Bitcoin Beyond the Base Layer Commissioned by Bitcoin Beyond the Base Layer | May 2022 3 Commissioned by Trust Machines The mission of Trust Machines is to grow the Bitcoin economy Trust Machines buil.
Introduction
What is Bitcoin? Is it peer-to-peer digital cash? Or a distributed database? Or a darknet currency? Or a global payment and settlement network? Or an uncorrelated financial asset?
Bitcoin has weathered a labyrinth of narratives since its birth, yet its core purpose has always been to serve as sound money While Ethereum and other layer-1 networks rapidly evolve to broaden blockchain technology, the Bitcoin community insists that Bitcoin’s deliberately limited use cases are its defining feature, not a bug At its base layer, Bitcoin remains a secure, global settlement network with a native store of value asset—BTC—and that is the essence of the network.
Many analysts contend that Bitcoin's durable and decentralized base layer can serve as the bedrock for a much broader range of economic activity Bitcoin-based protocols that add scale and programmability on top of this base layer are under active development, and despite current adoption being limited, builders are continuing to advance this vision.
Ethereum has roughly $500 billion in network value, with about $500 billion of applications built on top, while Bitcoin commands a trillion-dollar network value but supports far fewer applications on top Muneeb Ali, CEO, says he doesn't expect this imbalance to persist in the long run and believes a ton of value will be created on top of Bitcoin.
Trust Machines (CoinDesk Interview, February 2022)
Bitcoin’s development community stays deliberately conservative when it comes to changing the base layer Core protocol modifications require months—often years—to implement, and they are debated at length to safeguard Bitcoin’s foundational values of decentralization, stability, and security, ensuring that added functionality isn’t pursued at the expense of vulnerabilities in the core technology.
Taproot, one of Bitcoin’s largest upgrades, was proposed as early as January 2018 but wasn’t implemented until November 2021, nearly four years later Likewise, other major upgrades like SegWit and Schnorr Signatures took about three and five years, respectively, before they were integrated into the protocol These long timelines illustrate how initiatives to expand Bitcoin’s scalability and use cases are increasingly pursued outside its rigid yet stable base layer.
1 Taproot was an upgrade aimed at making complex Bitcoin transactions more efficient by reducing data and signature overhead
2 Proposed in 2015 and implemented in late 2017, SegWit (Segregated Witness) was a highly debated protocol update that changed the structure of Bitcoin transaction data
3 Proposed in 2016 and implemented in late 2021, Schnoor Signatures enhanced Bitcoin’s multi-signature functionality to reduce their data footprint on the Bitcoin Blockchain
Why Go Outside the Base Layer?
Before analyzing these Bitcoin-based protocols, one must answer the question - “why not just build directly on the base layer?”
Bitcoin's scripting language lacks loops and complex control flow, which constrains on-chain programming and makes it difficult to implement robust smart contract logic or general-purpose applications directly on the Bitcoin base layer As a result, developers often turn to off-chain solutions, layer-2 protocols, or sidechains to enable more advanced features, while Bitcoin remains focused on secure value transfer rather than native, feature-rich on-chain software.
Bitcoin's 10-minute block time is longer than those of Ethereum and other layer-1 blockchains While block time is only one factor in assessing a blockchain's settlement speed and the reliability of confirmations, Bitcoin’s slower cadence can deter use in applications that require rapid transaction confirmations, such as purchasing a cup of coffee.
Bitcoin transaction fees remain relatively high, with the average Bitcoin transaction costing about $10 in 2021 By comparison, many competing blockchain networks offer transaction fees that are only fractions of a cent, making them far cheaper to use.
The migration of Tether’s USDT off Bitcoin’s Omni protocol demonstrates the base-layer limitations in action Omni was the leading venue for USDT issuance and transactions through 2017, but the rise of Ethereum and other layer-1 platforms with larger ecosystems, faster confirmation times, and often lower transaction fees reduced Omni’s dominance As a result, Omni’s share of USDT in circulation dropped from 100% in 2017 to about 2% today, illustrating the shift to newer blockchains for stablecoin settlement.
What Benefits Can Bitcoin’s Base Layer Provide?
