L2 for Bitcoin: is it worth launching a project in the Stacks, Merlin Chain, Bitlayer, and other ecosystems

As we explained in our detailed article on rollups, L2 is any solution that helps improve the functionality of a blockchain: scaling, speeding up transactions, adding support for a new virtual machine, etc. L2 is typically discussed in the context of Ethereum, where daily transactions on rollups have long surpassed those on the main blockchain. But few people know that Bitcoin also has several L2 solutions, including rollups that are already operational and have their own ecosystems.

Let’s first look at the main problems that L2 aims to solve for Bitcoin:

1. Support for smart contracts and decentralized applications. The Bitcoin network does not natively support smart contracts, but this limitation does not apply to its L2 networks: they can use entirely different programming languages and virtual machines (such as the EVM) and support DeFi, NFTs, and more.

This potential is perhaps the biggest draw for investors. Many believe that once Bitcoin has a fully developed dApp ecosystem, liquidity will start flowing into it from the main network, and the long-anticipated «to the moon» moment will begin.

2. Scaling, which means the ability to process more transactions per unit of time and to confirm each transaction faster. Currently, each transaction takes about an hour to finalize (6 blocks).

3. Lowering fees. As of the time of writing, the average transaction fee on the Bitcoin network is around $1.20, which is lower than on Ethereum. But at the height of the Ordinals («NFTs on Bitcoin») popularity in April 2024, fees reached up to $130. By comparison, Ethereum users have access to large and reliable L2 chains like Arbitrum and Optimism, where fees are less than $0.01.

Interesting fact: L2 for Bitcoin appeared before L2 for Ethereum. The Lightning Network — a «fast payment system» on BTC — was introduced in 2015 and launched on the mainnet in 2018, while a similar solution for ETH, Plasma, only emerged in 2017. By the way, Plasma eventually evolved into Optimism, whereas the Lightning Network still operates, though few people use it.

This article, however, will not focus on the Lightning Network but on L2 solutions with their own ecosystems, where new projects can be created. Some of these have been on the market for a long time (for example, Stacks), while others have emerged in the past year or two, riding the wave of popularity around Ethereum L2.

According to L2Watch, there are already over 80 solutions in the Bitcoin ecosystem, but in this review, we’ll focus only on chains that are already live on the mainnet. Interesting solutions still in the testnet phase, like Citrea, B2 Network, Bison, Mirror L2, and many others, will be left out.

Lightning Network

The Lightning Network is a solution for fast payments on the Bitcoin network. Two participants open a private channel through which they transfer funds to each other off-chain and without fees. Only when the channel is closed are the transactions recorded on the main blockchain, and on-chain balances are updated. This is a specific case of state channel technology — with the difference being that a state channel can be used by any number of participants and for different types of transactions, not just payments.

The Lightning Network was launched on the mainnet in 2017 and was promoted as the future of Bitcoin, but the number of its active users, nodes, and channels has recently stagnated. Reasons for this include:

• Technical complexity in using non-custodial solutions;
• Risks associated with custodial wallets that support Lightning;
• Limited usefulness (a new channel needs to be opened for each new counterparty);
• Unpredictable final costs (the on-chain fee may be high at the time of channel closure).

As we mentioned, it's not possible to build an application ecosystem on the Lightning Network, although integration with the Liquid Network (see below) partially addresses this issue. In this article, we will focus on more traditional L2 solutions that support smart contracts, DeFi, and full-fledged ecosystems.

Liquid Network

The Liquid Network is a Bitcoin sidechain integrated with the Lightning Network. It allows, among other things:

• Projects to issue new assets, including tokens and stablecoins;
• Users to perform swaps, optimize Lightning Network channels, and accumulate small amounts of Bitcoin without spending money on fees;
• Merchants to accept payments in BTC.

Statechains

Statechains, or state chains, are a solution similar to the Lightning Network, but participants must sign each transaction using a temporary private key that is passed to the chain provider. This requires an intermediary, though the provider cannot steal the funds. So far, this solution is not actively used anywhere.

Stacks ($STX)

Stacks is a chain that allows the creation of smart contracts and decentralized applications. It was launched in 2017 and, in its current version, is fully dependent on the Bitcoin network for consensus, security, and transaction finality, which is why it can be considered an L2, though the creators themselves describe it as L1.5.

Transaction data on Stacks is recorded as hashes in Bitcoin L1 blocks—making Stacks similar to a rollup, although the data packaging mechanism is different. The main assets of the chain are STX and sBTC, which is pegged to BTC. Bitcoin network address holders can exchange BTC for sBTC, STX, and other assets on the Stacks network using atomic swaps.

Smart contracts on Stacks use the Clarity language, which was specifically developed for Bitcoin. In August-September 2024, the number of contracts in the ecosystem grew by 30%, reaching 1,400.

