Over the last few years, Bitcoin has gone from being just a financial asset to supporting innovations like Ordinal inscriptions and BRC-20 tokens. Thanks to its proof-of-work (PoW) consensus mechanism, Bitcoin is highly secure and decentralized. However, it was not built to be particularly scalable. Its growing popularity often strains the Bitcoin network, which can only process about seven transactions per second (TPS). Therefore, scalability is a major pain point that needs to be solved for Bitcoin to cope with increasing demand.
That’s where the Bitcoin scaling solutions come to help. They can help process Bitcoin transactions faster and cheaper, increasing the network’s throughput and efficiency. Layer 2 solutions like Stacks also bring additional functionality, like smart contracts, to the base chain.
In this article, we’ll familiarize you with the 10 most important terms associated with Bitcoin scaling.
10 Most Important Terms in Bitcoin Scaling
In Bitcoin scaling, you’ll frequently come across terms that refer to blockchains as layers, like base layer, layer 1 and layer 2, settlement layer, processing layer, and so on, depending on their functionalities and use cases. Bitcoin is often called the base layer or layer 1 since it serves as the primary record keeper of transactions, which are added through the proof-of-work (PoW) consensus mechanism.
In the case of layer 2 scaling solutions like the Lightning Network, Bitcoin acts as the settlement layer, responsible for the final confirmation of transactions and ensuring they become irrevocable. The Layer 2 blockchains like Lightning Network and Rootstock are built on top of Bitcoin and serve as the processing layer. These scaling solutions are responsible for processing transactions off layer 1 to increase its throughput and efficiency.
Off-chain transactions are simply those processed on a secondary blockchain outside the main chain. These transactions are later updated on the main blockchain, which makes them immutable.
Think of Bitcoin as a bank ledger and the Lightning Network as VISA. The bank ledger is slow as it keeps growing with each recorded transaction. So VISA (Lightning Network), which can process more transactions faster, takes the load off the bank ledger by processing transactions independently (on a secondary layer).
However, to ensure that the bank ledger also logs the transactions, VISA periodically settles the transactions with the bank ledger (Bitcoin). While there are some technical differences, the Lightning Network collaborates similarly with Bitcoin. The layer 2 solution increases the speed of Bitcoin transactions while reducing the mainnet’s burden.
Think of a subnet as a department in a company — each department operates independently while contributing to the larger whole. Therefore, subnets are smaller, self-contained networks built within or on top of the main blockchain. Basically, subnets partition the larger network into smaller, manageable sections, which makes it easier to process data and boost scalability.
Now, in a company, each department focuses on specific aspects of the business, such as marketing or finance. Similarly, subnets are designed to serve particular purposes, such as facilitating smart contract execution or enabling faster transaction processing.
While no subnets are directly connected to Bitcoin, they are indirectly implemented through Hiro’s subnets. Hiro’s subnets help scale the Stacks network, a scaling solution that adds smart contract functionality to Bitcoin.
Rollups aim to provide faster, cheaper transactions and are one of the most common types of layer 2 scaling solutions. They bundle or roll up a group of transactions, process them off-chain, and consolidate them into a single piece of data. This data is then published on the layer 1 blockchain, which, in such cases, serves as the settlement layer.
There are two main types of rollups you need to be familiar with optimistic and zero-knowledge (zk). Optimistic rollups assume that all their transactions are legitimate and valid unless someone disputes their authenticity — sort of like innocent until proven guilty.
Zk rollups, on the other hand, increase scalability by using zero-knowledge proofs that compress the transaction computation data to a single cryptographic proof. John Light’s research paper, published last year, shed light on how zk-rollups can be implemented on Bitcoin.
Another relatively new rollup type is a sovereign rollup, which is particularly relevant to Bitcoin. The launch of Celestia’s Rollkit enabled developers to deploy sovereign rollups on Bitcoin for the first time earlier this year. With such rollups, Bitcoin is only responsible for maintaining a record of the transactions while the sovereign network nodes take care of verification and settlement.
Sidechains are independent blockchains that run parallel to a primary blockchain like Bitcoin while being connected to it, like the Liquid Network. It's like train tracks. One side of the track is Bitcoin, and the other side is the Liquid Network. They run parallel and are linked together by bridges in between.
Sidechains are complete blockchains in their own right — they have unique rules, functionalities, consensus, and governance systems. Although sidechains like the Liquid Network can operate independently, they rely on the main blockchain for security.
Users can transfer assets between the chains through two-way bridges, although the assets never really leave the primary blockchain. Instead, the transfer involves locking up assets on the main chain, while the sidechain issues a mirrored asset pegged to the locked ones on the main chain. The transfer back involves the destruction of the mirrored assets on the sidechain, post which the assets on the main chain are unlocked.
A state channel is a layer 2 scaling mechanism. The Lightning Network is a prominent example that employs state channels. The mechanism allows users to privately and rapidly transact between themselves off the main Bitcoin blockchain. It involves creating a temporary channel — akin to a temporary group chat created for a specific project — where several transactions can be executed between parties.
These transactions are periodically updated on Bitcoin to record each participant's balance. State channels are commonly used for micropayments and gaming, where frequent transactions must be executed. This mechanism ensures that the primary blockchain is not burdened with details of every single transaction, which helps boost scalability.
A payment channel, a type of state channel, is used for one specific purpose: payments. While you can find payment channels on the Lightning Network, the concept can be employed by any blockchain.
A payment channel is a temporary, private channel allowing two parties to conduct multiple off-chain transactions. The participants can send funds back and forth within the channel and update their state to the main blockchain at intervals.
Channel factory is an extension of the payment channel concept. It allows you to create multiple payment channels simultaneously, with similar rules controlled by smart contracts. The idea is to enable more than two people to execute transactions off-chain simultaneously. It’s like having a factory that simultaneously produces multiple channels for different users, which reduces the load of creating separate channels and increases efficiency.
Each off-chain transaction between the participants of a payment channel is referred to as a commitment transaction. It is a cryptographic transaction that reflects the agreed-upon state of the distribution of funds between the participants. Commitment transactions are named so because they reflect a commitment on behalf of the participants since the transactions are not recorded on the main blockchain. Therefore, commitment transactions are designed to be revocable. When participants want to close a payment channel, they broadcast the latest commitment transaction for final settlement.
Schnorr signatures is a cryptographic innovation for Bitcoin designed to make the network more scalable. It compresses multiple signature inputs in a transaction into a single, smaller digital signature. Let’s say three people need to sign off on a single transaction from a multi-signature wallet. They can combine their public keys, sign the transaction using their private keys, and combine their three signatures to form a single signature.
Since Bitcoin block sizes are limited to one megabyte, Schnorr signatures offer a way to reduce transaction size to optimize block space usage and boost scalability. It also increases transaction processing efficiency since the validator needs to verify a single signature and public key instead of three separate ones. Moreover, Schnorr signatures also contribute to increased privacy and security.
Scaling Bitcoin: One Block at a Time
Bitcoin scaling solutions are still in their early stages, but they are gradually expanding Bitcoin’s use cases, and thereby, its user base. With continuous development and innovation, these scaling solutions can help developers build more Bitcoin-specific applications and solutions, enabling wider adoption.