2024 will likely be remembered as the BitcoinFi Renaissance, the year Bitcoin’s latent use as a productive asset truly awakened. But for all the productivity gained, there was also a reckoning. Since the tail end of 2022, Bitcoin Layer 2s (L2s) have been heralded as the next great frontier for scalability, ushering in what many developers saw as Bitcoin’s long-awaited leap. By 2023, the landscape was teeming with projects, each claiming to be the definitive solution to Bitcoin’s scalability dilemma.

Now, in 2024, we’re staring at the wreckage of that gold rush. For every project that delivered on its promise, dozens fizzled out, their fleeting moments of glory now reduced to whispers. These so-called Bitcoin L2s popped up faster than tech startups during the ZIRP era—only to collapse under the weight of their own unfulfilled ambitions. The pattern is familiar: The loudest and flashiest projects, often backed by venture capital dollars and marketing muscle, are usually the ones that fade the fastest. When the tide of enthusiasm goes out, they are the first to be found wanting, leaving behind nothing but abandoned code repositories and forgotten promises.

#History Rhymes

As the BitcoinFi Renaissance unfolded, it was hard to ignore the parallels to the Ethereum ecosystem’s own L2 frenzy just a few years prior. In Ethereum’s case, a slew of L2 solutions emerged to address scalability bottlenecks that had rendered the network virtually unusable for all but the wealthiest users. Optimistic rollups, zero-knowledge proofs, and sidechains all promised to alleviate congestion, but the road to adoption was littered with failures.

Bitcoin’s L2 landscape, in its rush to mimic Ethereum’s growth, has fallen into the same trap. Teams, eager to claim first-mover advantage, rushed to announce new L2 protocols without fully addressing key challenges such as product-market fit and, more importantly, technical soundness. The result? A graveyard of failed projects, victims of their own ambition.

#What is a Bitcoin L2?

Before diving into the wreckage, defining what a Bitcoin L2 really is important. The term Layer 2 is often thrown willy-nilly. An L2 is any system that sits on top of the Bitcoin network and aims to improve its scalability by allowing more transactions to be processed without sacrificing security. Importantly, users' confidence in their funds on the L2 should be nearly identical to their confidence in Bitcoin’s base layer (Layer 1). In other words, the L2 should not require users to take on additional trust or risk that they wouldn’t already accept with Bitcoin itself.

More formally, L2s have been defined as “a construction that improves the overall throughput of a blockchain ledger without requiring additional majority or strong economic trust assumptions” (h/t to Trey D’s postIn simpler terms, an L2 should be scalable and secure without introducing new risks.

But this is where things often fall apart for many Bitcoin L2s. Scalability solutions that don’t maintain the same security properties as Bitcoin’s base layer ultimately defeat the purpose of building on Bitcoin in the first place. And unfortunately, many of the projects that have come and gone over the past few years failed this fundamental test.

#Specifying the Failures

The frequent failure of Bitcoin L2s often boils down to a fundamental issue: economic assumptions. These assumptions form the bedrock of security in blockchain systems, but when misapplied or overly optimistic, they can lead to the downfall of even the most promising L2 projects. To grasp why L2s struggle, we must first understand Bitcoin's economic assumptions. Bitcoin's proof-of-work consensus mechanism relies on what we call a "weak economic assumption." It assumes that most mining power (over 50% of the hashrate) will act honestly, following the network's rules rather than attempting to subvert them.

This assumption is considered "weak" because:

  1. It only requires a simple majority to maintain security.
  2. Miners have a strong economic incentive to act honestly, as malicious behavior could devalue the very asset they're mining.
  3. The damage is limited even if this assumption is violated (e.g., in a 51% attack). Attackers can disrupt the network or potentially reverse recent transactions, but they cannot steal properly secured bitcoins or create new ones out of thin air.

L2 protocols should minimize the economic assumptions required to use them. However, many L2s introduce strong economic trust assumptions that are far riskier than Bitcoin’s base layer. A strong economic assumption typically means that a protocol relies on a significant portion of participants behaving honestly or economically rationally. If that assumption fails, the protocol becomes insecure. In contrast, a weak economic assumption requires less trust.  It assumes that only one or a few participants need to behave honestly for the system to remain secure. The problem with many L2s is that they rely on stronger assumptions, introducing risks that undermine their security.

#The Dearly Departed

Now, let's pay our respects to some of the fallen:

#Fractal Bitcoin: A Case Study in Rush to Market

Fractal Bitcoin is one of the most glaring examples of an L2 project that failed to live up to its promises. Billed as a native scaling solution for Bitcoin, Fractal was supposed to be a sidechain that leveraged Bitcoin’s security while offering faster and cheaper transactions. However, it quickly became clear that Fractal was anything but a true L2.

