Bitcoin

Bitcoin's Layer 3: Because Layer 2 Is So Last Season

Discover the untapped potential of Bitcoin's multi-layered architecture. Explore Bitfinity's role in providing a foundation for new Bitcoin L3s.

If you have been reading our articles, you have probably come across the concepts of Bitcoin Layers, particularly Layer 2, as Bitfinity is a prime example of, and while these Layer 2s might have gotten all the attention, there are more layers that deserve their time in the sun. As it stands, the Bitcoin framework is built on a multi-layered architecture, which means even the other layers deserve some discussion.

Join us in this article as we explore its third layer, known as 'Layer 3' (L3), how it functions, and also take you through several projects classified or defined as L3 on Bitcoin.

Understanding Bitcoin's Multi-Layered Architecture

Bitcoin was introduced with the promise of 'A Peer-to-Peer Electronic Cash System.' This meant that a central authority was no longer needed and information was to be verified by cryptography, as we all know the origin already.

And if a centralized authority was eliminated, then the Bitcoin blockchain had to be secured by nodes and miners. It also had to be extremely scalable to handle increasing users, transactions, and other data.

However, this is where the shoe didn't fit, as described by the famous blockchain trilemma. Simply put, present blockchains can only achieve two of three qualities simultaneously: decentralization, security, and scalability. Bitcoin is not an exception to this.

To address this issue, a solution was needed, and luckily one was found by adding layers on top of Bitcoin. Although there are different ideas on the specific number and organization of these layers, in this article we will focus on the three main ones...

Layer 1 of Bitcoin

Bitcoin Layer 1 (L1) is the base level of its architecture where transactions are recorded and stored. It includes all the fundamental components like transaction processing, the ledger, and the Proof of Work (PoW) consensus mechanism.

Despite its revolutionary status, this layer faces some limitations. For instance, it is intentionally kept simple to preserve the principles of decentralization and security, which has torn the community apart in the past.

But they had to make some decisions, and issues like slow transaction speeds and high fees are some of the prices we pay for a secure base layer or Layer 1. These limitations are what drove the development of another layer...

Layer 2 of Bitcoin

Developers soon realized that if they tried to scale the base layer, they would have to compromise on one of the three pillars of the 'trilemma,' which led them to develop solutions that process transactions off the base layer while still connected to the very roots of L1. These solutions are what we are referring to as Layer 2 (L2).

Over the years, several Bitcoin Layer 2 solutions have emerged, such as:

State Channels, which facilitate two-way communication between the main blockchain and off-chain transactional channels. They only post the final state of the channel to Layer 1 when a transaction or batch of transactions is completed. Lightning Network serves as the perfect example of this.
Rollups, which bundle transactions off-chain into a single transaction that is then posted to Layer 1. They exist in two main types: Optimistic Rollups & ZK-Rollups.

Optimistic rollups assume that transactions are legitimate by default and only perform fraud-proofs whenever there is difficulty.

ZK-Rollups on the other hand perform computations off-chain and only submit the validity proof to Layer 1.

Sidechains that run parallel to Layer 1 and operate under their own consensus methods. They only depend on Layer 1 for general security and dispute resolution, with Bitfinity as a prime example.🦦

True to their promise, Layer 2 solutions have succeeded in addressing the scalability limitations facing Bitcoin Layer 1. But as the Bitcoin user base keeps growing, a new necessity arises - the need for an application-specific network tailored to users' needs. To address this, Bitcoin has been forced to add another layer...

Introducing a Layer 3 on Bitcoin

Bitcoin Layer 3 is often referred to as the 'Application Layer.' This is because while Layer 2 focuses on scalability, the third layer focuses on the overall application of the Bitcoin blockchain. Layer 3s are built upon the capabilities of both Layer 1 and Layer 2 to provide more specialized features and decentralized applications, such as complex financial transactions and web functionalities for a new generation of apps.

What is the Significance of Layer 3 on Bitcoin?

As we began by saying, Layer 3 solutions on Bitcoin are developed to help meet the needs of its increasing user base by providing an application layer. But that's not all - Layer 3s also come with other capabilities.

