From Ethereum to Bitcoin: The Evolution of Layer 2

Layer 2s are now so deeply embedded in the EVM landscape that it’s hard to recall a time when they weren’t a cornerstone of daily life for millions of users. But not so long ago, Layer 2 existed as little more than an idea than a working reality. Over the last three years, however, dozens of Layer 2 networks have sprung up to take the strain off Layer 1 chains such as Ethereum – and now the same transformation is taking place on Bitcoin.

Why We L2

A layer 2 is essentially a blockchain network that draws its security model from the main chain, or parent chain, it’s connected to. Transactions are routed to a secondary network that is cheaper and faster to use, with this activity routinely verified on the main chain by transmitting a proof that attests to the validity of the L2 activity that has recently taken place. In this way, the L2 can benefit from the scalability that its purpose-built architecture supports without significantly weakening its security and decentralization versus the L1 it draws from.

L2s are essentially an attempt to have the best of both worlds: the strength of a battle-tested main chain such as Ethereum without the high fees and bottlenecks. In this respect, L2s have proven a resounding success. Second layer solutions such as Polygon, Optimism, Arbitrum, and Base now dominate the EVM ecosystem, collectively accounting for significantly more economic activity than Ethereum both in terms of dollar value and transaction count.

Ethereum has not been rendered redundant, however: the billions of dollars invested in securing its network through Proof of Stake makes the network extremely robust, and these effects filter through to the L2s it supports. Assets, including fungible tokens and NFTs, meanwhile, can be effortlessly moved between EVM chains by the plethora of bridges that have sprung up, allowing transfers to be concluded in under 60 seconds in most cases when moving from L1 to L2.

Now it’s Bitcoin’s turn to benefit from the cambrian explosion of L2s, with an increasing number of Layer 2 networks now live and bringing many of the same benefits enjoyed by ethereans to bitcoiners.

Scaling Bitcoin Through L2

Bitcoin’s architecture is designed very differently from that of Ethereum, which is why it took so long for the sort of use cases long popularized on Ethereum to take shape there. It wasn’t until Casey Rodamor conceived Ordinals that a framework existed for swapping NFTs and, through BRC20s and subsequently Runes, fungible tokens too. Once these use cases began seeing adoption, Bitcoin quickly ran into the same problems that have beset Ethereum: high fees and low throughput. The solution, once again, lies on Layer 2.

There are now numerous Bitcoin L2s taking the strain off the main network and providing more fertile soil for sectors such as DeFi to flourish. Chief among these is Merlin Chain, which allows native Layer 1 assets such as BTC to be traded on its purpose-built L2 along with dozens of other assets including ETH. Because that’s the other crucial thing to know about Merlin Chain: it’s EVM compatible, which allows assets to move from the Ethereum ecosystem directly to Bitcoin.

While Merlin Chain appears the best positioned L2 to unite the once siloed worlds of Bitcoin and Ethereum, it’s by no means the only second layer solution available on Bitcoin. One of the first was Stacks, which supports DeFi use cases such as lending and onchain perps, while the likes of Rootstock and SatoshiVM are also chipping away at the same challenge.

Since launching its mainnet, Merlin Chain has proven that there’s clear appetite among users for Bitcoin-centric DeFi and NFTs: its TVL now sits at an impressive $1.2B thanks to popular protocols such as Solv and Avalon, which form DeFi cornerstones. Those who once dismissed Bitcoin DeFi as unworkable or simply unnecessary given Ethereum have been forced to reconsider.

Have We Reached Peak L2?

On both Ethereum and Bitcoin, L2s have proven to be extremely effective at solving the primary problems they were designed to address, namely fees and throughput. In the process, they’ve shown that they can operate reliability and securely, without introducing trade-offs that impair blockchain’s core ethos of decentralization and immutability.

That said, there are clearly some drawbacks to the L2 landscape, particularly in terms of the liquidity fragmentation and balkanization they’ve introduced. So far, there has been no “winner takes all” scenario on either Bitcoin or Ethereum. While healthy in terms of promoting competition, the downside to this is that users are left unsure of which L2 to pick, and whether plumping for one risks missing out on opportunities on another.

It’s also important that, given the increasing speed and ease with which L2s can now be deployed, the industry doesn’t fracture into thousands of Layer 2s, most operating as ghost chains with nominal real users. A likelier outcome is that as the L2 landscape ossifies, a few clear winners will emerge and will dominate the bulk of all economic activity.

On Ethereum, we’ve seen specific use cases gravitate to specific L2s: gaming to Polygon, memecoins and SocialFi to Base, DeFi and perps to Arbitrum and Optimism. The zk-based L2s, meanwhile, such as StarkNet and zkSync, are still too new for any meaningful conclusions to be drawn. As for Bitcoin, it seems like Stacks and Merlin Chain are destined to command the majority of all L2 traffic, with perhaps other Layer 2s developing their own use cases and users in time.

One thing’s for sure: L2s have been a godsend for millions of onchain users. After experiencing the speed and convenience of transacting on Layer 2, it’s hard to envisage going back to L1.