January 25, 2024

Why Bitcoin Ecosystem Will Inevitably Surpass Ethereum Ecosystem?


The Bitcoin ecosystem can not be built on Layer 1. The Bitcoin blockchain is not Turing complete by nature. Moreover, Bitcoin’s simplistic UTXO and limited block space cannot handle complex data and calculations. Therefore, the development of Bitcoin’s ecosystem necessitates Layer 2, specifically a completely decentralized Bitcoin Layer 2. The several major upgrades of Bitcoin over 15 years have brought many technological innovations, but they have been overlooked. Thus, most people believe that Bitcoin can’t develop a completely decentralized Layer 2 that supports large-scale ecosystem applications. This is due to a lack of understanding of Bitcoin’s development, a misunderstanding of the essence of Layer 2, and arrogance and prejudice against the Bitcoin ecosystem.

The greatest obstacle to progress is arrogance and prejudice. We advise everyone to let go of arrogance, to learn with an open mind, and to correct their understanding. This article aims to set the record straight for the decentralized Bitcoin Layer 2.

I. What is Layer 2? What is the essence of Layer 2?

The concept of Layer 2 became well-known due to the Ethereum ecosystem, but Layer 2’s concept did not originate from Ethereum, it came from Bitcoin.

Bitcoin version 0.1 contained a piece of original code left by Satoshi. This code allowed users to update transactions before they were confirmed by miners. If one user’s balance increased, another’s would decrease accordingly. Once users complete a transaction, they can transmit only the transaction result to the network and then close their payment channel. The Lightning Network, which was based on the “payment channel,” emerged from this concept. It is Bitcoin’s earliest Layer 2 and one of the earliest and most feasible Layer 2 solutions in the crypto world.

Thus, when discussing what Layer 2 is, we shouldn’t only look at Ethereum Layer 2, nor should we use it as the sole standard (after all, Ethereum Layer 2’s design direction of rollups only became feasible after developments in the past two years).

Instead, we should look beyond the surface to understand what Layer 2 is. Only then can we design a viable Layer 2.

Whether it’s Bitcoin Layer 2 or Ethereum Layer 2, their emergence was due to Layer 1 mainnets being unable to handle more complex and high-performance application scenarios. Ethereum needs Layer 2 to expand its capabilities, and Bitcoin needs it even more. For example, BTC can achieve fast and efficient payment scenarios in the Lightning Network; $ETH can move to Arbitrum for faster, cheaper, and more complex smart contract scenarios.

Therefore, both Bitcoin Layer 2 and Ethereum Layer 2 essentially allow Layer 1 mainnet assets to move to Layer 2 for more complex and high-performance application scenarios. Hence, the essence of Layer 2 is a decentralized cross-chain solution + a high-performance and trustless second-layer network.

So, both Bitcoin Layer 2 and Ethereum Layer 2 must follow some basic principles in their design.

1. They must achieve trustless cross-chain movement of Layer 1 assets. This is the most crucial first step.

2. The Layer 2 network’s ledger must be secure and trustless.

Only by satisfying these two conditions can Layer 2 be truly usable and fully decentralized.

II. How do Bitcoin Layer 2 and Ethereum Layer 2 differ in design? What are the principles of Layer 2 design?

Having clarified the essence of Layer 2 and the basic principles of its design, let’s examine how Bitcoin Layer 2 and Ethereum Layer 2 differ in actual design.

1. Trustless cross-chain movement of Layer 1 assets

The cross-chain method between Ethereum Layer 1 and Layer 2. Layer 2 officially deploys an asset custody smart contract on the Ethereum mainnet. When users move ETH from the Ethereum mainnet to Layer 2, their ETH is locked in this smart contract and new ETH is generated 1:1 on the Layer 2 network.

When users initiate a return to the mainnet, Layer 2’s ETH is destroyed, triggering the smart contract on Layer 1 to unlock and return the ETH to the user. This is the cross-chain implementation method between Ethereum Layer 1 and Layer 2. It is achieved through Ethereum’s smart contracts and communication between Layer 1 and Layer 2, achieving trustlessness.

Then, how can Bitcoin achieve trustless BTC cross-chain?

Before the Bitcoin Taproot upgrade in 2021, it was impossible to achieve a completely decentralized BTC cross-chain. However, Taproot’s introduction of Schnorr signatures and MAST contracts has made it a reality.

Schnorr signatures are a type of signature algorithm more suitable for Bitcoin than elliptic curve signatures. Ethereum has also wanted to support this signature but has not done so due to the complexity of upgrading the signature algorithm, which involves Ethereum’s account system. The main feature of Schnorr signatures is aggregate signatures, allowing 1000 Bitcoin addresses to manage the same asset with one signature.

This not only achieves signature privacy but also consolidates the data from 1000 signatures into one transaction, solving the problem of data accumulation caused by multiple signatures. Therefore, Schnorr signatures can break the previous limit of 15 multi-signatures in Bitcoin, achieving completely decentralized signature management.

