January 25, 2024

Understanding the Six-Year Evolution of BTC Layer2 in 5 minutes

When mentioning Layer 2, we will immediately think of Ethereum’s Layer 2, probably because its development has been rapid in the past two years, leading many to mistakenly believe that Layer 2 originated from Ethereum and that it’s solely an expansion solution for Ethereum. However, the Layer 2 scaling solution actually originated with Bitcoin, even directly from Satoshi Nakamoto himself. Over the years, teams have continuously explored Bitcoin Layer 2 solutions. This article focuses on a startup team that has been dedicated to BTC Layer 2 for six years to observe the evolution of Bitcoin’s Layer 2.

The essence of Layer 2 refers to the establishment of a second-layer transaction network outside of the L1 (such as the Ethereum or Bitcoin main chain), with the aim of packaging most transactions from Layer 1 into this second layer to alleviate the pressure on the main network.

Bitcoin version 0.1 contained an original version of code that allowed users to update transactions before they were confirmed by miners. If one user’s balance increased, another’s decreased accordingly. Once users completed their transactions, they could transmit just the final outcome to the main network and then close their payment channel.

This process of “updating transactions before miner confirmation” can’t happen on the Bitcoin main chain but on an external second layer, namely Layer 2, and then “transmitting the transaction outcome to the main network” involves packaging the final transaction data from Bitcoin Layer 2 onto Layer 1. This is the interaction process between Bitcoin’s Layer 1 and Layer 2.

This original code from Bitcoin version 0.1 was created by Satoshi Nakamoto, and later, entrepreneurs in the Bitcoin ecosystem inherited Nakamoto’s vision and embarked on the journey of exploring Bitcoin Layer 2.

The Lightning Network, which we are familiar with, is one of the most well-known Bitcoin Layer 2 solutions, focusing solely on Bitcoin’s payment scenarios, providing faster and cheaper transaction experiences on Layer 2. Undoubtedly, the Lightning Network has been successful in advancing Bitcoin’s “global payment” vision. However, since Nakamoto believed that “transactions can be updated before being packed by miners,” could these “transactions” involve something more complex than just payment scenarios, like a relatively complex smart contract?

Almost concurrently with the exploration and implementation of the Lightning Network, another team was exploring this very direction for Bitcoin Layer 2.

In March 2018, as the Lightning Network began test implementations, the ChainX network, which focuses on Bitcoin Layer 2, officially launched (at that time, it couldn’t be considered a modern Bitcoin Layer 2 in the current sense, and was more defined as a Bitcoin cross-chain or side-chain network). Ultimately, over 100,000 bitcoins moved to the ChainX network. However, due to the limitations of the industry’s development and the understanding of the era, ChainX faced four major challenges:

  1. At that time, Bitcoins were transferred to the ChainX network using a Bitcoin light node, which could achieve decentralization. However, moving back to the Bitcoin main chain from ChainX lacked better solutions and had to rely on multi-signature addresses with limited addresses, which was still a relatively centralized solution. This inevitably reduced user scale.
  2. ChainX had not introduced a Virtual Machine (VM) and was not compatible with smart contracts, thereby limiting the construction of more decentralized applications around Bitcoin.
  3. Because smart contracts were not introduced, it was impossible to use BTC as gas like Ethereum’s Layer 2 does now. Hence, ChainX didn’t integrate BTC as gas, failing to create direct value for the Bitcoin ecosystem and lacking consensus and support from the Bitcoin community.
  4. Although over 100,000 BTC were transferred, what could be done with these bitcoins on Layer 2?

At the time, people couldn’t provide an answer. Based on Bitcoin, could assets be issued? Would people engage with it?

However, as the industry continued to develop and the era progressed, the subsequent growth of the Crypto industry gradually pointed the way for the continuously exploring ChainX team. Over six years, they evolved into a truly decentralized BTC Layer 2 — BEVM, compatible with EVM and using BTC as GAS.

Let’s take a moment to reflect on the history.

In 2021, Bitcoin underwent a significant upgrade with Taproot, introducing the Schnorr Signature + MAST contracts. This combination allowed for 1000-signature threshold signatures, meaning that a decentralized multisig could be formed with 1000+ addresses, enabling true decentralization without affecting speed and efficiency. This upgrade opened the door for decentralized multisignature on Bitcoin, allowing for genuine decentralized cross-chain transactions. Building on this, the BEVM team (formerly the ChainX team, hereafter referred to as the BEVM team) took it a step further. Using their experience from running the ChainX network, they turned Bitcoin light nodes directly into signing nodes for the decentralized multisignature network. At the same time, these nodes also served as operational nodes for the BTC Layer 2 network, thus realizing a truly decentralized Bitcoin Layer 2 and opening the door for users to confidently use Bitcoin’s decentralized cross-chain services.

Having solved the issue of completely decentralized circulation between Bitcoin’s Layer 1 and Layer 2, the next challenge was whether more complex applications could be built once Bitcoin was transferred to Layer 2?