While Bitcoin’s rigid base layer has historically created challenges for application development, it also creates unique opportunities for developers and users
Bitcoin is the most stable and secure base layer among blockchain networks, offering a reliable settlement platform The Bitcoin community's resistance to modifying its core protocol has preserved its stability and reliability over time The enduring core rules—proof-of-work consensus, finite supply, and the UTXO-based data structure—have remained firm and historically resisted change, underpinning Bitcoin's role as a trusted foundation for value transfer.
Michael Saylor, CEO of MicroStrategy, argues that bitcoin should be built on a granite-solid foundation to last forever, delivering high integrity and exceptional durability as a trusted digital asset.
This stability stands in stark contrast to Ethereum and other layer-1 networks that frequently modify their base layers to adapt to the pressing needs of their users
Ethereum has dramatically shifted its monetary policy with the EIP-1559 upgrade, completed in August 2021, introducing a new fee model and a burn mechanism Alongside The Merge, the network is transitioning from proof-of-work to proof-of-stake, fundamentally changing how security is achieved The architecture is evolving through layer-2 scaling solutions, and in the future Ethereum is expected to function mainly as a settlement and data-availability layer rather than a platform for directly deployed applications Ironically, even as Ethereum was designed to handle the complexity Bitcoin couldn’t, its base layer is set to become simpler in the coming years and to resemble Bitcoin’s base layer more closely.
Bitcoin's reliability goes beyond the technical difficulty of altering its base layer; it has delivered nearly uninterrupted uptime, a sharp contrast to many Ethereum sidechains and other Layer-1 networks such as Solana that have faced outages and sustained attacks The cost of attacking the Bitcoin blockchain — roughly estimated by total miner revenue needed to perform block reorganizations — remains comparatively high against other proof-of-work networks Even as Ethereum's miner revenue has at times matched or exceeded Bitcoin's, its upcoming migration to proof-of-stake introduces new security considerations for the safety of its core protocol.
4 Block reorganizations result in modifications to the previously finalized history of the blockchain
Bitcoin, the native asset of the network, commands a market capitalization of about $400 billion and represents the deepest liquidity pool in the crypto asset market by a wide margin Despite the Bitcoin base layer’s limited functionality, investors are compellingly deploying BTC in decentralized finance (DeFi) to generate yield and to take out crypto-denominated loans This appetite highlights BTC’s central role in DeFi liquidity and its potential to unlock productive uses beyond simple ownership.
The chart shows that BTC bridged to Ethereum and deployed in DeFi far surpasses the amount of BTC used for Lightning Network payments Bridges introduce additional risk factors for users, highlighting security and custody concerns This creates untapped demand for Bitcoin-native applications—Bitcoin-based DeFi—that enable users to unlock more value from their BTC directly within Bitcoin’s established security framework.
The Bitcoin-Based Protocol Landscape
Efforts to bring programmability and scalability to Bitcoin began as early as 2012, and as the timeline shows, a new class of Bitcoin-related protocols has emerged and started deploying innovative technologies into production, with widespread activity beginning in 2018.
A few years after their mainnet deployments, the Lightning Network, RSK, and Stacks have begun to cultivate their own ecosystems The graphic below highlights the major participants building on or partnering with these networks.
Generally speaking, the landscape of projects building on top of Bitcoin span:
(i) protocols scaling payments and asset issuance and (ii) general-purpose networks
Payments and Asset Issuance Platforms
Early initiatives to scale Bitcoin payments and enable asset issuance include:
• Colored Coins, a concept with different implementations that used the op_return 8 opcode of the Bitcoin protocol to store information about what those BTC represent (proposed in December 2012)
• Omni (formerly Mastercoin), a protocol layer on top of Bitcoin for asset issuance that also leveraged Bitcoin’s op_return function (launched in July 2013)
Colored Coins and the Omni Layer were once prominent, but neither achieved lasting product-market fit For this discussion, the focus shifts to Bitcoin layer-2 solutions, specifically the Lightning Network and the Liquid Network, illustrating how these technologies enable faster settlements, improved scalability, and real-world use cases.
