Bitcoin Layers: Lightning, RSK, Stacks & Co Explained
May 29, 2023
Bitcoin has come a long way since its inception in 2009, and it's hard to imagine the world of cryptocurrencies without it. However, as the Bitcoin network and its community have grown, so too have its limitations on the mainchain become more evident.
Still, Bitcoin is a generational endeavor, and recent developments have shown that Bitcoin can indeed be scaled and enriched with additional functionalities. One of the key ways to do this is through the implementation of Bitcoin layers on top of Bitcoin’s base layer blockchain.
In this guide, we’ll explore some of the top Bitcoin layers, how they work, and the value they bring to the Bitcoin network.
What Are Bitcoin Layers?
Prior to delving into the intricate Bitcoin layers, it’s essential to begin by clarifying the concept of “layers.”
Bitcoin layers, also known as Bitcoin protocol layers, are technological advancements built on top of the Bitcoin blockchain that enable new functionalities and use cases.
Bitcoin layers function separately from the Bitcoin blockchain, yet remain connected to the base layer in some form through diverse mechanisms. By adding layers to the Bitcoin network, developers can enhance its scalability, security, and speed while also enabling new, extended applications and features.
Bitcoin protocol layers can be categorized into two primary classifications: Layer-1 solutions and Layer-2 solutions, providing a comprehensive framework for understanding their distinct functionalities.
Layer-1 solutions refer to changes made to Bitcoin’s core protocol. For example, the implementation of Segregated Witness (SegWit) in 2017 was a Layer-1 solution that improved the efficiency of Bitcoin transactions and paved the way for future Layer-2 implementations.
Layer-2 solutions, on the other hand, are additional protocols that exist on top of Bitcoin’s core protocol. Examples of Layer-2 solutions include the Lightning Network and the Liquid Network. These protocols allow for faster and more efficient transactions by moving them off the main blockchain.
How Do Bitcoin Layers Work?
To gain insight into the functioning of these layers, it’s essential to acquire a fundamental comprehension of the Bitcoin blockchain.
Serving as a decentralized ledger, the Bitcoin blockchain meticulously records every transaction. Whenever a user initiates a transaction, it becomes part of a block, which itself is integrated into the chain of preexisting blocks, thus constituting the blockchain.
As Bitcoin has become more popular, its blockchain has experienced more and more congestion, leading to slow transaction times and high fees for users. Moreover, several use cases, which can’t be implemented on Bitcoin directly because of its restricted programming language, have to be implemented elsewhere (i.e., smart contract-enabled protocols). To achieve this, Bitcoin’s entire tech stack will consist of multiple layers, hosting different scaling solutions.
Bitcoin layers work by moving transactions off the main blockchain and onto separate channels or sidechains, referred to as off-chain scaling. These protocol layers operate independently of the main blockchain but are still connected to it in some way, as indicated in the examples below.
Top Bitcoin Layers You Should Know About
Now let’s take a look at some of the most promising Bitcoin layers.
The Lightning Network is perhaps the most well-known Bitcoin layer, and for a good reason. This Layer-2 solution enables fast and cheap transactions between two parties through the implementation of payment channels. Payment channels allow users to conduct multiple transactions off-chain, without requiring them to submit every transaction to the Bitcoin base layer blockchain. Instead, users settle the final balance on the blockchain once all transactions are complete.
The Lightning Network is particularly useful for smaller, frequent transactions that don't require the high level of security offered by the Bitcoin blockchain. For example, buying a cup of coffee or paying for a bus ticket could be done using the Lightning Network, rather than having to wait for every such Bitcoin transaction to be confirmed on the Bitcoin mainchain.
The Liquid Network is a sidechain for the Bitcoin network, designed to provide better privacy and scalability. As a sidechain, the Liquid Network is linked to the main chain through a two-way peg, a mechanism that allows for the transfer of assets between two blockchains in a secure and synchronized manner.
While the Liquid Network operates on top of the Bitcoin blockchain, it’s independent and operates under slightly different premises to achieve better security and faster transaction settlement. The Liquid Network is essentially a fork of Bitcoin’s code base with a different consensus mechanism.
Unlike Bitcoin, which uses proof-of-work, the Liquid Network is secured and validated through a group of businesses, exchanges, trading desks, and Bitcoin infrastructure companies known as the Liquid Federation. Members of the Liquid Federation run nodes known as functionaries and are responsible for signing transactions on the network and maintaining the two-way peg. Anyone can run a full node within the Liquid Network, while functionaries are chosen by the federation. Most Liquid Federation members are large-scale institutions such as exchanges that support the Liquid Network.
The Liquid Network utilizes a feature known as Confidential Transactions to obscure key details about transactions. While someone may see the transaction fees as well as the sending and receiving addresses, the total amount and asset type remain hidden. This allows for more privacy when using the Liquid Network compared to Bitcoin.
