What can we learn from Ethereum L2 on the eve of the Bitcoin Layer 2 explosion?

With the birth of the Ordinal protocol in 2023, Bitcoin, the once "digital gold", welcomes a brand new asset type—"inscriptions". If Bitcoin is gold, then inscriptions are similar to products processed from gold, possessing unique value.

This native asset issuance method on the first blockchain quickly gained market popularity, not only giving rise to more asset issuance protocols such as BRC20, Atomical, Runes, etc., but also producing well-known inscriptions such as ORDI, SATS, and numerous native NFTs of Bitcoin.

Once again, the Bitcoin ecosystem has welcomed a spring, attracting a large amount of capital, users, and developers. However, after a period of development, the assets on Bitcoin have indeed increased, and people have gradually realized the limitations of Bitcoin as a Layer 1 solution. On the one hand, Bitcoin itself does not support smart contracts, so it is difficult to expand richer application scenarios on Bitcoin relying on techniques like inscriptions.

On the other hand, the performance of Bitcoin and the miner fees have also become huge obstacles to the further development of the Bitcoin ecosystem. During the active period of the inscription gameplay, the transfer fees of Bitcoin will rapidly increase, even beginning to affect normal transfers of Bitcoin. Moreover, if there are indeed more application scenarios, it will further cause network congestion and long-term high miner fees.

Naturally, the wave sparked by inscriptions quickly spread to the Bitcoin scaling track, which also opened up another hot track - Bitcoin Layer 2.

From Fandom to Refutation, Where is Bitcoin Layer 2 Heading?

Some older Bitcoin scaling solutions are being revisited, while new Bitcoin Layer 2 projects are increasingly being proposed. Among them, the Bitmap Tech team, known for its nested protocol BRC420 on the Bitcoin chain in the field of inscriptions, took advantage of the ongoing enthusiasm for inscriptions to be the first to launch a Bitcoin Layer 2, which is the later well-known Merlin Chain.

Merlin Chain launched in February 2024 and quickly initiated the staking activity Merlin's Seal. The staking assets include not only Bitcoin and some inscriptions but also assets like the BRC420 blue boxes, which triggered a surge in blue box prices. Capitalizing on the popularity of Bitcoin inscriptions, Merlin Chain gained a substantial TVL shortly after the staking began. In less than 30 days since the activity's launch, the TVL surpassed 3 billion USD, reaching a peak of 3.5 billion USD, making it a popular star project in the Bitcoin ecosystem.

On April 19, the highly anticipated Merlin was finally launched, with its token MERL peaking at 2 USDT, but then it quickly fell back and continued to decline over the next few weeks, currently down over 80% and nearing the cost price, such performance has left many people astonished.

Not long after being listed on MERL, on April 25, Merlin opened the unlocking function for BTC, and subsequently its TVL plummeted sharply, now down to around 1.3 billion USD, a drop of over 60%. Meanwhile, the blue boxes that participated in staking have also crashed from a peak value of about 1 BTC to less than 0.05 BTC.

As a star project of Bitcoin Layer 2, it faced a dual crash in both coin price and TVL after its launch, which caused significant harm to many who actively participated in Merlin. This inevitably raises doubts about Bitcoin Layer 2: is it a genuine narrative of potential, or just a fleeting topic of speculation?

In fact, the entire development of the blockchain industry is a continuous exploration between various doubts and recognitions. For the scalability of blockchain, Bitcoin is not the only ecosystem exploring this. As an early pioneer, Ethereum also faces the dilemma of needing to scale up, but as Ethereum began exploring scalability solutions after Bitcoin, its Layer 2 has flourished and seen very active development, which certainly contains lessons worth learning. Let’s take a look at the development of Bitcoin's Layer 2 through the development of Ethereum's Layer 2.

Looking Back at the Ethereum Scalability Journey

1. Learning and Exploration

The scaling solution of Ethereum initially drew on the experiences of Bitcoin and explored methods such as state channels, the Lightning Network, and sidechains.

State channels are like two parties, A and B, wanting to trade, opening a continuously updated channel outside of Layer 1. Regardless of how many transactions they perform within the channel, they are not affected by the performance and fees of Layer 1. The reason for continuously updating the state is to upload the latest off-chain state to the Ethereum main chain as the final settlement basis to prevent malicious behavior. This can indeed greatly improve efficiency and reduce fees; for example, a certain network is exploring this based on state channels.

However, its limitation lies in that it is only applicable to both parties within the channel, and both parties need to remain online and continuously update their status; otherwise, there is a risk of asset loss.

The Lightning Network is an iteration based on state channels. If state channels represent a line between two parties, then the Lightning Network connects many lines together to form a network. This means that even if A and B are not in the same channel, they can be connected through the network by linking multiple channels together.

The Lightning Network is essentially a network version of state channels. Ethereum has borrowed from Bitcoin's Lightning Network to launch its own Lightning Network. However, the Lightning Network is an off-chain network and does not support smart contracts itself. Its main use case is still for transfer and payment purposes. Furthermore, the Lightning Network does not belong to the blockchain network, and its nodes can be easily controlled by centralized entities, posing certain risks; therefore, it still has many shortcomings.

