Bitcoin, as the first and largest cryptocurrency, has established itself as "digital gold" thanks to core characteristics like decentralization, superior security, and limited supply. However, its original architecture has significant limitations, especially regarding scalability and programmability. With low transaction throughput (only a few transactions per second) and Bitcoin Script's lack of Turing-completeness, the Bitcoin network frequently faces congestion, high transaction fees, and a lack of support for complex applications like Decentralized Finance (DeFi).
In this context, Layer 2 solutions have emerged as an effective means to address these challenges. These protocols are built on the Bitcoin blockchain, processing transactions off the main chain and then aggregating them, sending proof to the base layer, thereby increasing speed and reducing costs without altering or compromising the security of the underlying network.
BitLayer emerges as one of the pioneering Layer 2 solutions, established in October 2023, with the goal of transforming Bitcoin from a passive value storage asset into a productive capital source capable of participating in complex financial applications. This report will delve into the analysis of BitLayer's architecture, core technology, security model, ecosystem, and competitive position, providing a comprehensive and in-depth look at this project.
Chapter 1: Technical Architecture Analysis and Core Technology
1.1. What is BitLayer? Definition and Vision
BitLayer is defined as a Layer 2 project with Turing-complete capabilities, inheriting security from the Bitcoin network. Although Bitcoin Script lacks this capability, BitLayer has overcome that limitation to allow developers to deploy complex smart contracts and decentralized applications (dApps). The project's vision is to build a comprehensive DeFi infrastructure on Bitcoin, enabling users to trade, lend, borrow, and generate yield from their BTC assets securely and transparently. This transforms Bitcoin from a store of value tool into a high-yielding asset, opening up new opportunities for users and institutional investors.
1.2. Technology Platform: BitVM and Rollup
BitLayer uses the BitVM (Bitcoin Virtual Machine) model to enable complex smart contracts to operate on Bitcoin. BitVM is not a single smart contract but rather a "complex graph of pre-signed Bitcoin transactions." This mechanism allows for the execution of complex off-chain programs and relies solely on on-chain proof to verify validity. BitLayer is also built as an optimistic rollup, processing a large number of off-chain transactions in batches and then sending cryptographic proofs of the updated state to Bitcoin's Layer 1 for verification and final settlement.
To further optimize, BitLayer incorporates Zero-Knowledge Proofs (ZKP) to accelerate transaction processing and ensure privacy. Specifically, the project uses Taproot technology and FRI (Fast Reed Solomon IOP of Proximity) to build the most efficient ZK STARK (Zero-Knowledge Scalable Transparent Argument of Knowledge) verifier. BitLayer also utilizes a Layered Virtual Machine (LVM) architecture, where one virtual machine is used to execute smart contracts at the user interface and another virtual machine is used to handle ZK transactions in the backend. This separation helps optimize both performance and security for the entire system.
1.3. Multi-Layer Architecture: PoS and Rollup
BitLayer operates on a unique two-tier architecture. The first layer is a Proof-of-Stake (PoS) consensus layer that allows validators to quickly organize and produce L2 blocks, providing a high-throughput EVM-compatible environment. The second layer is a rollup layer that periodically commits and settles the state of the L2 chain on the Bitcoin blockchain. This model leverages Bitcoin as the final layer to ensure security and data availability, while the BitLayer Network serves as the scalable and efficient computation layer.
The network is maintained by several types of nodes, each fulfilling a specific role:
Validators: The backbone of PoS consensus, responsible for creating and validating L2 blocks. To participate, they must stake a certain amount of BTR tokens.
Rollup Operator: A specialized, periodically rotated role assigned to a single validator. This operator is responsible for packaging L2 state transitions, generating proofs, and sending them for settlement on Bitcoin L1. They must lock a significant amount of BTC as collateral to ensure accountability. This role is rotated to prevent censorship and centralization.
Watcher Nodes: Responsible for monitoring the network to detect and challenge invalid L2 state transitions submitted by the operator.
Attester Nodes: Responsible for deploying and interacting with the rollup contracts on Bitcoin.
