Introduction

With the continuous development of blockchain technology, Bitcoin has evolved beyond being just a cryptocurrency. Its ecosystem is constantly expanding and deepening. The Bitcoin scaling ecosystem includes a variety of Layer 2 solutions and applications, which enhance Bitcoin’s transaction speed and efficiency and support emerging fields such as smart contracts, decentralized finance (DeFi), and non-fungible tokens (NFTs). These innovations have broadened Bitcoin’s use cases, moving beyond value storage and peer-to-peer payments to cater to more complex and diverse needs, thus driving progress across the blockchain industry.

However, with this expansion, security issues have gradually emerged. New technologies and applications bring about more potential risks and challenges. Ensuring the system’s security while enhancing functionality has become a critical concern. Security vulnerabilities, attack incidents, and technical flaws threaten not only the safety of users’ assets but also the overall stability and trustworthiness of the Bitcoin network. In this article, ScaleBit, under the BitsLab umbrella, will delve into the development of Bitcoin’s expanding ecosystem, the security incidents it faces, and prospects for improving security. By analyzing current technological solutions and security challenges, the aim is to provide valuable insights and recommendations for the continued development of the Bitcoin ecosystem, ensuring that it remains highly secure and reliable as it expands.

The Bitcoin Extended Ecosystem

What is the Bitcoin Extended Ecosystem?

The Bitcoin Extended Ecosystem refers to the various solutions and application ecosystems developed around Bitcoin’s foundational network. While Bitcoin was initially designed primarily for peer-to-peer payments and as a store of value, advancements in blockchain technology have spurred the Bitcoin community and developers to explore ways to enhance its functionality. These efforts focus on smart contracts, decentralized finance (DeFi), non-fungible tokens (NFTs), and more efficient transaction scaling solutions.

How Does the Bitcoin Extended Ecosystem Operate?

The Bitcoin Extended Ecosystem operates through various scaling technologies and protocols built on top of or alongside the Bitcoin mainnet. These innovations enable Bitcoin to support a broader array of applications. Critical technologies within the ecosystem include:

(1) Lightning Network

The Lightning Network is one of the most mature and widely used Layer 2 solutions for Bitcoin. By establishing payment channels, it moves a large number of small transactions off-chain, significantly increasing Bitcoin’s transaction speed and reducing transaction fees.

Trends:
The Lightning Network’s infrastructure is continually evolving, with improved user experience and a growing number of merchants supporting Lightning payments.

Challenges:
Liquidity management and routing efficiency remain areas needing further optimization, particularly for high-value transaction scenarios.
These efforts highlight the potential for Bitcoin to transcend its original limitations and embrace a more versatile role within the blockchain ecosystem.

(2) Liquid Network (LQ)

The Liquid Network is a sidechain built on the open-source Elements blockchain platform, designed to enable faster transactions between exchanges and institutions. Governed by a distributed federation of Bitcoin companies, exchanges, and other stakeholders, Liquid Network employs a two-way peg mechanism to convert BTC to L-BTC and vice versa.

Liquid supports confidential transactions and tokenization, making it suitable for enterprise applications. If Bitcoin is the value layer of the internet, and the Lightning Network serves as the peer-to-peer payment network within Bitcoin-driven financial systems, then Liquid acts as the financial layer, adding multi-asset support and financial tools such as securities and commodities.

Compared to Lightning, Liquid facilitates larger and more complex transactions, such as asset issuance and trading (e.g., securities and stablecoins). While Lightning primarily provides privacy through off-chain transactions, Liquid has built-in confidential transaction features that obscure transaction amounts and asset types. Lightning excels in small-scale payments and everyday transactions, whereas Liquid is better suited for institutional finance, asset issuance, and cross-border transactions.

Over 50 exchanges have adopted the Liquid Network, enabling billions of dollars in transactions. This demonstrates its effectiveness in enhancing Bitcoin’s utility for institutional trading. The Liquid Network provides faster settlement times for exchanges, improving market liquidity and allowing institutions to operate more securely and efficiently.