MAST contracts, or Merkle Abstract Syntax Trees, use Merkle trees to encrypt complex locking scripts. Their leaves are a series of non-overlapping scripts. To spend, one only needs to disclose the relevant script and the path from that script to the root of the Merkle tree.

To put it simply, MAST contracts are equivalent to VM functions (like smart contract functions). They can execute predetermined operations through instructions. For example, a combination of MAST contracts and Schnorr signatures can trigger a MAST contract to enable 1,000 nodes participating in decentralized asset management to sign, thereby intelligently executing Bitcoin’s inflow, outflow, and spending according to the rules set by the contract.

There is no human intervention here; everything is executed by the contract, achieving decentralized management of Bitcoin. For more details, refer to the BEVM white paper:

Let’s take the BTC Layer 2 project BEVM as an example to see how true BTCLayer 2 achieves a completely decentralized cross-chain.

When users move BTC from the Bitcoin mainnet to BEVM, their BTC enters a contract address managed by 1,000 nodes. Then, new BTC is generated 1:1 on BEVM, i.e., BTC Layer 2 network. When users issue an instruction to move BTC back to the mainnet from BEVM, BEVM network nodes will trigger the MAST contract, and the 1,000 asset custodian nodes will automatically sign according to predetermined rules, returning the BTC to the user’s address. The entire process achieves complete decentralization and trustlessness.

From the above, we can see that using the combination of MAST contracts and Schnorr signatures introduced by Taproot, Bitcoin can also achieve a completely trustless cross-chain like Ethereum Layer 2. This is the most important first step in realizing a completely decentralized BTC Layer 2.

2. The Layer 2 network’s ledger must be secure and trustless.

Ethereum Layer 2’s ledger is managed by sequencers. When processing transactions, they typically use a 10:1 ratio to roll up Layer 2’s ledger and package it onto the Ethereum mainnet, where it is verified by Ethereum nodes.

However, Ethereum Layer 2’s sequencers (the nodes running Layer 2 networks, typically only one node) are completely centralized and controlled by Layer 2 officials. How can such a centralized design gain user trust? Mainly through packaging Layer 2’s ledger onto the Ethereum mainnet for miner node verification.

Users who don’t trust the ledger can initiate off-chain challenges to verify it. Therefore, Optimistic Rollups are also known as optimistic proofs — they optimistically assume that officials will not act maliciously, and if they do, it can be proven through challenges. These combined designs can ensure that Layer 2’s ledger is trustworthy.

However, this also means that assets on Ethereum Layer 2, such as ETH, are not censorship-resistant and can be forcibly frozen by external forces because Ethereum Layer 2’s sequencers are controlled by a single official node and can be centrally controlled. This will also limit the scale of assets on ETH Layer 2, as many large funds will hesitate to enter due to the issue of not being censorship-resistant. Imagine, if you had 100,000 ETH, would you dare to move these assets to a non-censorship-resistant Ethereum Layer 2?

At the same time, two user-unfriendly issues arise from this:

a. Due to the 7-day challenge period of Optimistic Rollups, when users move ETH from Layer 2 back to the Ethereum mainnet, they must wait at least 7 days for the challenge period to end.

b. Since Ethereum Layer 2’s sequencers are completely controlled by a single official node, all cross-chain and transaction fees on ETH Layer 2 are exclusively enjoyed by the official (it is reported that Base, ZKsync, and other ETH Layer 2 sequencers earn over $5 million per month, with peaks exceeding $10 million), while Layer 2 users cannot share in these network growth dividends.

So, how does Bitcoin Layer 2 ensure a trustworthy ledger?

Continuing with BEVM as an example, we previously mentioned that BEVM achieves decentralized Bitcoin cross-chain through a combination of Mast contracts and Schnorr signatures. To facilitate real-time communication between Layer 2 and Layer 1, BEVM’s network fully operates on Bitcoin light nodes, making it a trustworthy network composed of 1,000 Bitcoin light nodes.

To ensure the absolute security of the Layer 2 ledger and prevent network nodes from acting maliciously, BEVM has adopted Bitcoin’s economic game theory mechanism. BEVM merges the nodes that manage Bitcoin with those running the Layer 2 network. This means that nodes operating the Layer 2 network through asset staking are also the ones managing BTC assets.

Additionally, BEVM has designed a completely economics-based automated dynamic staking mechanism, ensuring that the total value of BTC/mainnet tokens staked by BEVM’s Layer 2 nodes always exceeds the value of the assets they manage. This game theory mechanism ensures that Layer 2 network nodes have no incentive to act maliciously, thereby ensuring the absolute security and trustworthiness of the Layer 2 ledger.

Furthermore, BEVM’s design brings two advantages that Ethereum’s Layer 2 does not possess:

a. BEVM’s network nodes are fully decentralized, and not controlled by any project team. Hence, BTC on this Layer 2 is resistant to censorship, cannot be frozen by any force, and can freely cross between BEVM and the Bitcoin mainnet anytime. This resolves the trust issues of major capital.

b. Since the BEVM network is operated by decentralized nodes, the cross-chain and network transaction fees generated are shared with the nodes and users, not monopolized by the project team.

