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Layer 1, Bitcoin Layer 2, or Sidechain? A Stacks Network Case Study

Defining layer 1, layer 2, sidechains, and more is important for Bitcoin. We explore why using some recent commentary around the Stacks Bitcoin layer as an example. The Stacks Network is a Bitcoin layer that employs smart contracts and makes use of the STX native token to make the Bitcoin blockchain programmable.
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Layer 1, Bitcoin Layer 2, or Sidechain? A Stacks Network Case Study

Layer 1, Layer 2, sidechains – how are they different?

The answer can vary depending on which ecosystem you’re part of.

And this week, we have another case study.

In a Github FAQ, co-founder of Stacks Muneeb Ali not only mentioned that you can call Stacks a Bitcoin layer, but he also laid out some of the properties that could lead it to be seen as an L2

Why L1, L2 and Sidechain Definitions Matter for Bitcoin

There are specific reasons why defining L1s, L2s, and sidechains matters for Bitcoin.

Bitcoin is the world's biggest and oldest blockchain, but it is still largely seen as a medium of exchange or a store of value. That perception is thanks to the blockchain’s original design, which focused on preserving security in a decentralized system.

This design also came at a cost for Bitcoin’s scalability.

And so, while Bitcoin was the original blockchain, newer blockchains and ecosystems – like Ethereum and Solana – became more closely associated with decentralized applications (dApps). 

That narrative has only become more established over the years, especially as L2s have come into play. 

Most recently, Coinbase launched Base – an Ethereum layer 2 that settles directly on the Ethereum blockchain – on testnet in an effort to drive dApp growth.

Base’s launch gave new momentum to the concept of using Ethereum as a base settlement layer. The L2 also provided access to other blockchains like Solana.

While Base highlighted the need for scalability solutions as a whole, its introduction also highlighted the importance of L2s for Bitcoin’s scalability.

In fact, many of the biggest innovations in Bitcoin are built upon layer 2s, sidechains, and additional protocols serving as an extension of the Bitcoin network.

This means that discussions around defining L1s, L2s, sidechains, and more are crucial to the Bitcoin ecosystem as they embody the innovations that have helped the blockchain scale. They also lay out the functionalities that have helped expand Bitcoin’s use cases.

With that, let’s explore how L1s and L2s have traditionally been differentiated. 

How L1s and L2s Have Traditionally Been Defined

Ali begins by making the point that L1s are “sovereign.” This effectively means that L1s have two defining characteristics:

  • They have their own security budget
  • They can survive independently; there’s no need for another L1 chain

This means that, by definition, L2s exhibit the following criteria:

  • They don’t have their own security budget
  • They need an L1 to survive

But Ethereum and other newer ecosystems have a different definition of L2.

The L2s on newer blockchains primarily “[focus on” the ability to withdraw assets using only L1 security and L1 miners,” as Ali summarizes.

When it comes to Bitcoin, new assets are actually issued on Bitcoin L2s, as BTC is the only L1 asset. 

However, many would argue that Stacks has also never displayed the exact classifications of an L1 or an L2.

Some would even call it a layer 1.5, of sorts, as it has layer 2 solutions without exemplifying some of the characteristics typical of other layer 2s.

What is the Stacks layer?

In short, the Stacks network is a Bitcoin layer for smart contracts. 

It is built on Bitcoin because of the Bitcoin blockchain's highly secure, reliable, and decentralized nature.

Stacks has a few unique characters, including its Proof of Transfer (PoX) consensus used to incentivize Stacks miners and participants, and its use of the Clarity smart contract language. It also makes use of the STX native token (the STX token also saw its first token offering in 2019). 

These designs enable Stacks to have knowledge of the full Bitcoin state, and effectively allow developers to build on the Bitcoin blockchain.

The ease of use and security embedded in the Stacks layer has led to an ecosystem of dedicated developers and high network activity. It also -- even ahead of the use of Ordinals on Bitcoin -- laid the foundations for an active community of artists and creators on Stacks who were dedicated to releasing their own Bitcoin NFT projects.

This all points to the fact that even aside from NFTs on Stacks, the ecosystem has been opening doors for users to develop applications on top of the Bitcoin network.

It has also been a big proponent of making the world's biggest and oldest blockchain programmable.

So, Is Stacks a Bitcoin Layer 2?

Some have tried to classify Stacks as a Bitcoin L2.

With the Nakamoto release and the introduction of sBTC, Stacks could have some properties of a Bitcoin L2. This includes:

  • Stacks finality on Bitcoin (100% of hashpower)
  • Stacks consensus runs on Bitcoin L1
  • BTC as main asset following sBTC rollout
  • All data on Stacks hashed & stored on every Bitcoin L1 block
  • Contracts on Stacks L2 can read L1 transactions
  • Assets on Stacks L2 can also be moved through L1 transactions

Stacks is a Bitcoin layer, but its various properties don't exactly fit current definitions of an L2. That’s why many users and developers in the ecosystem have been opposed to classifying it as such.

Ultimately, the main purpose of Stacks is to help developers build with Bitcoin as the base layer for their applications. 

The Future of Defining L1s and L2s

Stacks is just one ecosystem that has shifted how we think of Bitcoin L1 and L2s.

Other developments – like sidechains – have also influenced how we think of blockchain functionality.

As the latest discussions focused on Stacks show, the conversation around the infrastructure of Bitcoin and its development constantly evolves.

Like the Stacks Bitcoin community, other ecosystems are also ideating on everything from the language for writing smart contracts, to how layers could be used to expand on Bitcoin DeFi and other apps built on Bitcoin.

This is especially true due to Bitcoin’s inherent design, along with the benefits to be leveraged – and challenges to be solved – on the Bitcoin blockchain.

At the end of the day, layers are key to allowing Bitcoin to become the final settlement layer for many applications.

They also play an instrumental role in unlocking the Bitcoin economy, and the true potential of the blockchain.

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