The subsequently launched sidechain technology fills the gaps of the Lightning Network; it is a form of blockchain that can also run smart contracts, thus offering higher security and stronger scalability than the Lightning Network.

However, sidechains also bring new problems. Due to their independence, sidechains are only responsible for their own ledgers and only transmit transaction results back to the main chain, which may lead to losses caused by malicious behavior on the sidechain. For example, if a sidechain node tampers with transaction records or refuses to execute transactions, it may result in incorrect results being sent back to the main chain, thereby affecting the system's security and reliability. Therefore, sidechains have data availability issues and are not widely recognized.

At this stage, the scaling solution for Ethereum is basically implemented based on the ideas of the scaling solution for Bitcoin. However, after many attempts, Ethereum did not stop its exploration and began to take a more advanced step.

2. The willows darken, and the flowers brighten.

In 2017, Joseph Poon(, one of the creators of the Lightning Network, proposed a new Ethereum Layer 2 off-chain scaling framework called Plasma, along with Vitalik Buterin. Plasma referenced some designs of state channels and improved upon the shortcomings of sidechains, adopting a tree structure architecture composed of many child chains forming a Merkle tree. Compared to sidechains, Plasma hashes all transaction records occurring in these Plasma child chains to generate a Merkle root, which is then sent back to the main chain, allowing the main chain to supervise the transactions on Plasma. This Merkle root contains the summary information of all transaction records that occurred on the Plasma chain, which the main chain can use to verify the integrity and validity of these transactions, thereby ensuring the legality and security of the transactions.

Although Plasma seems to solve some issues related to state channels and sidechains, it still has certain data availability problems, and Plasma cannot support smart contracts, with its development also hitting a bottleneck.

It seems that a hard-to-come-by hopeful solution has fallen into a predicament, however, a year after the birth of Plasma, a new solution quietly emerged, and it was this solution that sparked the explosive growth of Layer 2, and that is — Rollup technology.

Although Rollup also utilizes Merkle trees and sidechain structures for construction, it differs from Plasma in that Rollup packages and compresses all transaction records from the sidechain and transmits them to the main chain, rather than performing hashing like Plasma. Nodes on the main chain can directly access and verify all transaction details, not just the hash summaries, thus providing sufficiently strong data availability and transparency, which increases the credibility and security of the system.

With the proposal of Optimistic Rollup, certain Layer 2 projects based on this technology have gradually gone live. Since OP Rollup addresses key issues such as data availability on subchains and supports smart contracts, its security and functionality have finally been widely recognized. These projects have attracted a large number of developers and projects, and users and funds are also willing to engage deeply, rapidly building their own ecosystems. Thus, Ethereum Layer 2 has finally gotten on track and is welcoming an explosion.

) 3. A hundred flowers bloom

The success of some Layer 2 solutions has attracted more teams to explore different Layer 2 solutions. For teams with strong technical capabilities, they may develop their own Layer 2 solutions. However, there are also some teams that may want to operate their own independent Layer 2 but lack the necessary technology. This demand has been discovered by a certain team first. They launched a tool that allows for one-click deployment of Layer 2 based on their own technology, enabling any team to more easily use this tool to release their own Layer 2. Meanwhile, other teams that have developed their own Layer 2 solutions are not to be outdone and have successively released their own Layer 2 deployment tools based on their projects.

As a result, more demand for Layer 2 has been uncovered, leading to a feast of Layer 2. Currently, there are more than 50 Layer 2 projects counted on L2beat, and the development of Layer 2 has entered a stage of vigorous growth.

On the other hand, there is often the issue of malicious sorting in the mainstream Rollup solutions at present. In Layer2, the sorter is mainly responsible for sorting transactions occurring on Layer2 according to certain rules, packaging them into blocks, and then submitting them to the main chain for confirmation. The sorter typically determines the order of transactions based on certain rules, such as transaction fees, timestamps, etc., and ensures the validity of the blocks.

However, since the sequencer has the power to control the order of transactions, there may be malicious behavior by the sequencer, intentionally adjusting the order of transactions to gain more MEV rewards. Therefore, some teams have begun to explore decentralized sequencer solutions to make Rollup more secure and mature.

Looking back at the development of Ethereum's Layer 2, we can see that Ethereum's scalability has not been smooth sailing, but it is exploring towards a more decentralized, more data-available, and more secure direction. Only when a more secure and decentralized solution reaches a certain level will it gain more recognition from funds and users, allowing for faster development.

Theoretically, the Layer 2 of Bitcoin can also refer to the development of Ethereum's Layer 2 to find its own "chain", and similarly, it will welcome a flourishing like Ethereum when its security and degree of decentralization reach a level widely accepted by the market.

So what are the current Layer2 solutions for Bitcoin, and what new changes are worth paying attention to? Let's bring our perspective back to the Bitcoin ecosystem with the development experience of Ethereum Layer2.

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The Dilemma and Breakthrough of the Bitcoin Ecosystem

) 1. The current scalability dilemma of Bitcoin

Currently, we haven't seen many professional organizations or institutions entering the Bitcoin ecosystem in large numbers, which is also because the level of security and decentralization has not reached the satisfaction of these professional players.

When we talk about the development of BTC Layer 2, the draft of the Lightning Network white paper was released as early as February 2015, which is also the earliest Layer 2 based on BTC.