Author: Calibre, Web3 Venture Builder Source: mirror Translation: Shan Ouba, Golden Finance
In the complex world of financial technology, Bitcoin is a beacon of innovation, a digital currency that circumvents traditional financial intermediaries and enables peer-to-peer transactions without intermediaries. However, with its rise, it has also brought a series of inherent challenges, most notably those related to scalability and transaction throughput - a significant obstacle to wider adoption.
These challenges are not unique to Bitcoin. Ethereum, although also designed with flexible application development capabilities, has similar problems. Many solutions have been proposed to address these two issues, such as sidechains, layer 2, or payment channel networks. With Ethereum, the Layer 2 ecosystem is rapidly expanding and offers a variety of solutions, such as EVM rollups, sidechain transitions to rollups, and projects striving to achieve varying degrees of decentralization and security. The security implications of Layer 2 solutions, with a particular focus on asset assurance and the ability of these systems to read and adapt to changes to the Ethereum blockchain. It highlights a key trade-off: greater security often comes at the expense of scalability and cost efficiency.
While Bitcoin has made impressive progress in improving its capabilities, there are still some significant challenges in developing Layer 2 (L2) solutions similar to Ethereum. Bitcoin’s design limitations are particularly evident when it comes to securing withdrawals in Bitcoin’s Layer 2 solutions. Its scripting language is intentionally limited in functionality and lacks Turing completeness, which limits its ability to perform complex computations and support advanced features. This design choice prioritizes Bitcoin’s security and efficiency, but limits its programmability compared to more flexible blockchain platforms such as Ethereum. And probabilistic finality also undermines the reliability and speed necessary for Layer 2 solutions, leading to issues such as chain reorganizations that affect transaction durability. While Bitcoin was built on reliable and secure principles, these aspects make it difficult for its L2 systems to quickly adapt to new changes.
SegWit and Taproot are game changers for Bitcoin. SegWit optimizes Bitcoin’s infrastructure by isolating signature data, increasing transaction speeds, and enabling lightning network fast payment processing. Taproot has since improved efficiency and privacy by compressing transaction data and shielding transaction complexity. Together, SegWit and Taproot have sparked a new wave of Layer 2 innovation, becoming the backbone of future Layer 2 designs and significantly expanding Bitcoin’s capabilities beyond its original scope as a digital currency.
In Bitcoin’s ever-expanding field of Layer 2 solutions, we see many different systems emerging, all designed to enhance scalability and increase adoption in various ways. These solutions offer unique approaches to overcoming Bitcoin’s built-in limitations. As introduced by Trevor Owens [2], one way to categorize these solutions is to organize them based on their approach to solving Bitcoin’s L2 trilemma, which divides L2 solutions into off-chain networks, decentralized sidechains, and federated sidechains, each of which presents unique features, approaches, and tradeoffs:
Off-chain networks: Prioritize scalability and privacy, but may present challenges to user experience. For example, Lightning & RGB.
Decentralized sidechains: Introduce new tokens and consensus mechanisms, expand functionality, but may complicate user experience and increase centralization concerns. For example, Stacks, Babylon, Interlay, etc.
Federated sidechains: Simplify operations through a trusted consortium, providing efficiency, but may come at the expense of Bitcoin's underlying decentralization. Examples include Liquid, Rootstock, Botanix.
This trilemma provides a useful way to categorize Bitcoin layer 2 solutions, but it may not fully capture all the complex details of their design. Furthermore, it points out the trade-offs of current solutions rather than unsolvable obstacles, suggesting that these elements of the trilemma are part of the decision-making process of developers.
For example, decentralized sidechains issue new tokens to improve security and promote network participation, which may make user interaction more complicated and may not be welcomed by Bitcoin purists. On the other hand, federated sidechains choose to skip new tokens, making the user experience smoother and reducing resistance within the Bitcoin community. Another option is to use a full virtual machine/global state, which allows complex functionality, including the creation of new tokens on the smart contract platform. However, this approach makes the system more complex and generally increases its vulnerability to attacks.