One of the primary goals of Bitcoin Layer 3 is to connect various blockchains and facilitate communication between them, commonly referred to as interoperability. This is achieved through the integration of advanced protocols and cross-chain bridges, which enhance Bitcoin's utility and user engagement. Think of Chainfusion, which Bitfinity also uses.

Secondly, they bring greater scalability. Although this is primarily a feature of Layer 2, Layer 3 applications also utilize scaling solutions to manage large volumes of transactions faster and cheaper, resulting in improved performance for end-users.

Lastly, Layer 3 is filled with applications that integrate Bitcoin transactions into various use cases, such as daily web and gaming activities, as well as DeFi-enabled projects, making Bitcoin's use more practical and mainstream.

Bitcoin Layer 3 Projects

While the concept of Layer 3s in Bitcoin is still considered a new development, some notable projects have pioneered the idea.

O3 Layer

O3 Layer is termed 'The First Modular Layer 3 on Bitcoin.' Modular blockchains distribute tasks across several networks to ease the strain on one specific network.

O3 Layer leverages three main networks: Arbitrum, for the execution and settlement of transactions; LayerEdge, for verification of transaction authenticity; and Avail, for data availability by storing transaction records and ensuring they are accessible across the entire network.

By integrating these networks, O3 Layer taps into Bitcoin's security while keeping costs manageable. If any issues occur with data publishing on its chain, the system reverts to the latest state submitted to Bitcoin.

Impervious

Impervious is a Layer 3 built on the Lightning Network that provides peer-to-peer internet standards through its web browser - 'the Impervious Browser'. Through a set of APIs based on the Lightning Network, Impervious has created a programmable Layer 3 for Bitcoin, where this browser operates.

This browser is encrypted and doesn't rely on third parties or central authorities, allowing users to access services like decentralized video calls, document sharing, streamed payments, and messaging.

“I can be in China, or I can be in Iran, and this allows us to speak freely without censorship,” - Impervious founder

ZEBEDEE

ZEBEDEE is a layer 3 payments processor application targeting the gaming space. For Bitcoiners and gamers, this could be worth checking out.

To enter the ZBD arena, users must pay an admission fee through the ZBD App's built-in wallet. All entry fees are collected and added to the total prize pool.

The application has integrated Bitcoin into games like Counter-Strike: Global Offensive, allowing players to earn satoshis instead of traditional in-game points.

Are There Challenges Associated With Bitcoin Layer 3?

Despite their promising potential to facilitate interoperability, scalability, and other admirable traits we seek in the perfect application, Layer 3s face several challenges. The same problems that emerged when Ethereum was experimenting with its layers and composable aspects arise here.

Having smooth interaction with the existing layered blockchain architecture is challenging, as different Layer 2s upon which they are built may have slight differences that can lead to complications, hindering the operation of the ultimate application layer.

Security presents another key challenge. Each layer of abstraction in Bitcoin adds more complexity to the protocol and creates potential vulnerabilities. It becomes challenging to preserve security and decentralization while growing transaction volume and user base.

Finally, regulatory challenges lie ahead. Although the landscape for Bitcoin is changing, the third layer primarily involves applications that handle user data, which could attract regulatory attention. To achieve widespread adoption, Layer 3 solutions must ensure compliance with existing financial and security laws.

Bitfinity Providing a Foundation for New Bitcoin L3's

Through the integration of the Bitfinity EVM, Bitfinity enables the deployment of smart contracts directly on Bitcoin. This is particularly important for Layer 3 applications that require advanced programmability to manage complex operations, such as those in financial instruments or decentralized applications.

Bitfinity also enhances interoperability between Bitcoin and other blockchains using Chain Key Technology. This cross-chain compatibility is essential for Layer 3 solutions that rely on connecting diverse blockchain ecosystems, thereby enhancing Bitcoin's utility and broadening its applicability across various platforms.

Additionally, Bitfinity extends Bitcoin's functionality into the realm of tokenization, enabling the creation of NFTs and custom tokens directly on the Bitcoin blockchain.

As we see solutions continuing to build upon each other, it is only a matter of time before Bitcoin becomes ground zero, maintaining the security and decentralization of the base layer while providing the functionality needed for modern financial systems and internet applications.

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