1.4. Transaction Finality Mechanism
BitLayer offers a two-tier transaction completion model, allowing users to choose between speed and Bitcoin-level security.
Soft Finality: A transaction achieves this finality within a second when the block containing it is confirmed by BitLayer's PoS consensus. The security of this level is supported by the economic stake of the set of validators, providing a fast and smooth user experience.
Hard Finality: This is the highest security guarantee achieved when the L2 state containing the transaction is settled and finalized on the Bitcoin blockchain. Due to the challenge mechanism of optimistic rollups, this process takes about seven days to complete. Security for this level relies solely on the honesty of one party to challenge any fraudulent behavior, making it nearly equivalent to the security of Bitcoin itself.
This combination allows BitLayer to serve a variety of use cases, from high-speed applications like DeFi transactions and gaming to high-value transactions requiring maximum security.
Table 1: Comparison of Soft Finality vs. Hard Finality
Soft Finality Criteria Hard Finality Criteria
Confirmation speed Under one second About seven days
Security mechanism Based on validators' PoS consensus and their economic stake Based on cryptographic proofs and settlements on Bitcoin L1, requiring only one honest party to oversee
User segments High-speed transaction demands, such as DeFi transactions, gaming High-value transactions requiring maximum security, withdrawals to L1
Purpose Improve user experience, increase speed and performance Ensure immutability and final security at the Bitcoin level
Risks Low risk when the majority of validators are honest Risks nearly equivalent to Bitcoin when there is one honest party
Export to Spreadsheet
1.5. The relationship between V1 and V2
The development process of BitLayer reflects a clear roadmap towards more closely inheriting security from Bitcoin. Initially, BitLayer V1 was deployed as a sidechain architecture. However, BitLayer V2, an upcoming upgrade, is designed to be the first native rollup of Bitcoin. This change marks an important step forward as it allows L2 state transitions to be verified directly on Bitcoin's Layer 1 through the BitVM approach, a progress described as "historic". This transition demonstrates the project's commitment to building a solution that is not only fast and cheap but also capable of maximum security, nearly on par with Bitcoin.
Chapter 2: Security Model and Risk Analysis
2.1. Inheriting Security from Bitcoin
The core differentiating factor of BitLayer compared to many other Layer 2 solutions is the ability to anchor security directly to Bitcoin L1. BitLayer's payment protocol allows validity proofs of transactions to be committed and finalized on the Bitcoin blockchain, ensuring that all transactions benefit from its immutable consensus mechanism.
This model does not require users to trust a large set of validators or a centralized overseer. Instead, it operates on the assumption that "only one honest party" is needed to monitor and challenge any fraudulent behavior. This is a significant improvement over traditional bridge models based on multi-signatures, where users must trust the majority of signatories. Recent audit reports have also confirmed that BitLayer's protocol has passed scrutiny from leading security firms without finding any vulnerabilities.
2.2. Trust-Minimized Asset Bridge
BitLayer has developed a special asset bridge based on BitVM, allowing BTC to be converted into YBTC (yield-bearing BTC). The mechanism of this bridge involves locking BTC directly in a smart contract on Bitcoin L1 and minting YBTC at a 1:1 ratio on BitLayer. The fraud-proof system ensures that any fraudulent attempts can be detected and proven on the main chain, providing a high level of security.
However, BitLayer's official risk report also acknowledges potential risks related to cross-chain activities, including "technical errors, delays, or bridge exploits." To mitigate these risks, the project employs a trust-minimized bridge architecture and auditable cross-chain proofs.
2.3. Centralization Risks and Mitigation Measures
One important aspect to consider in BitLayer's architecture is the role of the "single Rollup Operator" in the early stages. While this may raise concerns about centralization and censorship risks, a review of the overall design of the protocol indicates that this is a strategic trade-off for performance and development speed.