From another technical perspective, we group Bitcoin layer 2 solutions according to their main technical characteristics. This different classification looks at various technical details and structures, providing a nuanced understanding of how each solution contributes to the overall goal of enhancing Bitcoin's scalability, security, and functionality. Each approach has its own unique purpose, and these purposes do not conflict with each other or create a trilemma. However, each approach has its own advantages and disadvantages in terms of security and scalability. Therefore, some systems can utilize a combination of these approaches. We will discuss this in more detail in the next section of this article. Let's explore these categories:
Sidechains utilizing two-way peg protocols: These sidechains work similarly to Layer 2 connected to Bitcoin through a method called two-way peg. This setup enables the transfer of Bitcoin between the main blockchain and the sidechain, allowing for experimentation and the implementation of features that are not directly supported by the main blockchain. This approach improves Bitcoin's ability to handle more transactions and different types of applications by supporting a wider range of uses. The two-way peg mechanism plays a key role in transferring BTC value to the sidechain. On these sidechains, developers have built a variety of environments; some choose to use an EVM-compatible ecosystem, while others choose to create a VM environment with their own smart contracts.
For example, Stacks, Rootstock, Liquid, Botanix, etc.
Blockchain rollups: This approach uses Bitcoin as the data storage layer of rollup technology, inspired by the Inscription Protocol. In this setting, each UTXO is like a small canvas where more complex information can be written. It is conceivable that each Bitcoin can store its own set of detailed data, which not only increases value but also broadens the types of data and assets that Bitcoin can handle. It opens up a wide range of possibilities for digital interaction and representation, making the Bitcoin ecosystem richer and more diverse.
For example, B2 Network, BitVM
Payment Channel Network: Think of it as a network of fast lanes in the wider Bitcoin space. They help speed up the large number of transactions on the Bitcoin road, reducing congestion and ensuring that transactions are both fast and cost-efficient.
For example, Lightning and RGB
By breaking it down this way, we can get a clearer picture of how each tool helps improve Bitcoin, making it more scalable, secure, and versatile. Let's dive in and get a better understanding of these tools:
Two-way anchoring allows assets to be transferred between two different blockchains (usually a main chain and a side chain). The system enables assets to be locked on one chain and subsequently unlocked or minted on another chain, thus maintaining a fixed exchange rate between the original asset and the anchored asset.
Imagine embarking on a journey to transfer your assets from a main chain (such as Bitcoin) to a side chain. The anchoring process is your starting point. Here, your assets are securely locked on the main chain, similar to storing them in a vault for safekeeping. Subsequently, a transaction is made on the main chain to solidify this lock. The side chain, upon recognizing the transaction, mints an equal amount of the anchored asset. This process is similar to receiving a voucher of equal value in a foreign country, enabling you to use your wealth in a new environment while ensuring that your original assets remain intact and safe.
The peg-out process comes into play when you decide to restore your assets to the original main chain. This is the backhaul, where the peg assets on the sidechain are metaphorically “burned” or locked, meaning they are set aside and no longer circulate on the sidechain. You then provide proof of this action to the main chain. Once the main chain verifies your claim, it releases the original asset of equal value to you. This mechanism ensures the integrity and balance of the asset distribution on both blockchains, preventing duplication or loss.
Rootstock
RSK’s Two-Way Peg System is an advanced framework designed to seamlessly integrate Bitcoin with smart contract functionality via the RSK platform. By leveraging SPV for efficient transaction verification, adopting a strong federation model for transaction approval, and integrating SegWit and Taproot, RSK not only improves transaction efficiency, but also aligns closely with Bitcoin's security model. In addition, the merged mining method increases the security level of the system and incentivizes more miners to participate.
RSK Federation Model:
Pegnatories are a group of selected officials who are the guardians of this bridge or the trusted custodians in this federation model, ensuring that every transfer in and out adheres to the agreed-upon protocol. Think of them as a committee of guardians, each holding a key to a collective vault. Their role is critical - they ensure that every bridge transaction is conducted in good faith and consensus, thereby maintaining the safe and orderly flow of digital assets on this important channel.
SegWit and Taproot:
SegWit helps by separating signature information from transaction data, thereby reducing transaction size and processing time. Additionally, combining the Schnorr signature scheme with MAST (Merkleized Abstract Syntax Tree) and other enhancements to Taproot can make transactions more efficient and private.
RSK Merged Mining:
In RSK’s merged mining approach, miners simultaneously secure both the Bitcoin and RSK networks without additional computational requirements, thereby increasing the security of RSK. This approach leverages the strengths of Bitcoin mining, provides additional rewards to miners, and demonstrates an innovative use of existing blockchain infrastructure. However, the success of this integration depends on accurately aligning tags within Bitcoin blocks to correspond to RSK blocks, which emphasizes the need for detailed and precise execution to maintain the security and consistency of the interconnected network.
