What Are Bitcoin Layer-2 Networks?

Bitcoin is often described as the "gold standard" of cryptocurrency: highly secure, widely recognised and designed to be resistant to censorship.

However, during busy periods, using Bitcoin for everyday payments can be slow and expensive. Transaction fees can rise sharply and confirmations may take longer than expected.

This is known as the scalability problem. Bitcoin is very good at being a secure settlement layer. It is less efficient when used directly as a high-volume payment network.

Layer 2 networks try to solve this. They move most activity away from the main Bitcoin blockchain, while still using it as the final source of truth.

Understanding the Layer 2 concept

You can think of Bitcoin’s main blockchain, sometimes called Layer 1, as a very secure motorway.

Security is the priority, so capacity is limited and traffic can build up when many people try to use it at the same time.

A Layer 2 (L2) network is like an express overpass that connects to this motorway.

Cars, or in this case transactions, can move across the overpass much faster and more cheaply.

They only need to return to the main road at certain points to finalise their journey.

In technical terms, L2s process many transactions away from the main Bitcoin chain.

They then group these transactions and send a compressed record back to Bitcoin.

Because the cost of a single Bitcoin transaction is shared across many users, fees per user are usually lower and confirmation feels much faster.

Types of Bitcoin Layer 2 networks

Not all Bitcoin scaling solutions work in the same way.
As of 2025, three main approaches are being actively developed and used, each with different trade-offs and use cases.

State channels (The Lightning Network)

The most widely used Bitcoin L2 today is the Lightning Network.
It uses a structure known as a state channel.

A useful analogy is a bar tab. Two people open a tab on the Bitcoin blockchain, then send many small payments between each other off-chain.
Only the final balance is settled back on Bitcoin when the tab is closed.

This allows near-instant, low-cost payments, which makes Lightning suitable for everyday transactions and small online purchases.

However, managing liquidity and routing across the network can be complex, so the user experience may depend on the wallet or service you use.

Sidechains

Sidechains are separate blockchains that operate in parallel to Bitcoin.

They are connected to Bitcoin through a mechanism usually called a two-way peg, which allows you to lock Bitcoin on the main chain and receive a representation of it on the sidechain.

Key points about sidechains:

• They run their own consensus and security systems.
• They do not fully inherit Bitcoin’s security.
• Users must trust the sidechain’s validators or federation.

Examples

• Liquid Network, used mainly by traders and exchanges for faster and more private transfers.
• Rootstock (RSK), which aims to bring Ethereum-style smart contracts to Bitcoin-linked assets.

Although sidechains are often discussed alongside Layer 2 solutions, many researchers and developers view them as a separate category because they rely on different security assumptions.

Rollups

Rollups are one of the newest approaches being explored for Bitcoin scaling in 2025.

They were first popularised in the Ethereum community.

In a rollup, most transaction processing happens off-chain or on a secondary chain.

However, transaction data or proof of correctness is posted back to Bitcoin.

The idea is to combine higher throughput with stronger security guarantees than a typical sidechain.

If fully implemented and widely adopted, Bitcoin rollups could support more complex applications, such as lending, borrowing and decentralised exchanges, while still referencing Bitcoin as the underlying settlement layer.

Research and early prototypes exist, but many Bitcoin rollup designs are still evolving.

Users should treat them as emerging technology and understand that standards are not yet fully settled.

What is new in Bitcoin Layer 2 in 2025?

Layer 2 solutions have been discussed for many years.
In 2025, attention has shifted from simple payments towards building more programmable financial tools that use Bitcoin as collateral or as a base asset.

The rise of “BTCFi”

In earlier years, most decentralised finance activity took place on networks such as Ethereum, Solana or other smart contract platforms.

Bitcoin holders who wanted to earn yield or use DeFi often had to wrap their BTC or move value into a different ecosystem.

In 2025, several Bitcoin-focused projects, including Stacks, Merlin Chain and a range of rollup-style systems, are working on what many call “BTCFi”.

The goal is to allow users to interact with smart contracts while keeping their exposure to Bitcoin, rather than switching to a different token.

In practice, this can involve locking Bitcoin in a specific contract or bridge, then using a corresponding asset on a Layer 2 network.

Bitcoin moves from acting only as a long-term store of value to also being used in lending, trading and other financial applications.

It is important to note that any time you move Bitcoin into a smart contract or bridge, you introduce additional risks that do not exist when you simply hold BTC on the main chain.

The shift towards Zero-Knowledge (ZK) technology

New protocols are experimenting with Zero-Knowledge (ZK) cryptography for Bitcoin-linked rollups.