Let's list a few of the leading dApps on Stacks: to connect to them, it's recommended to have the Xverse, OKX, or Leather wallet.

• ALEX: A DEX, farms, staking, and launchpad all in one. The largest liquidity pool has a volume of $14 million (as of September 28).

• StackingDAO: A liquid staking protocol (TVL over $100 million), where you can stake STX at 9.3% APY and receive stSTX tokens, which are used in many DeFi applications on Stacks.
• 
  Zest: A lending protocol (current TVL is $36 million), where you can take out loans in stSTX, STX, or USDC.

Merlin Chain ($MERL)

Merlin Chain is the first EVM-compatible ZK-rollup for Bitcoin. In other words, it allows applications to be built in Solidity, like on Arbitrum or Optimism, although block data is recorded on the Bitcoin blockchain. This is a significant advantage of Merlin Chain for developers in the Bitcoin ecosystem, as they can work with familiar tools.

The chain uses ZK (zero-knowledge) technology, generating validity proofs in a similar way to Ethereum rollups like zkSync Era and Polygon zkEVM. Thanks to a bridge system, you can bridge MERL, mBTC, and even exotic tokens like pumpBTC between Ethereum and Merlin Chain, as well as BTC between Merlin Chain and Bitcoin.

Merlin Chain’s rapid rise in popularity is partly due to the very generous Merlin’s Seal staking program, which allocates 20% of all MERL tokens for rewards.

Among the major dApps (TVL over $10 million) on Merlin Chain:

• Avalon Finance (lending);
• Merlin Swap (DEX);
• Surf Protocol (derivatives);
• DeSyn Yield (passive income).

Rootstock ($RSK)

Rootstock is a Bitcoin sidechain that has been operational since 2018. Its main asset is RBTC, which is pegged to BTC, but the chain also supports the EVM (specifically, a fork called RVM) and smart contracts in Solidity. Bridges connect Rootstock with both Bitcoin and Ethereum.

Bitcoin miners can simultaneously mine RBTC, and about 50% of them do so, which enhances the stability and security of this L2.

Protocols on Rootstock support MetaMask and various BTC- or dollar-pegged assets: RBTC, Dollar on Chain, RIF US Dollar, and others.

• MoneyOnChain (yield staking);
• Sovryn (trading and lending);
• Tropycus (lending);
• RIF On Chain (stablecoin).

CKB Public Chain и Nervos Network

CKB (Common Knowledge Base) is the base layer of the Nervos Network ecosystem. The CKB coin is used to pay miner rewards and for data storage space (1 CKB = 1 byte on the blockchain). Like in the Bitcoin network, halving occurs every four years, meaning the number of new tokens issued per block is halved.

CKB provides consensus and security through a Proof-of-Stake mechanism, but it does not support applications or L2s itself; for that, the Nervos chain is used, which also uses the $CKB token. The base layer CKB can support various programming languages and blockchains, including rollups (even EVM-compatible ones), sidechains, and the Lightning Network.

Nervos, in turn, is a modular blockchain to which different L2s can be «attached,» enabling scaling to millions of transactions per second. However, it’s still far from reaching that level: on average, CKB processes 14 transactions per minute, and the only successfully operating L2 so far is the gaming EVM chain Godwoken.

In this matryoshka-like ecosystem, there are quite a few dApps, but activity levels are fairly low. According to DeFiLlama, the TVL of the Godwoken rollup is only $140,000.

BitVM

BitVM is not a chain but a virtual machine — a framework for executing smart contracts that serves the same role as the EVM in the Ethereum ecosystem. Based on BitVM, any number of new Layer 2 networks can be created.
BitVM executes smart contracts off the Bitcoin network, with only their functions being verified on the main blockchain. A special prover algorithm certifies that each function of the contract produces a specific result in response to certain inputs. Any full Bitcoin node can challenge the prover’s assertion, perform a verification, and penalize the prover if necessary — similar to the process in optimistic rollups, but applied to contract functions rather than transactions.

A key element of BitVM is the decentralized BitVMBridge, which facilitates the transfer of BTC between the Bitcoin network and L2 chains.

BEVM

BEVM is an EVM-compatible L2 for Bitcoin with a TVL of around $12 million and an ambitious goal to attract 10% of the entire BTC supply into its ecosystem. It is also the first EVM L2 to use BTC for gas payments.
The BEVM bridge allows for the transfer of BTC and various BRC-20 assets from Bitcoin, including ORDI, SATS, RATS, and others. There is also a bridge for Ethereum assets (ETH, USDT, USDC, etc.).

DApps on BEVM can look forward to an airdrop of BEVM tokens (see «Support Programs»). Among the leading dApps on BEVM are Satoshi Protocol (stablecoin), Coral Finance (staking), Bido Finance (yield staking), BEVM Swap (DEX), and dozens of others.