Lightning Network is a payment channel network built on the Bitcoin blockchain, designed to enable faster and cheaper BTC transfers A payment channel is an arrangement that allows users to spend BTC while keeping an up-to-date record of their balances By processing transactions off-chain, the Lightning Network enables greater scalability and reduces the cost of individual transactions.
How does Lightning Network work?
Lightning Network is an off-chain scaling solution for Bitcoin that relies on two core features—multi-signature wallets and timelock transactions—to operationalize fast, secure payment channels Multi-signature wallets require two or more private keys to spend BTC, providing joint control and increased security for channel funds Timelock transactions place a delay on when coins can be spent, enabling pre-agreed rules for when balances can be settled and ensuring orderly dispute resolution within the network.
OP_RETURN is a type of Bitcoin transaction that differs from standard payment transactions Its primary use is to write and store small amounts of data on the Bitcoin blockchain This capability enables embedding tiny data payloads into the blockchain, creating a permanent, lightweight record on the Bitcoin ledger.
Alice and Bob want faster Bitcoin payments, so they use the Lightning Network to set up a 2-of-2 multi-signature channel They fund the channel with their chosen amounts via an on-chain transaction, and the total funded amount defines the channel's capacity, meaning no single off-chain transfer can exceed that capacity Once the channel is opened, they can transfer funds indefinitely by signing off-chain commitment transactions, enabling near-instant, low-fee Bitcoin payments while keeping the main blockchain secure.
To terminate the channel, Alice can submit an on-chain transaction together with the ledger Bob cannot stop the channel from closing, but he can contest the closure by submitting proof of Alice's wrongdoing If Alice is found dishonest, all funds in the channel are awarded to Bob This mechanism combines on-chain settlement with dispute-proof evidence to secure channel termination.
What happens when users don't have a direct open channel?
Lightning Network allows users to transfer funds to users they are not directly connected with via a channel
Using the Lightning Network, Alice can send 0.5 BTC to Carl even without a direct channel by routing the payment through intermediate nodes If Bob has an open channel with Carl, the path becomes Alice → Bob → Carl: Alice sends 0.5 BTC to Bob, and Bob forwards that 0.5 BTC to Carl Once Carl receives the funds and confirms the receipt, the transaction is complete.
Time-locked contracts in the Lightning Network protect funds in multi-hop payments by ensuring that if an intermediary like Bob receives payment from Alice and fails to forward it to Carl, the transaction won’t be lost or hijacked Under these contracts, if Carl does not confirm receipt within a predefined time window, the payment is automatically reverted to the originator, Alice This mechanism prevents intermediaries from stealing funds and guarantees that multi-hop transactions settle securely on the Lightning Network.
What are some of the benefits of the Lightning Network?
By moving execution off Bitcoin’s base layer, the Lightning Network enables BTC to be used for low-value payments, such as buying a cup of coffee, which would be impractical on-chain due to high transaction fees This off-chain approach preserves Bitcoin’s security while dramatically reducing costs for everyday microtransactions, making small purchases feasible and speeding up confirmation times.
In 2021, the average transaction fee was around $10 Users no longer need to wait for the typical 10-minute block time for most merchants to consider a transaction final Moreover, increased scalability and significantly lower transaction fees—often a fraction of a cent—not only improve the user experience but also unlock new use cases, such as micropayments.
With scaling benefits growing, development organizations are expanding the Lightning Network's utility to include asset issuance Lightning Labs, a core developer of the Lightning Network, recently unveiled Taro, a protocol that uses Taproot to bring multiple assets to Lightning with a focus on stablecoins Networks like Taro could once again make Bitcoin a major platform for stablecoin issuance and transfer.
What are some of the drawbacks of the Lightning Network?
Using the Lightning Network typically requires at least one on-chain Bitcoin transaction High Bitcoin blockchain fees create upfront costs for users and can force a waiting period of several minutes for the base layer to confirm before funds can be spent on the Lightning Network.