(3) Rootstock Framework (RBTC)

Since its inception in 2015, Rootstock (RSK) has been the longest-running Bitcoin sidechain, with its mainnet launched in 2018. Rootstock is able to combine Bitcoin’s Proof-of-Work (PoW) security with Ethereum’s smart contract functionality. As an open-source, EVM-compatible Bitcoin Layer 2 solution, Rootstock provides an entry point for a growing ecosystem of decentralized applications (dApps) while striving for realizing fully trustless.

Like Liquid, Rootstock employs a two-way peg mechanism, enabling seamless swaps between BTC and RBTC. RBTC is the native currency of the RSK blockchain and is used to pay miners to process transactions and execute contracts. While Liquid focuses on fast and private transactions and asset issuance, Rootstock extends Bitcoin’s capabilities into DeFi and dApp ecosystems through smart contracts.

As of this writing, Rootstock’s total value locked (TVL) exceeds $170 million, with a market capitalization of $380 million.

(4) B² Network

The B² Network features a dual-layer architecture comprising a Rollup Layer and a Data Availability (DA) Layer, redefining how users perceive Bitcoin Layer 2 solutions.

Rollup Layer (ZK-Rollup):
B² Network uses a ZK-Rollup framework with a zkEVM solution to execute transactions and generate proofs within the Layer 2 network. User transactions are processed and stored in the Rollup Layer, where user states are also maintained. Batch proposals and generated zero-knowledge proofs are forwarded to the Data Availability Layer for storage and verification.

Data Availability Layer:
The DA Layer includes distributed storage, B² nodes, and the Bitcoin network. It handles the permanent storage of Rollup data, validates zero-knowledge proofs, and executes final confirmations on Bitcoin.

Distributed storage:
Distributed storage is a critical component of the B² Network, serving as a repository for ZK-Rollup transactions and their related proofs. With decentralizing storage, the network enhances security, reduces single points of failure, and ensures data immutability.

To guarantee data availability, B² writes a Tapscript script into every Bitcoin block on the Bitcoin network. This script anchors the Rollup’s data path and zero-knowledge proof stored in decentralized storage, ensuring data validity. This process is cost-efficient, producing six transactions per hour. Users verify the data by comparing transactions and Taproot script data on Bitcoin Layer 1, ensuring the ultimate reliability of the Rollup data.

This innovative design enhances Bitcoin’s Layer 2 infrastructure, enabling scalable and secure solutions while leveraging the robustness of the Bitcoin network.

(5) Stacks Protocol (STX)

Launched on its mainnet in 2018 under Blockstack, Stacks has grown into a leading Bitcoin Layer 2 solution.

Stacks directly connects to Bitcoin, enabling the creation of smart contracts, dApps, and NFTs on the Bitcoin network. This significantly extends Bitcoin’s capabilities, transforming it from a simple store of value into a more versatile platform. Stacks employs a unique Proof of Transfer (PoX) consensus mechanism, which links its security directly to Bitcoin without requiring any modifications to Bitcoin itself.

With a total value locked (TVL) exceeding $99 million, Stacks boasts a well-established infrastructure and a rapidly growing developer community, solidifying its position as a key player in the Bitcoin Layer 2 ecosystem.

(6) Babylon

Babylon envisions extending Bitcoin’s security to safeguard the decentralized world. By leveraging three key aspects of Bitcoin— timestamping service, block space, and asset value, Babylon transmits Bitcoin’s security to numerous Proof-of-Stake (PoS) chains, creating a more robust and unified ecosystem.

Babylon’s Bitcoin staking protocol employs a remote staking approach that overcomes the limitations of Bitcoin’s lack of smart contract functionality. This is achieved through cryptographic innovations, consensus protocol advancements, and optimized use of Bitcoin’s scripting language. The protocol allows Bitcoin holders to stake their BTC securely without bridging to PoS chains while providing these chains with comprehensive slashable security guarantees. This eliminates the need for bridging, wrapping, or custodial staked BTC.

A core feature of Babylon is its BTC Timestamp Protocol, which timestamps events from other blockchains onto Bitcoin, ensuring that these events benefit from Bitcoin’s timestamp security, just like Bitcoin transactions. This effectively leverages Bitcoin as a timestamp server. The BTC Timestamp Protocol facilitates fast stake withdrawals, composable trust, and reduced security costs, maximizing liquidity for Bitcoin holders.

