The Trust Models Behind Bitcoin Layer 2s

The Problem: Native Bitcoin smart contracts are limited, forcing complex multi-sig federations to manage assets off-chain. The Solution: A permissioned set of known entities (exchanges, custodians) operates a parallel chain with faster blocks and confidential transactions.

• Security Model: Trusted Federation of 15+ members like Blockstream, Coinbase.
• Trade-off: ~$1B+ in secured value, but requires trusting the federation's honesty and liveness.

The Problem: How to inherit Bitcoin's security for a general-purpose VM without modifying the base layer. The Solution: Execute transactions off-chain, post compressed data to Bitcoin, and use a fraud-proof window to challenge invalid state transitions.

• Security Model: Economic Security via bonded validators and a ~1-7 day challenge period.
• Trade-off: Delayed withdrawals but ~1000x cheaper execution than on-chain Bitcoin scripts.

The Problem: Optimistic rollups have long withdrawal delays; sidechains don't inherit security. The Solution: Use zk-SNARKs to generate cryptographic proofs of valid state transitions, verified directly by the Bitcoin script.

• Security Model: Cryptographic Security anchored to Bitcoin's ~$1T+ hash power.
• Trade-off: Complex proving infrastructure but enables trust-minimized, near-instant finality.

Bitcoin's L1 cannot natively verify off-chain state. A bridge must prove the L2's state is correct, creating a single point of failure.\n- Trust Assumption: Users must trust the bridge's multisig or federation.\n- Capital Efficiency: Locked BTC in the bridge creates ~$2B+ in custodial risk across major projects.\n- Dominant Model: Used by Stacks, Liquid Network, and most early L2s.

A proposed Bitcoin soft fork (BIPs 300/301) that allows sidechains to be secured by Bitcoin miners via merged mining.\n- Trust Model: Security inherits from Bitcoin's >50% honest miner assumption, not a new federation.\n- Withdrawals: Users can contest fraudulent state via a long delay, similar to Optimistic Rollups.\n- Trade-off: Requires a contentious Bitcoin protocol change and introduces ~3-month withdrawal delays.

A computing paradigm enabling optimistic rollups on Bitcoin without a soft fork, using Bitcoin script to verify fraud proofs.\n- Trust Model: Requires only 1-of-N honest watcher to challenge invalid state, reducing federation size.\n- Innovation: Leverages Bitcoin's limited scripting (Taproot, MAST) for expressive off-chain logic.\n- Limitation: Currently theoretical with high operational complexity and prover/verifier cost asymmetry.

Uses timelocked BTC staking to slash malicious actors securing other PoS chains, exporting Bitcoin's economic security.\n- Trust Model: Security relies on economic slashing of bonded BTC, not a new validator set.\n- Use Case: Secures PoS L2s and sidechains, not a general-purpose L2 itself.\n- Capital Efficiency: Staked BTC remains liquid on Bitcoin L1, avoiding bridge custodianship.

L2s that post transaction data to a cheap, high-throughput DA layer (e.g., Celestia, Avail) and only settle proofs on Bitcoin.\n- Trust Model: Splits trust between Bitcoin's settlement and the chosen Data Availability committee.\n- Scalability: Decouples DA from Bitcoin's ~4 MB/block limit, enabling 10k+ TPS.\n- Examples: Projects like Citrea and Bison explore this model, inheriting Bitcoin's finality.

Every Bitcoin L2 trust model is a trilemma trade-off between decentralization, scalability, and Bitcoin compatibility.\n- Multisig Bridges: Fast and compatible today, but centralized.\n- Drivechains/BitVM: More decentralized, but not live or highly complex.\n- The Future: Winning L2s will likely be hybrid models that minimize new trust assumptions while maximizing Bitcoin's unique security.

Most Bitcoin L2s use a federated multi-signature bridge because Bitcoin's base layer lacks a general-purpose VM for trustless verification. This creates a trade-off between speed and security.

• Key Benefit: Enables rapid innovation and complex state transitions (DeFi, NFTs) today.
• Key Risk: Concentrates trust in a small set of signers, creating a single point of failure.
• Builder Action: Evaluate signer sets for geographic/jurisdictional diversity and credible slashing mechanisms.

Projects like Botanix and Chainway are pioneering zero-knowledge proof (ZKP) based bridges. Validity proofs submitted to Bitcoin script act as a cryptographic security backstop.

• Key Benefit: Mathematically enforced security, removing trusted intermediaries.
• Key Challenge: Bitcoin's limited opcodes make proof verification expensive and complex.
• Investor Signal: Teams with deep ZK and Bitcoin Script expertise are solving the hardest problem.

Sidechains (e.g., Stacks, Rootstock) have independent consensus and faster blocks, while rollups (e.g., Citrea) batch proofs to Bitcoin. The choice defines sovereignty and security.

• Sidechain Pro: Full sovereignty enables high throughput and easy EVM compatibility.
• Rollup Pro: Inherits Bitcoin's finality for state transitions, a stronger security claim.
• Builder Decision: Choose sidechains for product-market fit speed; choose rollups for maximal security alignment.

Any L2 requiring Bitcoin as gas (Babylon, Bison) must solve the staking liquidity problem. This creates a massive opportunity for LST (Liquid Staking Token) protocols.

• Key Insight: LSTs become the primary liquidity layer and collateral asset for the entire L2 ecosystem.
• Investor Mandate: The dominant LST protocol will capture significant value, akin to Lido on Ethereum.
• Risk: Early centralization in staking pools and potential for slashing complexities.

Cross-L2 communication between Bitcoin layers is nascent and high-risk. Without a shared settlement layer (like Ethereum for its L2s), bridges are federated or wrapped asset schemes.

• Reality Check: Moving assets between Bitcoin L2s often requires routing back through the base chain, negating speed benefits.
• Builder Focus: Design for sovereign app-chains or accept fragmented liquidity in the near term.
• Future View: Watch for Bitcoin-native light client bridges or shared proof verification networks.

As Bitcoin L2 activity grows, transaction ordering on the base layer becomes a valuable commodity. This will create new MEV supply chains and risks.

• Emerging Threat: L2 sequencers could be incentivized to bribe miners for favorable block inclusion, centralizing power.
• Builder Defense: Implement fair ordering protocols or commit to L1 blockspace auctions (like MEV-Share).
• Investor Due Diligence: Scrutinize L2 designs for explicit MEV mitigation strategies from day one.