The Lightning Network seeks the cheapest route for transactions, but consistently finding viable paths for larger payments can be challenging due to several constraints First, the maximum transaction size depends on the capacity of the initiating node Second, timelock contracts can impose limits on how much BTC they can transfer Routing nodes set minimum and maximum BTC amounts they are willing to send and receive through timelock contracts, further narrowing the available routes As a result, finding routing nodes to relay BTC can be difficult in some cases.
Comparison of Bitcoin-based protocols
When evaluating protocols built on Bitcoin, several distinctions stand out for clarity: data storage locations, how Bitcoin is used for settlement, how BTC is ported into the solution, and the incentive structures that motivate miners and network nodes.
Separate Ledger for Data Storage
Protocols that extend Bitcoin's capabilities store some data on Bitcoin's base layer, but for many applications a separate layer that can hold the global state is vital A second layer beyond Bitcoin is essential to enable scalable storage and complex workflows Storing all of this data on the base layer is not optimal due to Bitcoin's block size constraints, which limit on-chain storage and performance.
To optimize data access for decentralized apps, smart contract platforms should maintain a dedicated global ledger capable of storing all the data applications may require, and platforms such as Liquid, RSK, and Stacks exemplify this approach by storing data in separate global ledgers, providing scalable and organized data storage for blockchain applications.
Counterparty and Omni do not maintain a separate data ledger; instead, their transaction data is stored in Bitcoin’s op_return space Liquid and RSK store only peg-in and peg-out transactions on Bitcoin, with the rest of their state kept on their own chains The Lightning Network records channel openings and closures on Bitcoin, while the actual transaction details remain off-chain within each channel Stacks uses a checkpointing-like mechanism to store state on Bitcoin: details of Stacks transactions between two Bitcoin blocks are kept on Stacks, while a compressed snapshot of the new state is committed to Bitcoin Regardless of how many Stacks transactions occur between blocks, the amount of information stored on Bitcoin stays roughly the same, enabling Stacks to scale in step with Bitcoin’s settlement guarantees.
Where these protocols store their state has direct implications for their settlement guarantees Storing state on Bitcoin’s base layer provides Bitcoin-level settlement guarantees for the protocol Because Counterparty and Omni keep everything on Bitcoin, their settlements occur on Bitcoin by default Similarly, Lightning channels settle their balances on the Bitcoin network, with final settlement anchored to the Bitcoin blockchain.
After payment channels close, Stacks finalizes microblocks between consecutive Bitcoin blocks and records all related information When a new Bitcoin block is mined, Stacks anchors the intermediate state changes from those microblocks by storing their hashed versions on the Bitcoin blockchain, thereby settling the updates on Bitcoin.
Today's cross-chain bridges largely rely on trusted custodians who hold bridged BTC and issue wrapped BTC on other blockchains In networks like RSK and Liquid, BTC is locked via peg-ins and peg-outs in multisignature Bitcoin addresses controlled by reputable entities Protocols such as the Lightning Network and Stacks enable using native BTC on new layers, eliminating the need for a trusted party to move BTC off the main chain If a smart contract on a separate blockchain can read and verify Bitcoin transactions, transferring BTC to that chain becomes unnecessary However, this design can suffer from performance overhead, since a non-Bitcoin smart contract may need to wait for Bitcoin block confirmations, typically about 10 minutes per block.
While Lightning enables atomic swaps that combine on-chain and off-chain elements, Stacks achieves swaps by blending native BTC with Clarity smart contracts on the Stacks platform Because these swaps involve two blockchains, Bitcoin and Stacks, they are called Catamaran swaps Clarity contracts on Stacks can read the Bitcoin state, enabling them to verify whether a transaction occurred on the Bitcoin blockchain A Stacks-based swap includes three transactions.
1 Sending a Stacks based asset to an escrow smart contract
2 Transferring BTC to the recipient's address
3 Once the Clarity smart contract verifies the BTC transfer, releasing the Stacks based asset
Beyond native swaps, Stacks enables BTC bridging through custodial wrapped tokens, mirroring the WBTC approach on Ethereum These derivative assets, such as xBTC, live on the Stacks blockchain and function similarly to WBTC, providing BTC liquidity and interoperability within the Stacks ecosystem.