To mitigate this risk, BitLayer has integrated several critical protection mechanisms. Firstly, the role of the operator is rotated periodically to prevent monopoly. Secondly, operators must lock a significant amount of BTC as collateral on Layer 1. If they engage in fraudulent behavior, this collateral will be slashed, creating a strong economic incentive for honest operation. Thirdly, the existence of Watcher Nodes and Attester Nodes allows for the detection and challenge of invalid state transitions. Finally, the Data Availability layer allows users to send transactions directly to this layer to "bypass the operator" in case of censorship, minimizing monopoly risks. These measures show that centralization risk is not an inherent weakness but part of a planned developmental roadmap aimed at complete decentralization in future versions.
Chapter 3: Ecosystem, Notable Applications, and Market Position
3.1. Key Application Areas
Thanks to EVM compatibility and support for Turing-complete smart contracts, the BitLayer ecosystem has attracted a diverse range of projects in key areas, including:
Decentralized Finance (DeFi): Lending, borrowing, stablecoins, and decentralized exchanges (DEXs).
Games and NFTs: Blockchain games, NFT marketplaces, and Web3 applications.
Launchpad: Platforms that assist in designing and deploying tokens.
Infrastructure: Restaking protocols, oracles, and other supporting tools.
3.2. Analysis of Notable Projects
The BitLayer ecosystem has rapidly developed with over 200 projects, including several notable projects:
DeFi: Lending platforms like Trustin Finance, ENZO Finance, and LayerBank. BitSmiley, a stablecoin protocol, has significantly boosted the Total Value Locked (TVL) on BitLayer, with over $30 million in locked assets.
Games and NFTs: The OKX NFT market has integrated with BitLayer, supporting NFTs, Ordinals, and Runes. Gaming platforms like Moonshot and Anome are also present. Ordzaar, the first Bitcoin NFT marketplace in Asia, has also been integrated.
Infrastructure: Bedrock is a liquidity restaking protocol that allows users to earn yields through synthetic tokens like uniBTC and uniETH. Macaron is a typical decentralized exchange (DEX) in the ecosystem.
3.3. Market Position and TVL
BitLayer's position in the Bitcoin Layer 2 market is very strong. According to some sources, BitLayer has previously been the number one Bitcoin scaling project by total value locked (TVL) with figures exceeding $550 million, while other data suggests the project's current TVL is around $430 million. There are even reports that TVL has reached $850 million. The discrepancies in these TVL figures are an important indicator of the immaturity and inconsistency of data within the broader Bitcoin Layer 2 market, a risk that requires investors to conduct thorough due diligence. Despite the discrepancies in absolute figures, BitLayer's position remains confirmed. According to Binance Research, BitLayer holds a 13% market share of TVL in the Bitcoin Layer 2 ecosystem, ranking second alongside Rootstock.
Table 2: Notable projects in the BitLayer ecosystem
Project Name Field Description Role in the BitLayer Ecosystem
Trustin Finance Lending/Borrowing Decentralized lending/borrowing platform Providing core financial services in DeFi
BitSmiley Stablecoin Stablecoin and lending protocol
Building stablecoin and lending infrastructure on Bitcoin
Ordzaar NFT Marketplace NFT marketplace specializing in Ordinals
Support for digital art and assets on Bitcoin
Bedrock Liquid Restaking Liquidity restaking protocol
Enables users to earn yields from locked assets on BitLayer
Macaron DEX Decentralized exchange
Provide liquidity and asset trading capabilities in the ecosystem
Chapter 4: Competitive Analysis
4.1. BitLayer vs. Lightning Network
Although both are Layer 2 solutions for Bitcoin, BitLayer and Lightning Network (LN) have significantly different goals. LN primarily focuses on high-speed micropayments, using off-chain payment channels to reduce congestion. In contrast, BitLayer is built to provide a Turing-complete environment for smart contracts and complex DeFi applications. These two solutions do not directly compete but complement each other, with LN addressing payment issues, while BitLayer addresses programming and financial issues.
4.2. BitLayer vs. Other L2 Solutions
BitLayer operates in a dynamic competitive market with major competitors like Rootstock and Stacks. BitLayer's competitive advantage comes not from a single feature but from a strategic combination of many factors.