Botanix
Botanix integrates the Bitcoin-based Proof of Stake (PoS) consensus and decentralized EVM network Spiderchain multi-signature architecture to manage Turing-complete smart contracts on the main Bitcoin blockchain. While Bitcoin serves as the primary settlement layer, Botanix uses advanced multi-signature wallets and off-chain cryptographic verification to ensure transaction integrity.
Spiderchain: A distributed multi-signature network that protects the security of all actual Bitcoins on Botanix.
Architecture: Spiderchain consists of a group of Orchestrator nodes - the node operators and liquidity sources for the entire chain. It consists of a series of multi-signature wallets to manage the custody of assets within the network. Multiple Orchestrators are required to approve any transaction for each wallet in the series, ensuring that there is no single point of failure.
Dynamic Operation: For each new Bitcoin block, the corresponding Orchestrator for the upcoming "epoch" (a term used to define the period between Bitcoin blocks in the Botanix system) is determined using a verifiable random function based on the Bitcoin block hash. The subsequent slot selection of the Orchestrator is calculated by hashing the block hash with SHA256 and then modulo the number of active Orchestrators (N) to ensure fairness and randomness of the Orchestrator selection. This ensures a fair and secure distribution of operational tasks, minimizing centralization risks.
Two-Way Peg System: Multi-signature wallets play a crucial role here, requiring consensus between the selected Orchestrators to execute any transaction.
Anchoring process: The user sends Bitcoin to a new multi-signature wallet where it is securely locked. This action will mint an equal amount of synthetic BTC on the Botanix chain. Creating this wallet involves multiple Orchestrators, who must all agree and sign, ensuring that no one can independently control the wallet.
Transfer-out anchoring process: Conversely, for transfer-out anchoring, the synthetic BTC is burned and the corresponding Bitcoin is released from the multi-signature wallet back to the user's Bitcoin address. This process is protected by the same multi-signature protocol and requires multiple Orchestrators to approve the transaction.
PoS Consensus and EVM Implementation:
Consensus: In Botanix's PoS system, Orchestrators stake their Bitcoin to participate in the network. They are responsible for validating transactions and creating new blocks within the Botanix chain. The selection process of these coordinators is based on their stake and is randomized using the method mentioned in the Spider Chain section.
EVM Implementation: The EVM on Botanix supports all operations compatible with Ethereum, enabling developers to deploy and execute complex smart contracts.
Stacks:
The Stacks platform aims to expand Bitcoin's infrastructure by enabling smart contracts and decentralized applications (dApps) through innovative mechanisms such as sBTC two-way anchoring, transfer proofs, and Clarity smart contracts.
sBTC two-way anchoring protocol:
Threshold signature wallet: The wallet adopts a threshold signature scheme that requires a predefined subset of signers (Stackers) to collaborate in signing anchor transactions. These Stackers are selected based on the amount of STX they lock using a verifiable random function (VRF) and rotated every cycle (usually two weeks) to ensure dynamic membership and continuous consistency with the current state of the network. This significantly enhances the security and robustness of the anchoring mechanism by preventing dishonest behavior and potential collusion among participants, while also ensuring the fairness and unpredictability of the selection process.
Proof of Transfer (PoX):
In PoX, instead of destroying Bitcoin as in Proof of Burn, miners transfer BTC to the Stack network, improving security by leveraging Bitcoin's strong proof-of-work system. This not only incentivizes participation through BTC rewards, but also directly ties Stacks' operational stability to Bitcoin's proven security features. Stacks transactions are anchored to Bitcoin blocks, and each Stacks block records the hash of the Bitcoin transaction using the opcode OP_RETURN, which allows embedding 40 bytes of arbitrary data. This mechanism ensures that any change to the Stacks blockchain requires a corresponding change to the Bitcoin blockchain, allowing you to benefit from Bitcoin's security without making any changes to its protocol.
The smart contract programming language Clarity used on the Stacks blockchain ensures predictability and security for developers by enforcing strict rules to guarantee that all operations are executed as defined and there will be no unexpected results. It provides decidability, i.e. the result of each function is known before execution, thus preventing surprises and improving contract reliability. In addition, Clarity interacts directly with Bitcoin transactions, allowing the development of complex applications that leverage Bitcoin's powerful security features. It also supports modular features, similar to interfaces in other languages, which facilitates code reuse and maintains a clean code base.