Bitlayer

Bitlayer is a Layer 2 based on BitVM, with a current DeFi TVL of around $380 million (as of the end of September 2024). This figure may soon increase thanks to the new $50 million Ready Player One incentive program for projects (see the «Startup Support Programs» section). The average network fee is $0.1.

There are already about 100 applications in the ecosystem, many of which attract users through airdrops. The leading dApps by TVL are:

• Avalon Finance (lending, $169 million TVL);
• DeSyn (passive income, multichain protocol);
• Macaron (DEX).

Dovi

Dovi is an inactive project that was supposed to address roughly the same tasks as BEVM, Bitlayer, etc.: support for smart contracts, EVM compatibility, and so on. The project has not published any updates since February 2024.

If you're considering launching your own project on one of the Bitcoin L2s, you're probably curious about how much funding you can receive from investors. Here are a few examples:

• Bitcoin L2 projects raised a total of $94.6 million in Q2 2024, which is 174% higher than in Q1 of this year (according to a report by Galaxy).
• Zulu Network (an EVM-compatible Layer 2) raised $3 million at the pre-seed stage in April 2024;
• BitLayer (an L2 based on BitVM) raised $16 million across two rounds;
• ZK-rollup Citrea raised $2.7 million.

For comparison, here are some figures characterizing recent investments in L2 projects within the Ethereum ecosystem:

• Movement Labs (L2 supporting Move VM): $38 million;
• Essential: $11 million in August 2024 (Series A);
• Corn: $6.7 million (seed round), also in August;
• AgentLayer (L2 for AI): $1.5 million (seed round).

As you can see, the numbers are similar, meaning Bitcoin L2s are just as interesting to investors as Ethereum L2s. However, keep in mind that investments in dApps on L2s are usually lower than investments in the L2s themselves. So, if you’re planning to launch, say, a DeFi protocol, you shouldn’t expect $5-6 million — more likely around $500k.

Bitcoin Frontier Fund
The fund invests in projects on Stacks, Rootstock, Bitcoin zk-rollups, and others. Eligible for support are startups in areas such as DeFi, Ordinals, GameFi, wallets, bridges, and more. The fund also provides a very useful guide on preparing a data room — a necessary document package for investors.

UTXO Management
A new fund financing seed-stage startups, including those in the DeFi, infrastructure, and Ordinals sectors. The website has an application form for submissions.

Bitcoin Startup Lab
A pre-accelerator program led by mentors, each of whom has raised at least $1 million at the pre-seed stage. The program is designed to help turn an idea into a fundraise-ready startup within 3 months, as well as to find co-founders, investors, partners, and more.

Stacks Foundation Grants
Projects on Stacks may be eligible for a grant if they fall into one of the current priority categories: developer tools, infrastructure, or solutions related to the recent Nakamoto upgrade.

The Ready Player One Program by Bitlayer
This grant program, offering between $10,000 and $300,000, is exclusively for projects in the Bitlayer ecosystem. The selection process consists of two rounds and takes about 2 weeks; in the final round, projects give a 15-minute presentation. However, grants are not issued in cash but in BTR tokens, after the startup has launched its own cryptocurrency.

BEVM Visionary Builders Program
Startups on BEVM can qualify for an airdrop if they manage to gather enough votes on the leaderboard. The total fund for the program is $60 million in BEVM tokens.

N21 Program
N21 is a go-to-market preparation program from Stacks that assists startups with development, marketing, and fundraising (though it does not provide funding itself).

ALEX Ecosystem Grants
ALEX is a DeFi platform on Stacks, offering an exchange, launchpad, farms, and staking. The goal of ALEX is to become a comprehensive financial layer for the entire Bitcoin ecosystem through integrations with projects from other teams, such as cross-chain swaps, RWA, futures, etc. You can apply for a grant here. Note that projects for ALEX must be built on the Stacks platform.

Not everyone agrees that building an L2 ecosystem on Bitcoin is a good idea. The main objections include:

• Challenges with Bitcoin Upgrades
  For rollups to develop effectively, the L1 chain needs to adapt to their requirements. This happened with Ethereum’s Dencun upgrade, which introduced a new type of transaction («blobs») specifically to help rollups save resources when recording data on L1. In Bitcoin’s case, such changes are unlikely due to the lack of a governing body and a structured mechanism for regular upgrades.
• Difficulty in Creating Effective Bridges for Bitcoin
  Bridges are needed for asset transfers with Layer 2 networks, and most bridges rely on advanced smart contracts, which cannot be implemented on Bitcoin. Even if they could, the mechanics of Bitcoin transactions (via UTXO) and EVM transactions (account-based) are difficult to reconcile. In response, proponents point to existing bridges on Merlin Chain, BEVM, and others.
• Data Availability (DA) Problem
  Data on L2 transactions needs to be recorded on the main chain so that full Bitcoin nodes can verify their validity. Ethereum addresses this with large blob objects, which are stored on the main chain temporarily, and with external DA solutions (like Celestia, EigenDA, and Polygon Avail) where rollups can store data cheaply.