Protocols that store data on-chain pay Bitcoin miners to include the information in blocks For off-chain transactions, every protocol under consideration—barring Counterparty and Omni—needs additional miner incentives to facilitate ledger updates The Lightning Network pays node operators routing fees, while RSK and Liquid reward miners by sharing transaction fees, and Stacks incentivizes miners with STX block subsidies and transaction fees.
The following section of the report presents several data series that capture the current state of adoption and investment into Bitcoin-based protocols
Data collection methodology: Block Research collected metrics from Liquid, RSK Labs, and Stacks Foundation for this report, including daily transaction counts, daily active addresses, daily aggregate transaction fees, and the number of nodes or validators over time Any data supplied by these organizations, along with publicly available data, are included in the following section.
Because the Lightning Network does not maintain a global ledger, estimating the total number of users and the volume of transactions across all channels is challenging; while rough figures can be inferred by surveying active nodes that route a large share of traffic, this analysis relies on publicly available data rather than private network metrics; this report focuses on publicly available Lightning Network data to provide an evidence-based view of user activity and transaction flow.
During 2021, the Lightning Network's capacity in BTC terms more than doubled, signaling rapid growth of off‑chain scalability for Bitcoin By the time of writing, roughly $200 million worth of BTC had been deposited into multi‑sig wallets across the Lightning Network and remained spendable at any given moment, indicating strong liquidity across the network.
As the Lightning Network grows in popularity, a small subset of nodes has become essential for connecting peers across the network, which reduces the clustering coefficient and increases the number of hops needed to reach a target node Although this pattern signals greater centralization, it does not materially hamper network performance as long as these crucial nodes remain online.
On the Lightning Network, the clustering coefficient measures how connected a node’s neighborhood is, capturing the level of local connectivity within the network A node with a clustering coefficient of 0 indicates that its neighbors do not connect with each other, revealing a lack of triadic closure around that node Understanding this metric helps researchers and practitioners assess network structure, spot nodes with sparse local clustering, and evaluate how tightly interconnected groups form in the Lightning Network.
When a clustering coefficient is 1, it implies that all its neighbors are connected to each other
Outlook and Conclusion
Despite nearly a decade of efforts to expand Bitcoin's use cases, adoption has remained relatively low to date However, several catalysts are now poised to accelerate Bitcoin-based application development.
Catalysts for adoption Maturing Infrastructure
Bitcoin-focused organizations are advancing the development of Bitcoin-based infrastructure, with recent examples including Lightning Labs' asset issuance on the Lightning Network and the launch of a BTC-collateralized stablecoin These efforts highlight the Lightning Network's significant headway in emerging markets and its ongoing impact on driving BTC payments adoption.
Trust Machines’ $150 million fundraising signals strong momentum for the ongoing development of Stacks’ core technology Startups within the Stacks ecosystem, including Superfandom, Arkadiko, and Gamma, are actively deploying Bitcoin-based protocols today, while Sovryn in the RSK ecosystem demonstrates similar forward progress for bitcoin-enabled smart contracts.
Furthermore, Block (formerly known as Square) has announced plans to build a Bitcoin- focused decentralized exchange Given Block’s large user base, successfully executing such an initiative could be a major catalyst for adoption
Explicit financial incentives aimed at attracting developers and users have proven effective at bootstrapping a growing blockchain ecosystem In March 2022, Stacks Foundation, Okcoin, Digital Currency Group, and GSR announced a $165 million ecosystem fund, Bitcoin Odyssey, dedicated to investing in applications that drive BTC adoption This strategic funding demonstrates how targeted incentives can accelerate ecosystem development by expanding Bitcoin's use cases, boosting developer activity, and increasing user adoption.
Miners play a vital role in the Bitcoin ecosystem, providing security and validating transactions Innovative mining schemes like RSK’s merge mining can boost miners’ bottom line with minimal extra investment Similarly, novel consensus mechanisms such as Stacks’ proof of transfer do not require upfront investment in computationally intensive mining hardware and have the potential to democratize participation in Bitcoin-based protocol operation.
