Since the resolution of the Bitcoin (BTC) block size limit debate in 2017, there has been a general consensus that Bitcoin is likely to scale via a multi-layer protocol stack rather than stuffing every transaction onto the base blockchain.
These secondary network layers, such as the Liquid sidechain and the Lightning Network, are often referred to as layer-two networks due to the different tradeoffs made with these systems in the areas of security, efficiency, and decentralization, in addition to the fact that they effectively use the base Bitcoin blockchain as a settlement network.
There has been plenty of hype around the Lightning Network as a solution for lower-value, bitcoin-denominated payments that retain many of the permissionless and low-trust properties of the Bitcoin blockchain over the past few years, and the Liquid sidechain has also achieved notable levels of adoption when it comes to the amount of bitcoin that has been pegged into the network.
However, it turns out that a third layer-two Bitcoin protocol, known as RSK, is now growing faster than both Liquid and the Lightning Network.
What is RSK?
RSK is a Bitcoin sidechain that is compatible with the Ethereum Virtual Machine (EVM). This means that any smart contract built for Ethereum (ETH) can be copied and made to work on RSK.
As a sidechain to Bitcoin, the native token of RSK, which is known as RBTC, is pegged to bitcoin on a one-to-one basis. This means that users are effectively using bitcoin to pay for gas on the RSK network rather than a new token like ETH, tron (TRX), or binance coin (BNB).
RSK uses a combination of a federation of bitcoin companies and SHA-256 miners who are already mining bitcoin to secure the two-way peg with Bitcoin’s base blockchain and the RSK blockchain itself. This current setup, which is known as the Powpeg, is about as low trust as a Bitcoin sidechain can be without the introduction of new, soft-forking improvements to the base Bitcoin protocol.
Comparing growth on Bitcoin’s Layer-2 networks
At the time of this writing, there is BTC 2,913 pegged into Liquid, BTC 1,638 pegged into RSK, and a total capacity of BTC 1,291 in public Lightning Network channels.
It should be noted that the real amount of BTC held in Lightning channels is difficult to estimate, as private channels can be opened that are harder to track. Past estimates have indicated as much as 41% of the BTC held in Lightning channels could be in private channels, which would mean the real capacity of the Lightning Network would be closer to BTC 2,190.
If you look at the past growth of each of these Bitcoin layer-two networks, most of the growth in the Lightning Network occurred in 2019, most of Liquid’s growth occurred in 2020 (including surpassing public Lightning Network capacity), and the vast majority of RSK’s growth has taken place in 2021.
Growth of the RSK Bitcoin sidechain took off in late March of this year, just as the RSK-based decentralized finance (DeFi) platform Sovryn enabled incentives for providing liquidity to the platform.
There was less than BTC 600 pegged into RSK on March 23, and there has now been more than BTC 1,000 added to that total in less than two months. During this same time, BTC pegged into Liquid has only grown by roughly BTC 20 and public Lightning Network capacity has increased by around BTC 120.
It’s clear that RSK is growing faster than Liquid and the Lightning Network right now, but this could also just be a short term trend.
For example, Liquid experienced a net increase of BTC 1,000 in March 2020, but the amount of new BTC pegged into the federated Bitcoin sidechain since then is less than BTC 1,000. Of course, the BTC/USD exchange rate has also increased substantially since that time.
It will be interesting to see if each of these three layer-two networks for Bitcoin continue to grow throughout the rest of the year, especially if transaction fees on the base Bitcoin blockchain continue to rise.
The difference in use cases between Liquid and the Lightning Network made it easy to predict that Liquid would overtake the Lightning Network over the short term, and a similar phenomenon could take place with RSK overtaking Liquid by the end of 2021.
Of course, there are a number of other blockchains with their own native cryptocurrencies that also act as quasi-layer-two options for Bitcoin. Examples of platforms that operate in this grey area between Bitcoin sidechain and completely separate, alternative chains include Ethereum, Binance Smart Chain (BSC), and Stacks.
From this perspective, the most successful Bitcoin layer-two project by far is the Wrapped Bitcoin (WBTC) token on Ethereum, which is currently backed by BTC 173,221 that has been pegged into the system.
Of course, like many Ethereum-based projects, some shortcuts have been taken here, and the level of decentralization achieved with this layer-two system is not different than simply holding bitcoin on Coinbase or another crypto exchange. For this reason, it’s questionable to classify it as a true layer-two network on top of the base Bitcoin blockchain.
Indeed, this point of contention is also found when comparing the Lightning Network to federated sidechains like Liquid and RSK, as Lightning users are able to retain a higher degree of control over their own coins. Although, the completely centralized custody model found with WBTC is harder to defend than the federated custody model found with current Bitcoin sidechains.
That said, there is no reason WBTC couldn’t become increasingly federated and reach levels of decentralization that is roughly the same as what’s found with Liquid and RSK.
– RSK Opens Bridge Between Bitcoin and Ethereum
– WBTC: Where Bitcoin Meets DeFi
– How Bitcoin and DeFi are Completely Different Phenomena
– DeFi On Bitcoin To Grow In The Shadow Of Ethereum
– ‘If DeFi Collapsed, Bitcoin Would Still Be Bitcoin’
– The Bitcoin Lightning Network Grows Even If You’ve Forgotten About It
– Bitcoin And Ethereum Scale Slower Than Cryptoverse Grows