A Zero-Knowledge proof is a way to show that a batch of transactions is valid, without revealing all the underlying data in a way that needs to be re-executed by everyone.

ZK-rollups typically:

• Process many transactions off-chain or on a secondary layer.

• Generate a cryptographic proof about their correctness.

• Post that proof (and often some data) back to Bitcoin.

If designed correctly, this can provide strong assurances that the rollup’s state is valid, even if you do not trust the operator.

ZK-rollups are still early on Bitcoin, and most implementations should be considered experimental.

Users should be cautious and not assume that all security guarantees from established networks automatically apply to new Bitcoin-based versions.

Aggregation and interoperability

Previously, Bitcoin scaling solutions often developed in isolation.

Moving value between Lightning, sidechains and newer smart contract layers could be slow, expensive or technically confusing.

In 2025, more projects are focusing on aggregation and interoperability.

The aim is to connect different L2s and sidechains so that value can move more smoothly between them.

For example, a user might:

• Receive a payment over Lightning.
• Then use an interoperability layer to move value into a smart contract platform such as Stacks.
• Finally interact with a DeFi application, all from within one interface.

This vision is still a work in progress. Standards, security models and user experience are actively being developed, and not all networks are compatible with each other.

Real-life examples: how it works in practice

Here are some simplified scenarios that show how Bitcoin Layer 2 networks can change the user experience. Figures are illustrative and may not reflect current market conditions or fees.

• Micro‑transactions
  Imagine you want to pay €2 to read a single online article.
  If the average on-chain Bitcoin network fee is around €4, sending a direct transaction would not make much sense.
  Using the Lightning Network, the fee can be a tiny fraction of a cent, and the payment typically confirms in seconds.

• Earning yield with Bitcoin exposure
  A long-term Bitcoin holder wants to try earning yield without selling their BTC. They choose a Bitcoin-linked rollup or smart contract platform, move a small portion of BTC across a bridge, then supply it to a lending protocol. In return, they receive variable interest paid in tokens that depend on the platform.

In both cases, the Bitcoin main chain is still used to open and close channels or bridges, while most activity happens on Layer 2.

However, these examples involve additional technical and smart contract risks compared with simply holding BTC on the base layer.

Risks and red flags

Layer 2 networks can offer faster and cheaper transactions, but they introduce new risk types. These risks may not exist, or may be lower, when using the Bitcoin main chain directly.

Centralisation and operator risk

Many L2s and sidechains rely on a small number of entities, often called sequencers, validators or federations, to order and confirm transactions. If these operators go offline or act maliciously, the network may pause, censor transactions or behave unpredictably.

While many designs include mechanisms to allow users to eventually withdraw funds, access can be delayed.
You should understand who controls the infrastructure, what the governance model is and whether there are clear exit options if something goes wrong.

Bridging vulnerabilities

Moving Bitcoin between networks usually requires a bridge or a custody mechanism. In most designs, BTC is locked on the main chain and a pegged or wrapped version appears on the L2.

Bridges have historically been a major target for hacks.
Bugs in smart contracts, poor key management or dishonest operators can result in significant losses.

Before using a bridge, consider:

• How long it has been live.
• Whether the contracts have been audited, and by whom.
• How funds are controlled (for example, multi-signature, federation, smart contract, central custodian).
• Whether there is any insurance or recovery plan, understanding that this may not fully protect you.

Never move more funds to a new L2 or bridge than you can afford to lose.

Complexity and user error

Layer 2 solutions can be technically complex.
Different networks may use different address formats, fee models or wallet software.

Common issues include:

• Sending Bitcoin from an L2 directly to a standard exchange deposit address that only supports main chain BTC.
• Forgetting to switch networks in a wallet app.
• Misunderstanding withdrawal steps from a rollup or smart contract platform.

These problems can sometimes result in delays, support tickets or, in the worst case, permanent loss of funds.
If you are unsure, test with a very small amount first and always follow official guides.

The future of Bitcoin layers

Looking ahead, many developers expect the Bitcoin main chain to act increasingly as a settlement and security layer.
Most high-frequency activity, from small retail payments to more advanced financial products, may move to various L2s and sidechains.

This multi-layer approach attempts to balance three goals at once: security, decentralisation and scalability. Bitcoin Layer 2 projects are trying to increase throughput and lower fees, while still relying on Bitcoin as the final arbiter of truth.

However, this evolution is not guaranteed. Technical research is ongoing, regulations are developing, and user preferences may change over time.

Anyone considering using or investing in Bitcoin Layer 2 networks should stay informed, start cautiously and regularly review the risks involved.