Moreover, since the Liquid Network uses signed blocks instead of mining, it reduces the time it takes to validate and process transactions. New blocks are confirmed in two minutes on average, compared to the 10 minutes it takes for a new block to be mined and added to the Bitcoin blockchain.
These features have made the Liquid Network popular with large institutions, such as exchanges, that seek to carry out large transactions quickly and privately.
Rootstock (RSK) is another Layer-2 solution that operates as a sidechain to the Bitcoin blockchain. It’s an open-source platform that enables smart contract functionality for Bitcoin. RSK leverages merge-mining to provide security to its sidechain.
RSK was built with the aim of enabling Bitcoin users to create and execute smart contracts. With RSK, developers can build decentralized applications (dApps) and smart contracts on top of the Bitcoin blockchain by utilizing the RSK Virtual Machine (RVM), which is similar to Ethereum's EVM (Ethereum Virtual Machine).
The RSK network uses smartBTC (RBTC) as its native token. RBTC is pegged 1:1 to BTC, meaning that 1 RBTC is always equal to 1 BTC. RBTC is used to pay gas fees on the RSK network andcan also be used for investment and trading purposes.
RSK is significant to the Bitcoin network because it allows users to execute smart contracts on the Bitcoin blockchain, which was not possible before. By bringing smart contract functionality to bitcoin, RSK enhances the Bitcoin network's utility and adoption potential.
Furthermore, RSK's merge-mining approach ensures that bitcoin miners can earn additional revenue by mining both Bitcoin as well as RSK blocks simultaneously, thereby providing security to either network.
Stacks represents an additional Layer-2 solution that presents a distinctive methodology for incorporating smart contract capabilities within the Bitcoin network. Functioning as a decentralized computing platform, Stacks facilitates the development of smart contracts and decentralized applications atop the Bitcoin blockchain.
Stacks uses a unique architecture that can also be considered a sidechain to the Bitcoin blockchain. Similar to RSK, this setup allows developers to build dApps without compromising the security or decentralization of the Bitcoin blockchain. The sidechain is secured through a consensus mechanism known as Proof of Transfer (PoX), which gives Stacks users the possibility to earn bitcoin rewards for participating and securing Stack’s consensus.
Stacks has been used to build dozens of decentralized applications such as the Bitcoin NFT marketplace and BNS, a decentralized domain name system.
Taproot Assets (formerly Taro)
Taproot Assets, originally launched under the name Taro (Taproot Asset Representation Overlay), is a Layer-3 protocol proposed by Lightning Labs, the leading company in the Lightning Network space.
With Taproot Assets, users can issue digital assets as fungible currencies like stablecoins (tokenized USD) or non-fungible tokens (NFTs) like collectibles. These assets are stored on the Lightning Network, providing users with fast and cost-effective transactions.
By allowing users to issue digital assets on the Bitcoin blockchain, Taproot Assets is expanding the network's use cases beyond just being a currency. It provides a platform for the creation and transfer of digital assets, enhancing the Bitcoin network's utility and adoption potential.
Why Bitcoin Layers Matter
Bitcoin layers are considered the key to unlocking the full potential of Bitcoin. The Lightning Network, RSK, Stacks, and Taproot Assets each has its unique features and benefits. These technologies offer faster and cheaper transactions, improved scalability, and new use cases that were previously impossible on the Bitcoin blockchain.
With the ongoing evolution of the Bitcoin ecosystem, it’s reasonable to anticipate an increase in innovation and exploration pertaining to Layer-2 solutions, and perhaps the development of Layer-3 solutions.
What is the difference between Bitcoin Layer-1 and Layer-2?
Bitcoin Layer-1, also known as the mainchain or base layer, refers to Bitcoin’s main blockchain. As such, Layer-1 is the original and foundational layer, which consists of the distributed ledger and the Proof of Work (PoW) mechanism.
On the contrary, Bitcoin Layer-2 solutions refer to higher layer protocols built on top of the main Bitcoin blockchain. Layer-2 solutions are normally designed to enable new features that address some of Bitcoin’s Layer-1 limitations, e.g., scalability, privacy, and transaction speed. Layer-2 networks allow transactions to occur away from the main Bitcoin network, while still taking advantage of its security and decentralization.
What is Layer-1, Layer-2, and Layer-3 crypto?
Layer-1 refers to any main blockchain or base layer. Examples of Layer-1 blockchains include Bitcoin and Ethereum.
Layer-2 solutions are scaling solutions built on top of Layer-1 blockchains and are designed to have integrated functionality with the base layer. They involve the execution of transactions on separate networks, effectively alleviating the load on the main chain. Examples would include the Lightning Network, Liquid Network, and Stacks.
Layer-3 refers to applications, protocols, and solutions built on top of layer-2. Taproot Assets would be an example of a layer-3 protocol.