For Bitcoin, relying on such external DA networks is inevitable because storing data on the main chain is too expensive. This solution introduces risk factors, as participants have to trust DA networks, which are usually quite centralized. On the other hand, in this regard, Bitcoin rollups are no different from Ethereum rollups.

• Risk of Rising Fees
  If the price of Bitcoin continues to rise in the long term (whether to $100,000 or even a million dollars, as some believe), and the main chain’s technology remains unchanged, transaction fees in dollar terms will inevitably increase as well. Add to this the high volume of transactions coming from rollups (with each L2 block equating to one transaction on Bitcoin), and you have a recipe for an explosive rise in fees similar to what happened in April 2024. Ultimately, this burden would fall on end users of Layer
• Lack of Competitiveness Compared to Ethereum Rollups
  An L2 chain for Bitcoin might achieve temporary hype due to novelty or generous incentives for projects. But for long-term success, it would need to be as fast, cheap, and reliable as Ethereum L2s, which will be challenging to achieve.
• Bitcoin’s Purpose is Different
  As one Reddit user put it, trying to use Bitcoin as a foundation for L2 is like trying to drill for oil with gold mining equipment—it might work, but it’s inefficient. Bitcoin was created as a new form of digital money, whereas Ethereum was designed as a decentralized global computer, making it a better home for applications and programs. Bitcoin, they argue, should continue to serve as a store of value and «digital gold.» Of course, unlike the other arguments, this is more of an ideological stance.

In conclusion, let’s highlight the main pros and cons of developing projects on one of Bitcoin's L2 networks.

Advantages

• Relatively Easy Access to Funding: Investors are interested in the Bitcoin ecosystem, and competition for funds in this niche is much lower than on Ethereum or Solana.
• Hype: There’s a chance to «ride the narrative» if the Bitcoin ecosystem becomes a focal point in 2025, as happened with AI in 2024. Media outlets are also eager to cover projects on Bitcoin L2.
• Ability to Work with EVM: Some L2s support EVM, meaning you can develop a product using Solidity, MetaMask, Remix, etc., with support from a smart contract development agency like MetaLamp, rather than searching for specialists in rare languages like Clarity.
• Support from the L2 Team: As in any young blockchain ecosystem, the L2 developers are eager to engage with startup teams, retweet posts, assist with marketing, and more. In established networks, it’s much harder to achieve this level of personal contact with the core developers.

Potential Challenges

• Liquidity Fragmentation: The simultaneous launch of multiple L2s means that each one only captures a portion of the overall «pie» of funds from interested traders and market makers. This results in low trading volumes, sharp token price fluctuations, and significant slippage.
• Limited Audience: The actual TPS (transactions per second) on Merlin Chain is around 1 transaction per second (1-5 transactions per block), and Rootstock is less than 1 TPS (5-15 transactions per minute). Even if there’s an impressive number of dApps in the ecosystem, it doesn’t necessarily mean that users are actively engaging with them.

• Risk of User Exodus: Some L2s attract projects and users through generous staking programs. Once these programs end (or simply when the hype dies down), there may be a sharp outflow of funds from the ecosystem and a drop in the number of active users. A comparable example is the Ethereum rollup Blast, whose TVL dropped threefold in three months.

• Development Complexity on Stacks: Stacks is arguably the most well-known L2 for Bitcoin, but creating a product in its ecosystem requires knowledge of the Clarity language. Finding specialists in Clarity is challenging, and if there’s a lack of interest in the project, it won’t be possible to migrate it to another ecosystem (such as an EVM L2).

Bitcoin L2 is a highly promising niche, at least in the short to medium term, and competition among dApps is still lower than on Ethereum rollups. Development costs will be roughly the same if we’re talking about EVM-compatible Bitcoin L2s like Merlin Chain, BitLayer, or Citrea.

Thanks to the popularity of the Bitcoin L2 narrative, startups have a better chance of attracting investor funds and gaining attention from crypto media. On the other hand, the number of active users on these L2s remains limited, making it harder to monetize applications.

It’s hard to give a definitive verdict here. Let’s put it this way: if you already have a detailed product idea and a solid pitch for investors, it’s worth trying to launch on an EVM L2 for Bitcoin — but be prepared to switch to another ecosystem if the chosen L2 «doesn’t take off.»

In any case, don’t rely on explosive growth in user numbers or dApp revenue in the short term. Also, be prepared for the fact that securing initial funding and conducting an IDO may be much easier than actually attracting users to the application.