In the year 2018, suggesting the construction of DeFi or GameFi decentralized applications on Bitcoin Layer 2 would have been unrealistic. Even Ethereum, known for its smart contracts, was at that time primarily used for issuing tokens. The real explosion of DeFi and other decentralized applications like GameFi and NFTs didn’t happen until the DeFi Summer of 2020 and beyond into 2021.

Therefore, after 2020, with the Ethereum EVM being validated and demonstrating the feasibility of more complex decentralized applications, the BEVM team realized the need to make BTC Layer 2 directly compatible with EVM. This would attract developers already familiar with EVM to deploy applications directly on BTC Layer 2, with low popularization and migration costs, and thereby finding the largest application scenarios for BTC on Layer 2.

Furthermore, after 2021, the explosion of Ethereum’s Layer 2 from 2022 to 2023 made it clear to the BEVM team that to unite the BTC ecosystem community, to truly empower the Bitcoin ecosystem, and to gain support from the Bitcoin community, BTC Layer 2 must use BTC as GAS. Any upper-layer application must use BTC as GAS, with the BTC main chain serving as Layer 1 for ledger purposes, and Layer 2 for applications. Using BTC as Gas, packaging data to Layer 1, paying taxes to Bitcoin miners, and empowering the Bitcoin network is the mass foundation for the success of BTC Layer 2. This is also the mass foundation that allowed many of Ethereum’s Layer 2 solutions to emerge.

Thus, the BEVM team has rearchitected a decentralized BTC Layer 2 that uses BTC as native GAS and is compatible with EVM.

Everything is ready; we just wait for the east wind.

Why wait for the wind? Because no matter how perfect the BEVM technical architecture, how decentralized the network, or how smooth the experience, the focal point of users’ attention isn’t here, the hot topics aren’t here. Many even question the necessity of issuing tokens based on BTC — isn’t that a job for Ethereum? Building decentralized applications in the Bitcoin ecosystem — isn’t it good enough that Ethereum doesn’t?

However, the development of anything doesn’t shift with individual will; the core lies in the will of the people, the choice of the majority of users.

The future of the BTC ecosystem originates from Bitcoin-based token-launch protocols like ordinals.

Before the explosion of BRC20 tokens, few could have believed that it was possible to issue tokens on Bitcoin. It was even more surprising to see these Bitcoin-based tokens being actively traded and reaching high values, which was outrageous and incomprehensible. Yet, that’s the reality. People’s preconceived notions often form a ‘curse of knowledge’, leading to path dependency. This path dependency and knowledge curse often explain why ‘new generations surpass the old’, and it’s the essence of ‘new talents continuously emerging’. If every trend was only recognized and supported by the same group, there would be no chance for newcomers. Without them, could the world still progress? How despairing would that be? Isn’t the emergence of something like Bitcoin a new opportunity being resisted and denied by the old guard?

But let’s not digress too far. Coming back to the point, the Bitcoin token issuance protocol caught fire. Tokens issued on Bitcoin protocols like ordinals and sats completely captured the industry’s attention. A flurry of investors, KOLs, project parties, developers, investment institutions, and exchanges began to pour in. This is the trend!

Hot topics and money drive the industry’s development.

Thus, the Bitcoin ecosystem welcomed its first east wind. However, the explosion of BTC Layer2 still needs a catalyst. The market needs to see that for the Bitcoin ecosystem to rise, simply having a Bitcoin token issuance protocol is far from enough. After the initial craze for Bitcoin ecosystem tokens, people will start to ponder whether Bitcoin needs more complex and sustainable application scenarios. We need infrastructure to provide various sustainable empowerments for Bitcoin ecosystem tokens. And all this can’t be achieved with just the Bitcoin token issuance protocol, nor on Bitcoin Layer1. It has to be on Bitcoin Layer2 — this is the super opportunity for Bitcoin Layer2.

This is the east wind that BEVM is waiting for.

The rise of the Ethereum ecosystem also followed a similar pattern:

From 2017 to 2020, token issuance based on Ethereum became a hot topic. Everyone was issuing and trading tokens, leading the bull market, but ultimately, there was a lack of real application scenarios.

From 2020 to 2021, people realized that mere token issuance couldn’t sustain the market; application scenarios were needed. Thus came DeFi, GameFi, NFTFi, and SocialFi, leading another bull market.

But the Ethereum main chain couldn’t support such a vast scale of applications, so,

From 2022 to 2023, Ethereum Layer2 exploded.

Ethereum took nearly six years to complete this journey, while Bitcoin will likely accomplish it all in the next bull market cycle, probably between 2024 and 2025.

However, savvy investors and developers have already been positioning themselves in anticipation, much like most of Ethereum’s well-known Layer2 projects, which completed their investment layout between 2018 and 2021.

The Bitcoin ecosystem will only move faster. As for the BEVM team, which has been continuously cultivating in the Bitcoin ecosystem and Layer2 field, they have undoubtedly witnessed the entire evolution of Bitcoin Layer2 and grasped the most crucial and exquisite essence of it.

The above is the evolution of Bitcoin Layer2 that we have outlined based on the BEVM team’s six years of continuous exploration in the Bitcoin ecosystem.