The first red flag was the introduction of a new token—Fractal Bitcoin ($FB)—which was issued independently of Bitcoin. With a massive pre-mine of 50% of the total supply reserved for insiders, Fractal looked more like a cash grab than a legitimate scaling solution. Worse, there was no mechanism to move actual Bitcoin into the Fractal sidechain, meaning users couldn’t even interact with the system using real Bitcoin.

Fractal’s Cadence mining system only added to the confusion. While the project claimed to be merge-mined with Bitcoin, only a third of the blocks produced on the network were compatible with Bitcoin miners. The rest required miners to devote their hashing power exclusively to Fractal, creating a perverse incentive structure that encouraged miners to defect from Bitcoin in pursuit of higher rewards. They handwaved about using Discreet Log Contracts for "bridging" between different levels of Fractal sidechains. This is about as logical as using a fishing rod to build a skyscraper. DLCs are great for many things, but they're not designed for the kind of arbitrary fund movement a sidechain needs. In the end, Fractal Bitcoin was less of a scaling solution and more of a masterclass in how to slap Bitcoin on a project and hope nobody asks too many questions.

#SatoshiVM: The Rollup That Rolled Over

SatoshiVM started out with lofty ambitions, positioning itself as a zk-rollup for Bitcoin, promising the holy grail of scalability and security on the network. But what it delivered was far from its marketing pitch, and in the end, the project became known more for its controversies than for its technical merits.

In January, the project’s Initial DEX Offering (IDO) on Ape Terminal was marred by accusations of insider trading and token manipulation. Allegedly, a handful of wallets, all connected to team members, reaped most of the token allocations. The result? A token price plunge of nearly 40%, and a bitter exchange took place between SatoshiVM’s advisors and the Ape Terminal team. It became the crypto equivalent of a messy public divorce—both sides blaming the other for shady behavior. Regardless of who was right, the damage to SatoshiVM’s credibility was done.

But the scandal wasn’t the only problem.

Technically, SatoshiVM was supposed to be a zk-rollup for Bitcoin, but a closer look reveals some glaring issues. For starters, the platform is built on a fork of Frontier. This isn't a particularly controversial choice—many projects take this route to piggyback on the established Ethereum infrastructure. However, for a project that claims to be native to Bitcoin, building on an Ethereum-compatible framework raises a few eyebrows.

On the validation front, there appear to be only four or five active validators proposing blocks. For a network claiming to decentralize Bitcoin transaction processing, that’s a tiny pool of participants. It's a far cry from the robust, decentralized security we expect from Bitcoin itself. But that’s not the worst part.

SatoshiVM allows users to bridge Bitcoin over to its network, but this process is done through a third party, Bool Network, which adds an additional layer of trust. Even more concerning is the fact that the BTC Bridge contract is upgradeable by a single externally owned account. This is a massive point of centralization and a huge security risk.

Then there’s the transparency issue. The node software, which was initially available for public scrutiny, has mysteriously disappeared from the repository. This is particularly troubling given that SatoshiVM positions itself as an open-source project. The sudden lack of source-viewable code doesn’t inspire confidence. The roadmap promises a data availability layer, but it doesn’t explicitly say that this will be tied to Bitcoin in any meaningful way. In fact, there’s nothing at all suggesting that Bitcoin is involved beyond some vague claims.

The project also touts BitVM integration. However, there are no live repositories to back this claim. In the end, SatoshiVM is a cautionary tale about the dangers of buzzword bingo in crypto. Just because you can string together "Bitcoin," "ZK-Rollup," and "Layer 2" doesn't mean you should.

#The Moral of the Story

In the rush to build the next great scaling solution for Bitcoin, many projects have overpromised and underdelivered. First and foremost, appearances can be deceiving. If a project claims to be a Bitcoin L2 but is festooned with more red flags than a communist parade, it's wise to approach with caution. The crypto world is no stranger to wolves in sheep's clothing, or in this case, altcoins masquerading as Bitcoin scaling solutions. The graveyard of Bitcoin L2s is filled with projects like Fractal Bitcoin and SatoshiVM—projects that promised the moon but delivered little more than broken code and shattered trust.

For the sake of brevity there are tons of Bitcoin “L2s” we did not cover here today. Please check out this site for a full list of the dearly departed L2s.

Nevertheless, BitcoinFi continues to chug along, unyielding. For every unsettling tale of an L2 gone astray, there emerge glimmers of resilience—projects that, against the odds, take root and push the boundaries of what Bitcoin can become.

In Bitcoin, hope is never buried—it flickers like an eternal flame, quietly defying the darkness, waiting to reignite.