So, you’ve finished up reading “The Bitcoin Standard”, bought some Bitcoin, avoided shitcoins and realised that Bitcoin is the only true form of decentralised peer-to-peer currency that they all promise. You’ve received your toxic Bitcoin maximalist badge and now all that is left to do is fend off trolls on Twitter and wait around for the moon.
But wait, you hear and read about these mysterious ‘Layer 2’ technologies which are built on top of Bitcoin…
Bitcoin has been dubbed the ‘internet of money’ so it makes sense to use the internet as a comparison when talking about Bitcoin.
The foundation of the internet is a global system of connected computers that use what is known as TCP/IP for communication. TCP/IP is a set of protocols that facilitate communication between computers in this network by sending and receiving packets of data between them.
Bitcoin, at its foundation, is a global decentralised system of nodes that uses P2P (peer-to-peer) technology to send and receive data to each other. But, Bitcoin also has the currency aspect built within it.
This means that more technologies are required for the base layer to function effectively. The likes of P2P, proof of work, blockchain and cryptography all work harmoniously together and make the Bitcoin network function. One of these technologies alone aren’t enough to revolutionise the financial world (blockchain solves nothing on its own), but put them together and we get the magic that is Bitcoin.
But, imagine a world in which the internet just stopped at TCP/IP. Where no more innovation was made. A world where Tim Berners-Lee never invented the World Wide Web, a world with no email, no file sharing, no YouTube, no Netflix. Without TCP/IP, the mentioned innovations would not have been possible.
Thankfully the internet didn’t stop with TCP/IP. Instead what happened with the internet was an explosion of innovation that changed the world and created the start of this digital age. Decades after it was created, the internet is still being built upon and has become the heartbeat of the modern world.
Bitcoin is following down this same path. We are seeing improvements being made on the foundational layer of Bitcoin, along with more technologies and ideas floating around building on top of the Bitcoin base layer. This building on top of the base layer is what we are currently calling Layer 2.
The Lightning Network is by far the biggest and most successful Layer 2 technology we have today.
Built to be the payment rails of the future, to facilitate almost instant settlement of transactions with the ability to scale larger than any other payments technology out there. The Lightning Network utilises the underlying security of the Bitcoin network to build its own decentralised network of payment channels that allows me to send Bitcoin without needing to transact on the base chain. This comes with advantages such as lower fees, fast (near instant) settlement and increased privacy, all while still knowing it is backed by Bitcoin’s base technologies and security.
Once the innovation of the Lightning Network was sparked, so was the countless ways in which the Lightning Network could be used for other things in the space. The ability to facilitate transactions of such small values opens up ideas like streaming money, paying for media by the second as you consume it, as apposed to current subscription models.
Thus the creation of Layer 3 was born, and just like the internet; let’s see how far this goes…