Liquid:
Liquid Network provides a federated sidechain for the Bitcoin protocol, significantly enhancing transaction capabilities and asset management. At the core of the Liquid Network architecture is the concept of a strong federation [6], which consists of trusted functionaries responsible for block verification and signing.
Watchmen: Watchmen manages the anchoring process from Liquid to Bitcoin, ensuring that every transaction is authorized and valid.
Key Management: Watchmen’s hardware security module protects the keys required to authorize transactions.
Transaction Verification: Watchmen verifies transactions through cryptographic proofs, confirms compliance with Liquid’s consensus rules, and utilizes a multi-signature scheme for enhanced security.
Anchoring Mechanism:
Peg-Ins: Bitcoin is locked on the Bitcoin blockchain (by using Watchmen’s multi-signature addresses), and an equivalent Liquid Bitcoin (L-BTC) is issued on the Liquid sidechain using cryptographic methods to ensure the accuracy and security of the transfer.
Peg-Outs: The process involves burning L-BTC on the Liquid sidechain and a corresponding release of actual Bitcoin on the Bitcoin blockchain. The mechanism is closely monitored by designated staff known as "Watchers" to ensure that only authorized transactions can be carried out.
Proof of Reserves (PoR): An important tool developed by Blockstream to provide transparency and trust in network asset holdings. PoR involves creating a partially signed Bitcoin transaction to prove control of funds. The transaction, while invalid when broadcast on the Bitcoin network, proves the existence and control of the claimed reserves. It allows an entity to prove possession of funds without moving the funds.
Babylon
Babylon aims to integrate Bitcoin into the Proof of Stake (PoS) ecosystem, enhancing the security of the PoS chain by allowing Bitcoin holders to stake their assets, leveraging Bitcoin's massive market capitalization without requiring direct transactions or smart contract functionality on the Bitcoin blockchain. Importantly, Babylon does not attempt to move or lock Bitcoin through vulnerable bridges or third-party custodians, thus avoiding the complexity and security risks of bridging, thereby protecting the integrity and security of staked assets.
Bitcoin Timestamp:
Babylon uses a timestamp mechanism to embed PoS chain data directly into the Bitcoin blockchain. By anchoring PoS block hashes and key staking events to Bitcoin's immutable ledger, Babylon provides historical timestamps secured by Bitcoin's extensive proof-of-work. Using the Bitcoin blockchain for timestamping leverages not only its security, but also its decentralized trust model. This approach ensures an additional layer of security against remote attacks and state corruption on interconnected blockchains.
Responsible Assertions:
Babylon leverages responsible assertions to manage staking contracts directly on the Bitcoin blockchain, allowing the system to expose stakers' private keys in the event of misconduct such as double signing. The design uses Chameleon hash functions and Merkle trees to ensure that assertions made by stakers are cryptographically linked to their stakes, enabling automatic slashing. This approach enforces protocol integrity through cryptographic accountability, where any deviation by a stakeholder (such as signing conflicting statements) results in deterministic exposure of their private keys, triggering automatic penalties.
Staking Protocol:
One of Babylon's major innovations is its staking protocol, which allows for rapid adjustment of staking allocations based on market conditions and security needs. The protocol supports fast stake unbinding, enabling stakeholders to quickly transfer their assets without experiencing the long lock-up periods associated with PoS chains. In addition, the protocol is built as a modular plugin, compatible with a variety of PoS consensus mechanisms. This modular approach enables Babylon to provide staking services for a wide range of PoS chains without major modifications to its existing protocol.
Payment channels are a tool designed to support multiple transactions between two parties without submitting all transactions to the blockchain at once. Here is how they simplify transactions:
Initial: The channel is opened with a single on-chain transaction, creating a multi-signature wallet shared by both parties. *
Transaction Process: Within the channel, parties transact privately through instant transfers, adjusting their respective balances without broadcasting to the blockchain. *
Closing: The channel is closed by another on-chain transaction, which settles the final balance based on the most recent transaction agreed upon by both parties. *
Based on the idea of payment channels, the Lightning Network extends these concepts to the network, allowing users to send payments through connected paths on the blockchain.
Routing: Just like using trails to find your way through a city, the network will find a path for your payment even if you don't have a direct channel with the end recipient.
Efficiency: This interconnected system significantly reduces transaction fees and processing times, making Bitcoin suitable for everyday transactions.