III. The right path for Bitcoin Layer 2

From the above comparison, we can see the similarities and differences between Bitcoin Layer 2 and Ethereum Layer 2. Due to the innate differences between Bitcoin and Ethereum, the design of Bitcoin Layer 2 cannot simply copy Ethereum’s Layer 2 model. Instead, it should penetrate the essence of Layer 2 and combine it with Bitcoin’s unique characteristics to find the right path for Bitcoin Layer 2.

The correct direction for Bitcoin Layer 2 design:

1. Bitcoin’s Layer1 is not Turing-complete by nature. Its simplistic UTXO design and limited block space cannot verify and compute complex data and programs. Therefore, attempting to improve this within the limited UTXO and block space of Bitcoin, or through client-side validation, is not feasible. This approach is extremely complex and, at most, can only support asset issuance. The only correct direction is to decentralize BTC to Layer 2, thereby enabling the expansion of more complex and high-performance scenarios.

2. It’s essential to solve the issue of decentralized Bitcoin cross-chain to Layer 2, as this is the foundation of everything. Traditional Bitcoin cross-chaining methods such as Hash time locks, pegs, wrapping, and multi-signatures are difficult to gain user trust. The combination of Mast contracts and Schnorr signatures brought by Bitcoin’s 2021 Taproot upgrade can solve the problem of decentralized Bitcoin cross-chain, which is a direction worth exploring for Bitcoin Layer 2.

3. To ensure the security and trustworthiness of the Layer 2 ledger, it’s crucial not to simply copy Ethereum Layer 2’s model. Attempting to compress and pack the BTC Layer 2 ledger onto the Bitcoin chain for verification through rollups is not feasible, as the Bitcoin blockchain does not support OP or ZKP validation, and miners will not participate in the verification of Layer 2 ledgers. Storing these ledgers on the Bitcoin chain is merely a form of record-keeping, serving no real purpose. To ensure the security of the Layer 2 ledger, one can learn from Bitcoin’s economic game theory and design a dynamic staking mechanism for nodes at the economic and game-theoretic levels, thereby ensuring that Layer 2 network nodes have no incentive to act maliciously and securing the Layer 2 ledger.

4. Supporting ZKP on Bitcoin Mainnet. We all hope that Bitcoin will undergo another BIP-level upgrade in the future, enabling the Bitcoin network to verify OP or ZKP and Bitcoin mining machines to perform ZKP calculations. At that time, ZK-rollups could enter the Bitcoin network, and Bitcoin Layer 2 could achieve a more ultimate solution. However, this might only be feasible in the next 5–10 years.

Based on the above analysis, we can see that the most feasible BTC Layer 2 solution currently is based on the Mast contracts and Schnorr signatures brought by the Taproot upgrade, combined with Bitcoin light node dynamic staking network to implement real-time communication and network security between Layer 2 and Layer1, thereby realizing a truly decentralized Bitcoin Layer 2. This is exactly the solution that BEVM has already implemented.

IV. Bitcoin Layer 2 will inevitably surpass Ethereum Layer 2, and the Bitcoin ecosystem will inevitably surpass the Ethereum ecosystem

Why do we believe that Bitcoin Layer 2 will surpass Ethereum Layer 2, and the Bitcoin ecosystem will surpass the Ethereum ecosystem?

We believe there are several reasons:

1. There is already a fully decentralized BTC Layer 2 solution available. Before such a solution, the largest Bitcoin-wrapped asset was WBTC, issued by the centralized institution Bitgo, currently at about $6.5 billion in scale. With the emergence of fully decentralized solutions (such as BEVM), it’s predicted that this market could grow by another 5–10 times or more, reaching a volume of $32.5 billion to $65 billion, far exceeding the current total TVL of $20 billion for ETH Layer 2 (this data includes cross-chain ETH and other assets on ETH Layer 2, and the actual cross-chain ETH is far less than $20 billion).

2. As Bitcoin is not Turing-complete by nature, it needs Layer 2 to develop its ecosystem more than Ethereum. Therefore, in the future, a large amount of BTC will be transferred to Layer 2 to build various decentralized BTC applications. This is determined by market demand.

3. Bitcoin Layer 2 can be more resistant to censorship than Ethereum Layer 2, making it easier to gain the trust and favor of users, especially large capital.

4. Bitcoin’s market value is three times that of Ethereum. Currently, the total TVL of ETH Layer 2 is about $20 billion, approximately 10% of Ethereum’s market value. By the same proportion, if 10% of BTC enters Bitcoin Layer 2 in the future, the total TVL will reach $85 billion, three times more than the volume of Ethereum Layer 2.

IV. Conclusion

We have analyzed the essence of Layer 2 and compared the designs of Bitcoin Layer 2 and Ethereum Layer 2. We have seen practical and feasible solutions for Bitcoin Layer 2. Based on the advanced design of Bitcoin Layer 2 and the rigid demand for the development of Bitcoin’s volume and ecosystem, we deduce that Bitcoin Layer 2 will inevitably surpass Ethereum Layer 2.

Ultimately, the Bitcoin ecosystem will also surpass the Ethereum ecosystem.