Analyizing the impact of second layers on Bitcoin’s ecosystem

Nearly 15 years after Bitcoin instigated the digital monetary revolution, its perception is now nestled as sound money. Following dozens of hard forks and developer attempts to tweak Bitcoin’s core code, the pioneering cryptocurrency settled on decentralization and sound incentive structure for miners.

Both were vital for Bitcoin to power through market crashes, media attacks, and government attempts to ban it. Yet, even with the effective increase of its block size to 4 MB in 2017 via the SegWit upgrade, Bitcoin’s wider adoption as daily currency cannot rely on its mainnet:

• Larger block size would reduce transaction fees as more transactions per block could be processed. But this would lead to larger computing and storage demands, triggering network centralization.
• By the same token, larger block size would increase Bitcoin mainnet throughput above the present 7 transactions per second. Therefore, this would lower fees as network activity (adoption) increases.

In other words, Bitcoin’s status as decentralized sound money is innately opposed to its status as frictionless currency with negligible transaction fees and high tps throughput. However, this is only true if we focus on Bitcoin’s mainnet – the first network layer.

The Lightning Network (LN) emerged as the second layer to address Bitcoin’s scalability problem in 2015. Enabling near-instant and low-cost payments on top of Bitcoin’s mainnet, LN is paving the road to scaling Bitcoin from store-of-value into frictionless currency. With AI in the mix, more refined trading strategies could come into play.

Nonetheless, just as Bitcoin’s block size determines the level of network decentralization, so do have to distinguish between types of second layers possible. Whether they are open or closed, they offer different advantages and drawbacks.

Understanding Second Layers in Bitcoin

The status of “sound money” contains a degree of fragility. To be regarded as such, Bitcoin has to maintain a conservative approach to changes. In turn, this limitation has to be neutralized via second-layer solutions.

Bitcoin Sidechains

From sidechains and drivechains to Lightning Network, they are complementary in their effort to extend Bitcoin’s smart contract functionality and scalability. Case in point, Rootstock (RSK) is a sidechain that uses Ethereum Virtual Machine (EVM) to port Solidity-written Ethereum contracts into RSK.

Developers could then create decentralized applications (dApps) on Bitcoin, which has…