Smart Locks (HTLC): The network uses advanced contracts called Hashed Time Lock Contracts to protect payments across different channels. It’s like making sure your shipment passes through multiple checkpoints safely before reaching its destination. It also reduces the risk of intermediary defaults, making the network reliable.
Safety Protocol: In the event of a disagreement, the blockchain acts as a judge to verify the latest agreed-upon balance, ensuring fairness and security.
Taproot and Segwit have greatly boosted the development of the Bitcoin network, especially benefiting the Lightning Network, enhancing privacy and efficiency:
Taproot is like an aggregator for Bitcoin transactions — it bundles multiple signatures into one. This not only keeps off-chain transactions tidy, but also makes them more private and cheaper.
Segwit changes the way data is stored in Bitcoin transactions, allowing a block to contain more transactions. For the Lightning Network, this means cheaper and smoother opening and closing of channels, further reducing fees and increasing transaction throughput
Inscriptions have triggered a new wave of innovation in Bitcoin's second-layer ecosystem. With the advent of two groundbreaking updates (Segwit and Taproot), the Ordinals protocol was introduced, enabling anyone to attach additional data to the Taproot script of a UTXO, up to 4MB. This development made the community realize that Bitcoin can now act as a data availability layer. Inscriptions offer a new perspective in terms of security. Data, such as digital relics, are now stored directly on the Bitcoin network, making them unchangeable and preventing them from being tampered with or lost due to external server problems. This not only enhances the security of digital assets, but also embeds them directly into Bitcoin's blocks, ensuring that they are permanently reliable. Most importantly, Bitcoin rollups are already a reality, and inscriptions provide a mechanism to incorporate additional data or functionality into transactions. This allows for more complex interactions or state changes to occur outside the main chain while still anchoring to the main chain's security model.
BitVM:
BitVM combines Optimistic Rollup technology and cryptographic proofs in its design. By moving Turing-complete smart contracts off-chain, BitVM significantly improves transaction efficiency without compromising security. While Bitcoin remains the base settlement layer, BitVM ensures the integrity of transaction data by cleverly leveraging Bitcoin's scripting capabilities and off-chain cryptographic verification. Currently, BitVM is being actively developed by the community. [9] In addition, it has become a platform for multiple top projects such as Bitlayer [7] and Citrea [8].
Inscription-like storage:
BitVM leverages Bitcoin's Taproot to embed data into Tapscripts, similar to the concept of the Inscription protocol. This data typically includes important computational details such as the state of the virtual machine at different checkpoints, the hash of the initial state, and the final computational result. By anchoring this Tapscript in an unspent transaction output (UTXO) stored in the Taproot address, BitVM effectively integrates transaction data directly onto the Bitcoin blockchain. This approach ensures data persistence and immutability while benefiting from Bitcoin's security features to protect the integrity of recorded computations.
Fraud proofs:
BitVM uses fraud proofs to ensure the security of transactions. Here, the prover commits to a computational output for a specific input, and the commitment is not executed on-chain but verified indirectly. If the verifier suspects that the commitment is wrong, they can challenge it by providing a concise fraud proof that leverages Bitcoin's scripting capabilities to prove the incorrectness of the commitment. This system significantly reduces the computational load of the blockchain by avoiding full on-chain computation, in line with Bitcoin's design philosophy of minimal transaction load and maximum efficiency. The core of the mechanism is hash locks and digital signatures, which protect claims and challenges and link them to the actual off-chain computational work. BitVM adopts an optimistic verification approach - operations are considered correct unless proven otherwise, which improves efficiency and scalability. This ensures that only valid computations are accepted and that anyone on the network can independently verify their correctness using available cryptographic proofs. Optimistic rollups: BitVM adopts optimistic rollups technology to significantly enhance Bitcoin's scalability by batching multiple off-chain transactions for collective processing and verification. In fact, BitVM processes these transactions off-chain and intermittently records their results on the Bitcoin ledger to ensure integrity and availability. The use of optimistic rollups in BitVM represents a way to overcome Bitcoin's inherent scalability limitations by leveraging off-chain computational power, while ensuring transaction validity through regular on-chain verification. The system effectively balances the load between on-chain and off-chain resources, optimizing the security and efficiency of transaction processing.
Overall, BitVM is not just another Layer 2 technology, but represents a potential fundamental shift in the way Bitcoin scales and grows. It provides a unique solution to Bitcoin's limitations, but further development and improvement are still needed to fully realize its potential and gain wider adoption within the community.
