by the user.
During the 7-day lock period, normal withdrawals require the user to sign on the BEVM network and then sign again on the Bitcoin network to ensure transfers from the multi-sig address on the Bitcoin network.
In extreme cases, like a network breakdown, BEVM's multi-sig address allows users to initiate signed transactions to transfer funds back to Layer 1.
For example, a Bitcoin institution (LN node A) and BEVM's Bitcoin Taproot contract address (LN node B) establish a state channel, creating a multi-sig contract address C.
Suppose LN node A locks 1000 BTC, and LN node B locks 10 BTC. The "BTC balance sheet" is:
A: 1000 BTC
B: 10 BTC
C: 1010 BTC
Since BEVM's Bitcoin Taproot contract address is one of the state channel nodes and a multi-sig address for C, BEVM's contract address on Bitcoin Layer 1 has management authority over 1010 BTC. Therefore, BEVM's chain can display 1010 BTC 1:1. A's address on BEVM's chain can perform any smart contract operations, and the "BTC balance sheet" within the state channel will update accordingly.
For example, A uses BEVM's lending protocol to mortgage 100 BTC and borrow 1 million USDT. Before executing this transaction, A needs to sign to transfer 100 BTC to B's state channel address. The balance sheet updates to:
A: 900 BTC
B: 110 BTC
C: 1010 BTC
A is the LN node of the Bitcoin institution, and B is the LN node of BEVM's Taproot contract address. B can settle A's spent BTC at any time. If B has no objections, the transaction confirms, and settlement completes.
If A disputes the settlement, they can challenge during the 7-day period. After the Time Lock expires, the transaction automatically confirms, and settlement completes.
Even in extreme cases like network breakdowns, BEVM's multi-sig mechanism allows users to sign and retrieve their unspent BTC, with the network ledger synchronizing balances. Bitcoin users no longer need to worry about losing their BTC or being unable to retrieve assets due to chain issues.
In some sense, this is an already implemented "Bitcoin Layer 2 escape hatch mechanism."
For a long time, Bitcoin users, especially large holders, have had security anxiety about on-chain activities. Concerns about cross-chain transactions, smart contracts, and on-chain interactions have led them to prefer cold wallets, foregoing any returns rather than placing BTC on-chain.
Public data shows that currently, the total on-chain BTC, with WBTC ranked first at 154,000 and TBTC second at about 3,500, plus other Bitcoin Layer 2 BTC, totals less than 210,000, less than 1% of the total Bitcoin supply.
Security anxiety is the primary obstacle to the large-scale development of Bitcoin Layer 2.
The BEVM team's proposed integration of Lightning Network state channels and Bitcoin Layer 2 smart contracts may solve this issue.
As described, any Bitcoin user can establish transactions with BEVM's chain via state channels. Users can sign for the amount they want to spend; if they don't spend, they don't sign. Without signing, Bitcoin remains in their control. In other words, Bitcoin users fully control their BTC spending.
Even if the Bitcoin Layer 2 network breaks down or shuts down, after the Time Lock expires, users can sign to transfer BTC from the multi-sig address (the Layer 2 network balance will auto-reconcile), unaffected by chain or smart contract issues.
This solution addresses Bitcoin users' biggest pain point and clears the "obstacle" for the large-scale development of Bitcoin Layer 2.
The design of state channels and smart contracts not only addresses Bitcoin users' security concerns but also promotes the development of the Lightning Network.
Over nearly 10 years of Lightning Network development, two issues have consistently troubled developers:
1. How to add smart contract functionality to the Lightning Network, allowing BTC to be used not just for payments but also for lending, swaps, derivative trading, and other complex applications. Essentially, this is about "how to decentralize smart contract functionality for BTC."
2. How to implement Byzantine Fault Tolerance (BFT) in the Lightning Network to address efficiency and security issues in peer-to-peer networks.
The BEVM team has proposed a state channel + Taproot Consensus solution to address these two issues:
1. Expanding Beyond Peer-to-Peer Payments to Programmable Smart Contract Scenarios
The BEVM team's state channel + Taproot Consensus solution has two core designs:
- First, Taproot Consensus is an organic integration of Bitcoin SPV nodes, Schnorr signatures, and MAST, ensuring data consistency between Bitcoin Layer 2 (BEVM network) and the Bitcoin mainnet.
- Second, by incorporating Lightning Network design, the BEVM chain itself can act as a Lightning Network node, allowing BTC to freely circulate within state channels. Through Taproot Consensus, BTC in the state channels can utilize any smart contract application, enabling BTC to be used not just for payments but also for lending, swaps, staking, and derivative trading.
This innovative design significantly expands the Lightning Network and will greatly promote its long-term development.
2. Using a BFT Consensus Network as a Lightning Network Node to Solve Decentralization and Fault Tolerance Issues
It is well known that the Lightning Network is a peer-to-peer network but not a Byzantine Fault Tolerant decentralized network.
A BFT decentralized network operates on BFT consensus, where users only need to trust the BFT network consensus, not any single point or individual. Users can execute any transaction on-chain with the private key generated on-chain, essentially transacting with a BFT consensus network rather than an individual.
In contrast, in a peer-to-peer network, transactions are between individuals or single points, heavily relying on each participating node's professionalism and real-time response capability. The response ability and honesty of a single point determine transaction efficiency and security.
For example, if A and B establish a state channel on the Lightning Network, and A is an unprofessional node while B is a professional but dishonest node, B could submit a dishonest invoice on-chain before the transaction is completed. If A, due to lack of expertise, fails to challenge within the 7-day period, A risks losing assets or facing double-spending. The Lightning Network demands high professionalism from both parties involved.
These practical issues have frequently hindered the Lightning Network's development.
However, the BEVM team's solution involves using the BEVM chain itself as a Lightning Network node. Transactions are no longer with a single point or individual but with a BFT consensus-driven blockchain network validated by 1,000 nodes. The network's consensus mechanism ensures trustworthiness, alleviating users' concerns about dealing with dishonest nodes, thus significantly addressing the Lightning Network's decentralization and fault tolerance issues.
The BEVM team's state channel + Taproot Consensus solution addresses at least three issues in the Bitcoin ecosystem development:
1. By designing a "Bitcoin Layer 2 escape hatch mechanism," it alleviates long-standing on-chain security concerns for Bitcoin users.
2. By enabling smart contract functionality in the Lightning Network, it breaks the limitation of Bitcoin being used only for payments, allowing programmable smart contract capabilities through the Lightning Network.
3. By using the BEVM chain as a Lightning Network node and replacing single nodes with BFT network consensus, it greatly mitigates decentralization and fault tolerance issues in the Lightning Network.
