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Definition
A Bitcoin Layer 2 refers to any off-chain network, system, or technology built on top of the Bitcoin blockchain to enhance its capabilities. These solutions are designed to address Bitcoin’s scalability issues, such as high transaction fees and network congestion.
Since its creation in 2008, Bitcoin has become the leader in the cryptocurrency space, both as the first decentralized digital currency and as the largest by market capitalization. However, Bitcoin's network is limited in its ability to scale, which can make it impractical for everyday transactions, especially during times of high demand. This is where Layer 2 solutions come in, providing necessary scalability to improve Bitcoin's usability.
In this article, we will explain what Layer 2 solutions are, how they work, and how they can benefit from industry-standard oracle services.
How Do Bitcoin Layer 2s Work?
The Bitcoin network is known for its security and decentralization, but it only processes about seven transactions per second (TPS) and takes around 10 minutes to finalize a block. Increasing the Bitcoin blockchain’s capacity is challenging because it would require sacrificing either security or decentralization, according to the blockchain scalability trilemma.

While Bitcoin’s core functionality as a global, censorship-resistant currency makes it incredibly secure, it also limits its ability to handle everyday transactions. This is where Layer 2 solutions come in.
A Bitcoin Layer 2 is built on top of the Bitcoin blockchain and improves its scalability by handling transactions off-chain before settling them back on the main Bitcoin network. Crucially, these Layer 2 solutions inherit Bitcoin's security, meaning the Bitcoin blockchain is still responsible for validating transactions.
Layer 2 networks can vary in design, but they all require some form of cryptographic proof when settling transactions on the Bitcoin blockchain. This ensures that the proposed changes to the network are legitimate, whether they are submitted proactively or after the fact.
Types of Bitcoin Layer 2s
There are several types of scalability solutions for Bitcoin that qualify as Layer 2s. While some of these solutions may not always fit the technical definition of "true" Layer 2s, they all aim to improve Bitcoin’s scalability. New technologies may also emerge in the future to address the existing limitations of Bitcoin’s Layer 2 solutions.
State Channels
State channels allow two parties to conduct multiple transactions off-chain by locking Bitcoin into a multi signature wallet. These channels keep track of all transactions until they are closed, and only the opening and closing balances are recorded on the Bitcoin blockchain. This approach reduces transaction costs, as users don’t need to pay main net fees for each individual transaction.

State channels are similar to the payment channels used in the Bitcoin Lightning Network, but they support more complex transactions beyond micropayments.
Sidechains
A sidechain is an independent blockchain that is connected to Bitcoin via a two-way peg. This means assets can be transferred between Bitcoin and the sidechain. While sidechains often use Bitcoin as their native currency, they can also issue their own tokens.
Because sidechains operate with their own consensus mechanisms, they are not always considered true Layer 2s. However, some sidechains periodically settle on the Bitcoin blockchain, which helps enhance their security.
Sidechains offer faster transactions and can support additional features like smart contracts, making them useful for various use cases.
Rollups
Rollups move transaction execution and data off the main Bitcoin blockchain to a separate chain or Layer 2 while anchoring important data back to Bitcoin. This method helps reduce congestion on the Bitcoin network.
Transactions are executed on the rollup chain, and after processing, the rollup submits a cryptographic proof of the transaction batch back to the Bitcoin blockchain. This reduces the need for each individual transaction to be recorded on the main Bitcoin network, thus improving scalability.

Benefits of Bitcoin Layer 2s
Bitcoin Layer 2s offer several key advantages:
Greater Scalability: Layer 2 solutions increase the number of transactions that Bitcoin can handle by processing transactions off-chain and later settling them on the main chain. This improves Bitcoin’s overall throughput and transaction speed.

Reduced Fees: By moving transactions off-chain, Layer 2s significantly lower transaction costs. This makes use cases like micropayments feasible on Bitcoin, which would be impractical on the main Bitcoin network due to high fees.

Smart Contract Programmability: Although Bitcoin wasn’t originally designed to support smart contracts, Layer 2 solutions can enable this functionality. This opens up the possibility for decentralized applications (dApps) and complex programmable financial instruments on Bitcoin.

Deeper Liquidity: Layer 2 solutions can enhance liquidity for Bitcoin and unlock new opportunities in decentralized finance (DeFi), improving access to Bitcoin and boosting capital efficiency.
Bitcoin Layer 2 vs. Ethereum Layer 2
While both Bitcoin and Ethereum are exploring Layer 2 solutions, there are key differences in their implementation. Both ecosystems aim to improve scalability without altering the base layer, but they do so in distinct ways based on the unique purposes and technical features of their respective blockchains.
Accelerating Bitcoin Layer 2 Adoption
Solutions like state channels, sidechains, and rollups represent different approaches to scaling Bitcoin and supporting the growth of on-chain applications. As these solutions evolve, they help improve user experiences and facilitate broader adoption.
The Chainlink platform, which provides high-quality data and interoperability, is particularly well-suited to support the growing demand for data and oracle services in the Bitcoin Layer 2 ecosystem. Chainlink has been a critical infrastructure for decentralized finance (DeFi), and as Bitcoin Layer 2s gain traction, the need for reliable, decentralized data services will only increase.
Chainlink’s Role in Bitcoin Layer 2
Once an application uses a single Chainlink service, it can easily integrate additional services from the same trusted platform. This interoperability and reliability make Chainlink a valuable tool for Bitcoin Layer 2 solutions, driving developer activity and accelerating the growth of the Bitcoin ecosystem.
By joining the Chainlink Scale program, Bitcoin Layer 2s can leverage the platform's extensive oracle infrastructure, attracting developers and users and helping to grow their ecosystems.