B2 Network:
B2 Network is Bitcoin's first zero-knowledge proof verified commitment rollup, leveraging rollup technology and zero-knowledge proofs to increase transaction speed and minimize costs. This setup allows off-chain transactions to execute Turing-complete smart contracts, significantly improving efficiency. Bitcoin acts as the base settlement layer of the B2 Network, where B2 rollup data is stored. This setup allows B2 rollup transactions to be fully retrieved or recovered using Bitcoin inscriptions. In addition, the computational validity of B2 rollup transactions is verified through zero-knowledge proof confirmation on Bitcoin.
Important Role of Inscriptions:
The B2 network leverages Bitcoin inscriptions to embed additional data in Tapscripts, which includes important information such as the storage path of the rollup data, the Merkle tree root hash of the rollup data, zk proof data, and the parent B2 inscription UTXO hash. By writing this Tapscript to the UTXO and sending it to the Taproot address, B2 effectively embeds the rollup data directly into the Bitcoin blockchain. This approach not only guarantees the persistence and immutability of the data, but also leverages Bitcoin's powerful security mechanisms to protect the integrity of the rollup data.
Zero-knowledge Proofs for Enhanced Security:
B2's commitment to security is further reflected in its use of zero-knowledge proofs. These proofs enable the network to verify transactions without exposing the details of these transactions, thereby protecting privacy and security. In the context of B2, the network breaks down computational units into smaller units, each represented as a bit-valued commitment in a Tapleaf script. These commitments are linked together in a master root structure, providing a compact and secure way to verify transaction validity on the Bitcoin and B2 networks.
Rollup Technology for Scalability:
At the heart of the B2 architecture is the Rollup technology, specifically the ZK-Rollup, which aggregates multiple off-chain transactions into a single transaction. This approach significantly increases throughput and reduces transaction fees, addressing two of Bitcoin's most pressing scalability issues. The B2 network's aggregation layer processes user transactions and generates corresponding proofs, ensuring that the transactions are valid and finalized on the Bitcoin blockchain.
Challenge-Response Mechanism: In the B2 network, after transactions are batched and verified using zk proofs, nodes have the opportunity to challenge these batches if they suspect they contain invalid transactions. This critical stage utilizes a fraud proof mechanism, and the challenge must be ultimately resolved before the batch can proceed. This step ensures that only transactions that have been verified as legitimate can enter the final confirmation. If no challenges appear or existing challenges fail within the specified time lock, the batch will be confirmed on the Bitcoin blockchain. On the other hand, if any challenge is verified, the rollup will be restored afterwards.
Unlocking DeFi Markets: By enabling features such as smart contracts through EVM-compatible layer 2 solutions, Bitcoin can enter the multi-billion dollar DeFi market. This is not only to expand the utility of Bitcoin, but also to unlock new financial markets that were previously only accessible through Ethereum and similar programmable blockchains.
Expanded use cases: These layer 2 platforms support not only financial transactions, but also a range of applications in areas such as finance, gaming, NFTs, or identification systems…thereby expanding the use cases of Bitcoin far beyond its original scope as a simple currency [3, 4, 5].
Centralization risk: Certain mechanisms involved in some layer 2 solutions may lead to increased centralization. For example, in the mechanism that requires locking the value of BTC, unlike Ethereum’s layer 2 solution, the interaction from layer 2 to Bitcoin is not protected by the Bitcoin security model. Instead, it relies on a smaller decentralized network or federated model, which may weaken the security of the trust model. This structural difference may introduce failure points that do not exist in the decentralized model.
Increased transaction fees and blockchain bloat: Data-intensive use of serial numbers and other inscription protocols can cause blockchain bloat, slowing down the network and increasing transaction costs for all users. This can lead to higher costs and slower transaction verification times, impacting the efficiency of the network.
Complexity and user experience: The technical complexity of understanding and interacting with layer 2 solutions can be a significant barrier to adoption. Users will need to manage additional elements, such as payment channels on the Lightning Network or handling different token types on platforms like Liquid.
Regulatory and ethical issues: The immutability of these inscriptions, while a technical advantage, also raises potential regulatory and ethical issues. This poses significant challenges if the data is illegal, unethical, or just plain wrong, leading to permanent consequences with no recourse.
Impact on fungibility: If some bitcoins are "tagged" with non-financial data, this could affect their fungibility (each unit should be indistinguishable from another), potentially causing some bitcoins to be less valuable or acceptable than others.
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