Despite the emergence of these catalysts for adoption, there are several challenges that these protocols need to overcome in order to reach higher levels of adoption
Challenges for adoption Competition from Ethereum and other layer-1 blockchains
Since their inception, Ethereum and other layer-1 networks have been optimized for general-purpose applications, a design choice that keeps their user experience ahead of many Bitcoin-based solutions with far less tooling support The strength of these ecosystems—anchored by seamless wallet integrations, extensive developer tooling, and broad supporting infrastructure—facilitates easier onboarding, a wider range of use cases, and stronger adoption compared with more limited Bitcoin tooling.
28 infrastructure for Bitcoin-based solutions need to improve to match the experience of alternative layer-1 networks
Centralization remains a critical risk for Bitcoin-based protocols
Bridging BTC to sidechains like RSK, Liquid, and Stacks exposes users to many of the same risks as bridging BTC to Ethereum With Ethereum’s extensive ecosystem of applications and tooling, it will likely remain a primary platform for deploying BTC in DeFi However, the landscape is slowly shifting as the Lightning Network announces asset issuance and Stacks enables native BTC usage.
Bitcoin’s Stable Base Layer Can Create Development Challenges
Certain protocols built on Bitcoin could benefit from modifications to the base layer, such as adding support for zero-knowledge proof verification These base-layer limitations could prevent some Bitcoin-based protocols from achieving their full potential Isn’t Bitcoin’s resistance to change one of the reasons it remains a solid foundation on which to build? Targeted, security-preserving enhancements—like integrating zero-knowledge verification—could expand Bitcoin's capabilities without compromising its core principles, unlocking new use cases for the ecosystem.
The Lightning Network is gaining momentum, with its spending capacity increasing meaningfully in 2021, though it remains limited compared to on-chain capacity Lightning Labs, the network's leading development organization, has just completed a fresh round of funding and is actively expanding the network's functionality with upgrades like Taro.
Early Bitcoin smart contract efforts showed that storing transaction data on Bitcoin’s base layer wastes scarce block space Protocols such as RSK extend Bitcoin’s capabilities by using merge mining and delivering Ethereum Virtual Machine (EVM) compatibility However, these approaches rely on relatively centralized bridging architectures and still require significant improvements to achieve scalable performance.
Stacks’ approach, combining PoX and native BTC, represents a novel model designed to fill gaps left by earlier blockchain technologies After a year in production, Stacks has gained traction relative to RSK, but developer and user adoption remains modest compared with Ethereum and other EVM-compatible chains The gap could narrow as comparable infrastructure and applications are built on Stacks, expanding its ecosystem Whether capital infusion and accelerator programs will unlock the necessary developer and user traction remains to be seen.
Are Rollups Possible on Bitcoin?
Over the past two years, the Ethereum development community has embraced layer-2 scaling solutions and rollups as the de facto path to scalability At the same time, researchers are beginning to explore whether ZK-rollups can be verified on Bitcoin’s base layer This exploration is supported by a four-month research fellowship funded by the Human Research Foundation and StarkWare, a leading layer-2 development organization, to investigate the use of ZK-Rollups on Bitcoin.
In conjunction with The Block’s data collection process, it was able to obtain several Stacks-specific data sets which are included in the following section for reference
Contracts deployed and NFT-Related Transactions
Stacks saw an uptick in contracts deployed and NFT-related transactions as applications went live in Q4-21, underscoring rising developer activity on the platform Beyond stacking, NFTs have emerged as a top use case for Stacks, with additional NFT statistics available here.
Active Addresses and Daily Transactions
Stacks started seeing marginal uptake in active addresses and transactions around the same time when applications started going live in Q4 2021
Stacks vs Other Layer-1 Networks
Alternative layer-1 networks and EVM-compatible blockchains have achieved faster adoption than Stacks, largely because EVM chains piggyback on Ethereum’s network effects and extensive tooling ecosystem This allows developers to copy and paste Solidity-based contracts from Ethereum to other EVM-compatible chains, accelerating development and deployment In contrast, Stacks uses Clarity-based contracts that must be written from scratch, which can slow onboarding and limit rapid deployment compared to EVM-enabled ecosystems.
Block to Launch Bitcoin-based Digital Identity