Three Key Design Decisions for Bitcoin Layer 2 Solutions

Author: @momir_amidzic

Translation: BAIHUA Blockchain

Regarding Bitcoin's Layer 2 solutions, when considering Bitcoin's Layer 2 solutions, I start with a simplified model focusing on three key design decisions:

How to bridge BTC?

How and to what extent to inherit Bitcoin's security?

How to handle data availability (DA) issues?

1) Bridging BTC

BitVM Bridge: A trust-minimized bridging solution with a 1/N trust assumption should be the optimal solution. However, there is currently no specific bridging specification, and some unresolved (hopefully solvable) issues, such as multi-signature operators needing to provide liquidity in advance. The optimistic forecast is that we might see the emergence of BitVM bridging within at least 12 months, and in the base case within 24 months.

Decentralized Bridging: Economic security bridges like XCLAIM are generally safer but not very scalable. In contrast, statistically secure bridges, such as large rotating multi-signature networks, currently seem to offer better trade-offs.

Centralized Bridging: Although not ideal, they are a straightforward solution, and many Bitcoin sidechains today rely on simple custodial bridging.

2) Inheriting Bitcoin's Security

This part is where it gets really interesting.

BitVM Programs: In theory, BitVM programs can write rules even for tokens that exist only on the sidechain and not natively on Bitcoin. This not only enables trust-minimized bridging through BitVM but also allows for actual rollups on top of Bitcoin. However, the technical risks cannot be ignored, and practical solutions seem to be quite distant.

PoS Sidechains Combined with Babylon: Another option is to build PoS sidechains combined with Babylon. Specifically, Babylon is the first solution that allows trustless Bitcoin staking, adding utility to BTC by using it as an economic security layer for new PoS chains, similar to how Eigen allows ETH to be used as an economic security layer for new middleware and infrastructure.

Merge Mining: Merge mining is another option; however, traditional merge mining has some inherent limitations, such as the inability to enforce certain behaviors on miners. Some hybrid mechanisms might be interesting, such as requiring miners to stake on the sidechain to increase their participation while giving the sidechain the ability to slash them.

3) Data Availability (DA)

Why is DA crucial? If we are talking about optimistic designs like BitVM, users need to be able to access data to challenge and prove malicious transactions.

Bitcoin itself has constraints, storing only 4MB every 10 minutes, making it unsuitable as a DA layer, not to mention the uncertainty of costs and the unpredictability of inserting data into the next block.

Can Bitcoin have rollups without Bitcoin-guaranteed DA?

DA is a widely discussed topic in the Ethereum community, with some community leaders insisting that anything using external DA is not a true Ethereum rollup.

By the same principle, anything using non-Bitcoin DA is not a Bitcoin rollup. However, Bitcoin sidechains may have to compromise and be more pragmatic here, opting for alternatives like Ethereum DA, Celestia, Eigen DA, or DA guaranteed by staked BTC (via Babylon).

One last point: What is the best settlement layer for Bitcoin L1?

In the long run, as Bitcoin's mining rewards gradually decrease, Bitcoin miners will have to rely more on organic fees or secondary revenue sources. In other words, to maintain high hash power, Bitcoin needs to develop a sustainable fee market. All things considered, the solution most beneficial to Bitcoin L1 security, surprisingly, is merge mining.

That is, BitVM (combined with external DA) and Babylon will not bring more transaction fees to Bitcoin miners. The former, as an optimistic design, only needs to be executed on Bitcoin in rare cases, while the latter, although increasing the demand for BTC as an asset, does not enhance Bitcoin PoW security.

Merge mining aligns well with increasing Bitcoin security because it requires miners to compete for L1 block execution to build sidechain blocks and earn sidechain rewards. In other words, winning the next Bitcoin block is a prerequisite for building the next sidechain block.

In summary, with these simple modules, you can already create 18 unique sidechain combinations. Assuming there are no restrictions when combining different modules, my personal favorite and likely achievable solution within the next two years is as follows:

Bridging through BitVM

Using Babylon for BTC PoS security or some innovative merge mining method to extend Bitcoin PoW security

Relying on external DA, such as Ethereum or DA provided by Babylon.