Security Model: BitLayer uses the BitVM fraud-proof model, an approach that provides reliability almost equivalent to Bitcoin. In contrast, Rootstock inherits security through merged mining and a federated peg, a model that may face risks if on-chain activity declines. Stacks secures its model by hashing data to L1. BitLayer's model, which requires only one honest party, is seen as a significant improvement over the trust assumptions of these competitors.
BitLayer plans to launch its native token, BTR, which will play a crucial role in the ecosystem. BTR will be the governance token of BitLayer, used for staking to ensure network security and to pay gas fees for transactions. The report also compares the role of BTR with the ARB token of Arbitrum, a leading Layer 2 on Ethereum, showing a similar economic model.
Notably, sources providing information on the total supply of BTR show conflicting figures: some sources indicate 2.1 billion tokens, reflecting Bitcoin's limited supply, while another source states the total supply is 1 billion tokens. However, all sources agree on the distribution model: 80% of tokens are allocated for liquidity pools, 15% for incubator projects, and the remaining 5% for governance and advisors. The inconsistency in these figures is a factor that stakeholders should consider carefully.
5.2. Fundraising and Strategic Partnerships
BitLayer has demonstrated strong fundraising capabilities, reflecting the trust of major investors. The project successfully raised $5 million in a Seed round led by Framework Ventures and ABCDE. Following that, a Series A round raised an additional $11 million, with participation from Franklin Templeton, Polychain Capital, and OKX Ventures, bringing the total funds raised to nearly $30 million.
Additionally, BitLayer has established strategic partnerships with a range of leading Layer 1 and Layer 2 blockchains such as Base, Arbitrum, Starknet, Sonic SVM, and Plume Network. These partnerships not only demonstrate BitLayer's position in the market but also serve as an important strategy to build a multi-chain ecosystem, bringing the enormous liquidity of Bitcoin out to participate in DeFi opportunities on other networks.
Conclusion and Future Prospects
6.1. Summary of Advantages and Challenges
BitLayer has created a prominent position in the Bitcoin Layer 2 market through a unique combination of technical innovations and strategies. Core strengths of the project include:
Pioneering the implementation of BitVM: BitLayer is the first project to turn the BitVM model from theory into practice, paving the way for complex programming capabilities on Bitcoin.
Breakthrough security model: BitLayer's payment protocol requires only one honest party to ensure safety, a reliable assumption that surpasses traditional multi-signature models.
EVM compatibility strategy: Full EVM compatibility enables BitLayer to easily attract a large developer community from Ethereum, accelerating ecosystem building.
Strong ecosystem and partners: Significant fundraising from institutional investors and partnerships with leading blockchains demonstrate the trust and growth potential of the project.
However, BitLayer also faces certain challenges. The existence of a single operator in the early stages is a concentration point that needs to be monitored, although mitigation measures have been implemented. Additionally, discrepancies in published figures, especially TVL and token supply, present a risk factor for investors and reflect the immaturity of this market. Finally, competitive pressure from established and significant competitors like Rootstock and Stacks is also a significant barrier.
6.2. Development Prospects
With the roadmap transitioning to Rollup V2, BitLayer is aiming for a stronger security model, fully inheriting from Bitcoin. Addressing programming and scalability limitations will allow BitLayer to unlock billions of dollars of BTC liquidity currently "lying dormant," bringing them into a vibrant and productive DeFi world. If the project can successfully realize this vision, BitLayer has the potential to become one of the core platforms in the Bitcoin financial ecosystem in the future.
6.3. Recommendations
For investors: It is crucial to closely monitor BitLayer's development roadmap, particularly the transition to V2 and the decentralization roadmap for operators. Caution is needed, and diligence should be exercised in verifying TVL and tokenomics figures from reliable sources.
For developers: BitLayer provides an ideal environment for building DeFi applications on Bitcoin thanks to EVM compatibility and strong support from investors and partners. Developers can leverage this platform to create new products, particularly in emerging areas like restaking and RWA, providing real value to Bitcoin users.