Designed as a modular plugin, the protocol is compatible with various PoS consensus algorithms and is a foundational layer for building robust reset protocols. Babylon’s innovative design enhances Bitcoin’s utility while strengthening security across the decentralized ecosystem.

Security Incidents in the Bitcoin Expansion Ecosystem

In October 2023, a potential security vulnerability was identified in Bitcoin’s scaling solution, the Lightning Network. Developer Antoine Riard disclosed details of the vulnerability after its discovery.

This vulnerability, referred to as a “replacement cycling attack,” poses a risk to the security of funds flowing through the Lightning Network. It could result in transaction delays or failures, potentially leading to fund losses within Lightning Network channels.

This incident highlights that security must always be a top priority in the rapidly evolving scaling ecosystem. Developers and the community need to continuously monitor and improve existing scaling solutions to guard against potential security threats and ensure the safety of user funds.

Security Outlook for the Bitcoin Expansion Ecosystem

Despite the significant progress made by the Bitcoin scaling ecosystem in improving transaction efficiency and functional diversity, its security still requires ongoing enhancement. This section will explore the future development directions and challenges of security in the Bitcoin scaling ecosystem.

The Bitcoin expansion ecosystem aims to address the main chain’s transaction throughput issues while maintaining security and decentralization.

Trust Models for Off-Chain Transactions:
The Bitcoin expansion ecosystem leverages off-chain technologies to enhance transaction speed. Developers must ensure the trust mechanisms for off-chain transactions are sufficiently robust. For instance, the bidirectional payment channels in the Lightning Network require multi-signature technology and secure channel closure processes to prevent fund freezing or loss.

Privacy and Transparency:
The Lightning Network allows channel transactions to be conducted privately, enhancing user privacy and increasing regulatory challenges and the risk of malicious behavior. Layer 2 networks need to balance privacy and transparency by selectively disclosing certain transaction records to improve regulatory compliance.

User Experience and Security:
The complexity of the expansion ecosystem increases the difficulty of user operations. For example, managing channels in the Lightning Network may be unfriendly to ordinary users, raising the risk of operational errors. The Bitcoin expansion ecosystem can address these issues by designing more user-friendly interfaces and simplifying tools to improve the user experience and reduce security risks.

Conclusion

The Bitcoin scaling ecosystem, through various Layer 2 solutions and innovative protocols, has significantly enhanced the functionality and transaction efficiency of the Bitcoin network, driving the development of emerging fields such as smart contracts, DeFi, and NFTs.

However, as the ecosystem continues to expand, security issues have gradually emerged and must be given high attention by developers and the community. In the future, as the Bitcoin scaling ecosystem strives for higher transaction throughput and more diverse applications, it must continuously strengthen security mechanisms, optimize the user experience, balance privacy with transparency, and ensure broader and more robust development based on decentralization and security.

About ScaleBit

ScaleBit, a security subsidiary brand under BitsLab, is a blockchain security team providing solutions for Web3 mass adoption. With expertise in scaling technologies such as blockchain cross-chain solutions and zero-knowledge proofs (ZKP), we primarily offer detailed and cutting-edge security audits for ZKP, Bitcoin Layer 2, and cross-chain applications.

The ScaleBit team consists of security experts with extensive experience in both academia and industry, dedicated to ensuring security for large-scale applications within scalable blockchain ecosystems.

About BitsLab

BitsLab is a security organization committed to safeguarding and building the emerging Web3 ecosystem. Its vision is to become a highly respected Web3 security institution within the industry and among users. BitsLab operates three subsidiary brands: MoveBit, ScaleBit, and TonBit.

BitsLab focuses on infrastructure development and security audits for emerging ecosystems, covering, but not limited to, ecosystems such as Sui, Aptos, TON, Linea, BNB Chain, Soneium, Starknet, Movement, Monad, Internet Computer, and Solana. Additionally, BitsLab demonstrates deep professional expertise in auditing various programming languages, including Circom, Halo2, Move, Cairo, Tact, FunC, Vyper, and Solidity.

The BitsLab team is composed of top vulnerability research experts who have won multiple international CTF awards and have discovered critical vulnerabilities in well-known projects such as TON, Aptos, Sui, Nervos, OKX, and Cosmos.

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