Bitcoin’s secondary layers are often overlooked, despite their undoubted potential to increase Bitcoin’s potential for even more advanced functionality. A lot of the focus is on the Lightning Network and its ability to do so Process microtransactions at high speed.
however, the secondary layers (or layer 2) can effectively handle smart contracts, deploy cryptographic techniques for advanced privacy and set up decentralized identity and access solutions connected to the blockchain.
This article explores these fascinating layers and their potential use cases, considering how they could define Bitcoin’s future beyond currency transactions. Bitcoin’s secondary layers are expected to form the backbone of a complex ecosystem that accelerates the growth of decentralized applications.
What are the secondary layers of Bitcoin?
The terms primary layer and secondary layer refer to the different networks within a single blockchain, the shared database that powers cryptocurrency and other projects.
The primary layer (layer 1), also called the overlying chain or ‘mainnet’, is the blockchain itself and is fundamental to all operations. Secondary layers (layer 2), on the other hand, are secondary networks that are developed on top of the blockchain (layer 1), which enables third-party integrations.
Secondary layers help reduce the burden on the blockchain by making use of his strengths and circumvent its limitations. These networks can process transactions externally, which are then sent back to the blockchain for processing and confirmation. This can increase the overall capacity of the blockchain, resulting in additional usability and functionality.
The most well-known secondary layer is the Lightning Network which uses state channels (a solution we will discuss later) to enable microtransactions on the blockchain. This involves users sending Bitcoin payments via an encrypted peer-to-peer (P2P) channel that works similarly to smart contracts, creating a simple, efficient and more cost-effective channel between sender and receiver.
What are the main benefits of Bitcoin’s secondary layers?
There are three keys Benefits of Bitcoin’s Secondary Layersto increase scalability and expand the functionality of the blockchain, while making it easier for companies to comply with financial regulations.
Increase scalability
Processing a single set of transactions on the Bitcoin network can take about ten minutes, averaging about seven seconds per transaction. This can result in: network congestion at peak times and lead to higher transaction fees, impacting the viability of microtransactions and point-of-sale transactions.
The Bitcoin blockchain cannot scale because it compromises security and decentralization, the two main pillars of the network. Due to the large number of transactions within the network, secondary layers are increasingly used to process transactions ‘off-chain’. reduce the load on the primary layer.
In terms of decentralized applications, by distributing data across a network of nodes, secondary layers reduce the risk of centralized points of failure and attacks, improving overall securing app deployment processesas well as patches, updates and all other forms of changes.
Improving functionality and usability
The Bitcoin network is designed to enable transparent P2P transactions and provide the means for the digital currency to continue to grow in value. By focusing only on these two main features, the Bitcoin network remains robust and secure, preventing any chance of manipulation.
However, this would limit future innovation if there were no secondary layers. Layer 2 allows third-party developers to significantly increase the functionality of Bitcoinby expanding the use cases and taking advantage of new web3 technologies such as NFTs and, of course, smart contracts.
Compliance
With more secure payment channels, compliance with regulations becomes much simpler and cheaper Compliance is an important consideration for any business accepting cryptocurrency payments.
Secondary layers and the blockchain, both in its current and future iterationscan be the key to setting up many of the tracking and security features that site owners and businesses need for PCI compliant hosting (if they accept payments) or spend six-figure sums on large volumes of testing.
How Bitcoin’s Secondary Layers Work
Secondary layers can work in different ways and there are three main solutions at layer 2 that you should be aware of to help understand the processes.
- State Channels – This solution allows users to avoid high transaction fees and provide end-to-end encrypted payment channels for sending and receiving Bitcoin. State Channels are essentially micro-ledgers and only the opening and closing balance is reported to the blockchain once the payment channel closes, allowing users to make unlimited transactions with no transaction fees.
- Sidechains – Sidechains are an independent blockchain creates a two-way bridge to the blockchain. This makes it possible to transfer data assets easily and quickly between different transaction chains. As an independent blockchain, side chains can do that too integrate other secondary layer solutions.
- Rollup Chains – Rollup Chains also allow users to perform a large number of transactions off-chain, with the individual transactions being aggregated into a single block of data that is then reported to the blockchain. There are two types of roller chainsoptimistic and ZK. Optimistic rollups automatically validate all consolidated transactions, while ZK rollups generate a single cryptographic proof for validation.
Developing more secure and faster systems is essential for both small businesses and the company level where organizations are built on complex processes such as switching to ERP software or performing Workday staff augmentation. As third-party secondary layers become even more sophisticated, these companies will likely become increasingly reliant on the blockchain instead of cloud solutions, further accelerating the growth of the Bitcoin ecosystem.
What are some of the most popular secondary layers?
We’ve already talked about the most popular secondary layer, the Lightning NetworkTo provide a more in-depth overview of the capabilities of Layer 2, we’ll focus on some other commonly used solutions.
Rootstock (RSK)
As a popular sidechain, Rootstock (RSK) is at the forefront of smart contract functionality on the Bitcoin blockchain. ‘two-way pin’ system involves a user sending Bitcoin directly to RSK, where it is stored and secured in a digital wallet as a Smart Bitcoin (RBTC). Users can get the RBTC from the regular Bitcoin blockchain.
RSK offers significantly higher transaction speeds than the Bitcoin network and is also compatible with it Ethereum virtual machine (EVM)making it possible to execute smart contracts on the Ethereum-style blockchain.
Liquid network
Liquid Network is a solution that improves transaction speeds but also uses cryptographic techniques to improving the privacy of Bitcoin payments. It is another sidechain solution and runs alongside the blockchain, but uses its own native asset Liquid (L-BTC) instead of standard Bitcoin. Liquid Network also uses a two-way link like RSK, converting BTC to L-BTC
RGB
RGB is a smart contract protocol and Bitcoin secondary layer associated with the Lightning Network. This allows users on a Lightning network to do that design contractual agreements with the option to create an issuance token or not. This system offers great speeds and lower costs while using the primary blockchain as a proprietary control and confidentiality mechanism.
By interacting with the Bitcoin Blockchain and the Lightning Network, RGB enables the development of more third-party solutions to explore advanced automation at the blockchain level and further reduce transaction costs.
Stacks Protocol
This protocol makes it possible to execute self-executing smart contracts without the need for a hard fork, a modification of the Bitcoin blockchain that creates a completely new blockchain. Hard forks can often disrupt communities and cause instability, which is why they are often avoided.
Instead, Stacks Protocol uses microblocks that provide and operate at high speeds a unique Proof-of-Transfer (PoX) mechanism to connect them to the Bitcoin blockchain. This makes it extremely easy to execute smart contracts and decentralized applications without leaving the Bitcoin ecosystem.
Conclusion
The Bitcoin Blockchain (the primary layer) has many limitations as it was designed purely to enable secure P2P transactions. This is why secondary layers are needed that allow third-party integrations to work alongside the blockchain to provide innovations.
These layers can result in slower transaction speeds, faster processing times with minimal network congestion, and the integration of advanced cryptographic privacy techniques.
Going forward, secondary layers are expected to enable even further growth and help the Bitcoin ecosystem integrate a range of advanced, decentralized applications that can revolutionize P2P transactions, point-of-sale payments, and much more.
This is a guest post by Kiara Taylor. The opinions expressed are entirely her own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.