What is Bitcoin Layer 2? Popular explanation of Bitcoin Layer 2 concept

Although the market has always been optimistic about the future of Bitcoin, in order to achieve new breakthroughs, the development of Bitcoin Layer 2 has attracted much attention. Unlike Ethereum Layer 2, the founder of Bitcoin has not defined Bitcoin Layer 2. So what exactly is Bitcoin Layer 2? There is no finalized definition yet. But everyone agrees that Bitcoin Layer 2 is an expansion solution built on the Bitcoin main chain, aiming to improve the transaction speed and processing capabilities of the Bitcoin network while reducing transaction fees. The editor below will explain the concept of Bitcoin Layer 2 in a simple way.

What is Bitcoin Layer2?

Layer2 refers to a set of off-chain solutions built on the main network, aiming to increase transaction throughput without sacrificing decentralization or security. It achieves these goals by processing transactions off-chain and saving intermediate states, which speeds up transaction confirmations, reduces transaction fees, and increases the capacity and throughput of the entire system. Layer 2 aims to improve the performance of Bitcoin and make it more suitable for a wide range of applications.

Bitcoin was designed to be a decentralized and secure payment system, but it faces limitations in scalability. It turns out that during periods of higher trading volume, the average block time of 10 minutes and the throughput of 7 transactions per second (TPS) cannot meet the transaction needs of users, resulting in increased handling fees and delays.

The Bitcoin blockchain’s limited scripting language also limits its ability to support complex smart contracts and decentralized applications (DApps). To address these challenges, the concept of the Bitcoin Layer 2 network emerged.

How does the Bitcoin Layer 2 network work?

Layer2 solutions operate based on off-chain processing principles, i.e. transactions are processed outside the main chain, thus reducing the burden on the Layer1 network. By creating off-chain channels, users can conduct multiple transactions without adding each transaction directly to the blockchain. This off-chain processing method not only increases transaction throughput, but also minimizes fees, making micro-transactions and point-of-sale transactions more feasible.

The mechanisms supporting Bitcoin Layer 2 network functions include state channels, summary chains and side chains. Relying on state channels, Layer 2 solutions such as Lightning Network can empower users to create end-to-end encrypted channels for sending and receiving payments. Transactions within these channels occur off-chain, with only opening and closing balances reported to the mainnet, thereby reducing network congestion and improving transaction efficiency.

Blockchain aggregation (including optimistic aggregation and zero-knowledge aggregation) can merge multiple transactions off-chain into one piece of data, and then add it to the main chain. This approach not only improves scalability but also significantly improves transaction throughput.

A side chain is an independent blockchain with its own consensus mechanism, connected to the Layer1 blockchain through a two-way cross-chain bridge. This connection can not only realize asset transfer between blockchains and support more Layer 2 solutions, but also expand the functions of the Bitcoin network.

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